Private Credit in PE: Will it Continue to Thrive in 2025?

This is an excerpt from Dechert's 2025 Global Private Equity Outlook. To read the full report, click here.

The global private credit market continues to grow at pace, having quadrupled in size over the past decade to exceed the US$2 trillion mark for the first time in 2024, according to Preqin; with BlackRock predicting that figure could reach US$3.5 trillion by 2028.

Indeed, the growth of private credit has been so rapid that the IMF now fears the market may pose a risk to financial stability – it issued a warning earlier this year, urging regulators to be more proactive and intrusive in their supervision.

For PE firms, this rapid evolution of the private credit sector comes with certain ironies. On the one hand, it effectively represents a rival asset class from a fundraising perspective, providing investors with a different type of risk and return profile; some funding that might once have found its way into PE funds may now have been invested in private credit instead, particularly during “risk-off” periods for investors worldwide. On the other hand, the private credit sector provides a variety of new opportunities for PE firms to secure financing at both the portfolio and the fund level. Blackstone Alternative Credit Advisors, for instance, signed a US$5.5 billion multicurrency senior secured revolving credit facility, which is considered top of its class for the BDC industry; and Centerbridge Partners acted as co-lender on a US$510 million asset-based lending (ABS) transaction with Blue Owl, acting as collateral manager, and Société Générale, as arranger.

Meanwhile, KKR has worked on more than 25 individual financing transactions in the past year totaling over US$13.76 billion, including asset-based facilities, rated notes issuances, repurchase transactions and other innovative structures.

Indeed, PE firms attracted to the agility, speed and suitability of private credit products continue to make more use of the industry as the search for liquidity goes on. In our survey, firms worldwide highlight several areas in which private credit has supported their activities.

Most commonly, almost two-thirds of PE firms (63 percent ) say they now use private credit to support acquisition financing in their portfolios; in the Asia-Pacific region, three-quarters of respondents cite this use case – perhaps surprising given the strong levels of bank liquidity available in the region for acquisitions, though India and Australia have seen significant private credit activity.

“The appetite for private credit remains strong across the product range currently being made available,” says David Miles, Dechert co-head of global leveraged finance, corporate and securities (London). “With a hopefully reducing interest rate environment approaching and an improving M&A market, it will be interesting to see how private credit deploys relative to other financing solutions.” Private credit is also underpinning refinancings and recapitalizations, with 62 percent  of PE firms worldwide using the sector’s solutions in this way. More broadly, almost half of PE firms (47 percent ) say they use private credit for general corporate borrowing at the portfolio level. Net asset value (NAV) financing is another area in which the private credit sector continues to make inroads into PE firms, with significant minorities of funds taking on debt. Such facilities, involving loans secured against the net asset value of the underlying assets in their portfolios, provide GPs with a means to generate cashflow without having to turn to the secondary market. In the current environment, where the slowdown in exit activity has been marked, that functionality is particularly valuable, enabling firms to return cash to investors. Texas-based Vista Equity Partners and Sweden’s Nordic Capital are among those to have used NAV financing this year.

Similarly, more than a third of PE firms in this research (36 percent ) say they have set up subscription lines. These are loans secured against the commitments to the fund made by investors – rather than on the underlying assets – and help the GP to manage capital calls on LPs more efficiently and LPs to manage their own funding requirements. The added advantage is that by shortening the holding period for investors’ capital, the internal rate of return (IRR) on investments that appreciate in value will naturally be higher (but cash-on-cash return will be lower).

However, in a falling interest-rate environment, it may be that private credit investors are inclined to divert their allocations to other capital strategies, including PE, warns Bolsinger.

“If rates are coming down, we may see private credit cool a little bit,” he says. “These lenders have wedged themselves into the space where the banks used to be before they retreated, and I don't think that's going to change. I do think, however, you will see banks trying to get into the private credit market, as Wells Fargo did when it partnered with Centerbridge.”