The Rise of Private Credit: Fueling Growth or Brewing Risk?

This report examines the significant expansion of private credit markets over the past two decades. Private credit refers to direct lending by non-bank financial institutions (NBFIs), bypassing traditional banks and public debt markets. While historically concentrated on middle-market firms, private credit has broadened to include investment-grade corporates and asset-backed finance.

Over the last two decades, the private credit market has grown significantly, reaching $2.1 trillion USD. Major Canadian pension funds and insurance firms have been active participants throughout this period, with most lending occurring outside Canada.

Several factors fueled this growth: heightened banking regulation following the great financial crisis, prolonged accommodative monetary policy that triggered a “reach for yield”, and rapid growth of the technology sector. More recently, efforts to attract retail investors have emerged. However, regulatory concerns about private credit are mounting. These include the sector’s limited track record in downturns, opaque valuation practices, complex leverage structures, liquidity risk, looser lending standards and a general lack of transparency.

Looking ahead, private credit may benefit from its large stock of investable capital (“dry powder”) but faces challenges from geopolitical uncertainty and broader macroeconomic instability. The report concludes that while private credit has delivered flexibility and attractive returns, its resilience under severe stress conditions remains unproven.