Key points
Every market is a meeting of supply and demand. Private credit grew from a niche into a market worth more than $2 trillion because both sides moved at the same time. Banks lent less to certain borrowers. Those borrowers still needed capital and found they liked the alternative. And investors, after a decade of low yields, went looking for income they could hold.
Understanding these drivers matters for anyone allocating to the asset class, because they explain where returns come from and where they are being competed away. If capital floods into a segment faster than good borrowers appear, pricing falls and terms loosen. Where demand for loans still exceeds the supply of lenders, the opposite is true.
For a full definition of the asset class, its strategies and risks, see our pillar guide, What Is Private Credit?. This article looks at why the market exists and where the balance between supply and demand sits today.
Driver one: banks stepped back from lending
After the 2008 financial crisis, regulators required banks to hold more capital against riskier loans. The Basel III reforms made lending to smaller, unrated and leveraged businesses more expensive in capital terms, and banks responded by concentrating on larger clients, mortgages and fee-earning business.
The gap was filled partly by challenger banks and partly by non-bank lenders. In the UK, challenger and specialist banks provided 60% of gross SME bank lending in 2025, up from 39% in 2012, and together with non-bank lenders accounted for 68% of SME lending, according to the British Business Bank. Globally, SMEs make up around 90% of businesses and more than half of employment, yet the World Bank describes their unmet financing needs as running into the trillions of dollars.
Banks have not left the picture. Many have changed role, from lending to the end borrower to lending to the lender. Committed bank credit lines to private credit funds and BDCs grew from about $8bn in 2013 to about $95bn by the end of 2024, according to the Federal Reserve. That is a more capital-efficient way for a bank to take credit exposure, and it has helped private lenders grow.
The regulatory tide may now be turning. In March 2026, US regulators re-proposed the Basel III endgame rules with lower risk weights for many corporate and retail loans, Simpson Thacher notes. If adopted, banks could compete for some lending they had ceded. That would affect the large, plain-vanilla end of the market first.
Driver two: borrowers want speed, flexibility and control
On the demand side, borrowers have found reasons to prefer private credit even where a bank or bond market would lend.
- Speed and certainty: a private loan can close in weeks with one lender or a small group, while a bond issue depends on ratings, documentation and market windows.
- Tailored terms: repayment profiles, covenants and drawdowns can be shaped around the borrower's cash flows, and changed by agreement with a lender who knows the business.
- No dilution: unlike private equity, debt leaves ownership with the founders and existing shareholders, who keep the upside.
- Confidentiality: terms and financial information stay between the parties.
- Stability: a relationship lender is less exposed to day-to-day market swings than a bond buyer.
The trade-off is cost. Private credit usually charges more than a bank loan or an investment-grade bond. For many borrowers it is still cheaper than giving away equity, which can turn out to be the most expensive capital of all once the business grows.
| Bank loan | Public bond | Private equity | Private credit | |
|---|---|---|---|---|
| Speed to close | Slow for smaller borrowers | Slow; needs market window | Slow; long negotiation | Weeks |
| Flexibility of terms | Standardised | Rigid once issued | High | High |
| Ownership dilution | None | None | Significant | None |
| Cost of capital | Lowest, if available | Low for rated issuers | Highest over time | Moderate to high |
| Access for SMEs and specialty lenders | Limited | Very limited | Selective | Growing |
Demand has been strong across the market. US direct lending issuance reached a record $327bn in 2025, according to Houlihan Lokey, and larger borrowers increasingly turned to private lenders when public markets were volatile.
Driver three: investors want contractual income
The supply of capital has come from three main groups.
Insurers are natural buyers of long-dated, predictable cash flows. Private bonds made up 45.6% of US life insurers' bond exposure at the end of 2024, and 93% of insurers surveyed expected to increase private market exposure, according to BlackRock.
Pension funds, endowments and sovereign funds have built private credit allocations over the past decade as a source of floating-rate income with security attached.
The wealth channel has been the newest and fastest-growing source, through evergreen funds and non-traded BDCs. It has also proved the most sensitive. In the first quarter of 2026, redemption requests at several large funds exceeded their 5% quarterly caps, as Advisor.ca reported. We examine that episode in Has Private Credit Gone Public?.
When supply catches up with demand
Markets find a balance, and in parts of private credit the supply of capital has caught up. Average all-in unitranche yields fell to 9.33% at the end of 2025, about 308 basis points below their July 2023 peak, according to Houlihan Lokey. Some of that fall reflects lower base rates. Some reflects spread compression: median BDC spreads have narrowed by about one percentage point since 2022, the Boston Fed finds.
When too much capital chases the same deals, lenders compete on price and terms, and protection erodes. That is the dynamic behind the crowding in mid-market direct lending, which we examine in Private Credit and Concentration Risk in the Mid-Market.
Where demand still outstrips supply
The balance is very different at the smaller end. Specialty lenders, non-bank financial institutions and growth-stage businesses with tangible assets often struggle to raise institutional capital. Their facilities are too small for the large funds and too specialised for most banks. This is the gap we focus on at Kingsbury & Partners: senior secured facilities, typically first institutional credit lines of roughly $5–25M, for lenders that need capital to grow their own loan books. We set out the reasoning in Why We Allocate to Non-Bank Financial Institutions.
We have seen this demand from asset managers and business owners across the UK, Europe and the US, in sectors from business-to-business lending to social housing and US student loans. Many of these businesses want what amounts to a mini-securitisation: a structured facility secured on their assets that lets them grow without giving up equity. For investors, these segments offer pricing set by scarcity of capital, without the crowding seen elsewhere. The financing gap in SME credit is where that mispricing is most visible.
What this means for investors
The forces behind private credit's growth are structural and unlikely to reverse quickly. Bank capital rules may ease at the margin, but borrowers who have experienced the speed and flexibility of private lenders are unlikely to return wholesale, and insurers will keep buying long-dated income.
The useful question for an allocator is where supply and demand are in balance. In segments where capital is abundant, expect thinner spreads, looser documents and more competition for each deal. In segments where it is scarce, expect better pricing and stronger protection, along with more work in origination and monitoring. Knowing which side of that balance a strategy sits on is a large part of the allocator's job.
Frequently Asked Questions
Why is private credit growing so fast?
Banks reduced lending to many mid-sized and smaller borrowers after 2008, borrowers came to value the speed and flexibility of private lenders, and investors sought contractual income. All three trends have continued.
Why did banks pull back from lending to businesses?
Post-crisis capital rules made riskier and smaller loans more expensive for banks to hold, so many concentrated on larger clients and secured lending. Many now lend to private credit funds instead of directly to businesses.
Why do companies choose private credit over bank loans?
Mainly for speed, certainty and flexibility, and because many smaller or specialised borrowers cannot get bank finance on workable terms. The cost is usually a higher interest rate.
Is private credit better than private equity for a growing business?
It depends on the business. Debt avoids diluting ownership and keeps future profits with existing shareholders, but it must be repaid on schedule, so it suits businesses with predictable cash flows or assets to secure it against.
Who invests in private credit?
Insurers, pension funds, endowments, sovereign wealth funds, family offices and, increasingly, private clients through evergreen funds, BDCs and listed vehicles.
Will private credit keep growing?
Most forecasts expect so. BlackRock, citing Preqin, projects the market roughly doubling to about $4.5tn by 2030, although growth will be uneven and pricing will depend on how much capital chases each segment.