Private credit is beginning to look like the bond market — and that comes with red flags
Private credit is starting to resemble the public bond market, as the rapid growth and development of the asset class blurs lines that have separated two financing channels. Once restricted to a niche corner of lending to mid-sized firms, private credit has expanded across sectors, borrower sizes and collateral types, prompting large allocators to treat it increasingly as part of the same opportunity set as high-yield bonds and leveraged loans, said experts. The private credit industry’s assets under management are projected to grow to about $5 trillion by 2029, from the roughly $3 trillion at the beginning of 2025, a Morgan Stanley report showed . While that is a fraction of the overall bond market, its similar to the size of the public high-yield debt segment, according to J.P. Morgan. “In the year ahead, we expect private credit to deepen its role as a mainstream financing solution and to resemble public bond markets more closely,” said Emily Bannister, credit portfolio manager at Wellington Management. The market is beginning to display “a private credit analog for each of the public market fixed income sectors,” Bannister said, meaning that nearly every type of debt that one can normally find in the public bond market now has a private-credit equivalent. “The lines between public and private markets are blurring.” Private credit players used to focus on lending to mid-sized companies, but now they offer versions of investment-grade loans, high-yield debt, asset-backed financing, infrastructure and real-estate credit, according to experts. Whatever exists in the public fixed-income world increasingly has a matching product in private markets . The lines between public and private markets are blurring. Credit Portfolio Manager, Wellington Management Emily Bannister The merging pathways between public and private markets are showing up across segments such as commercial real estate and data centers, where financing packages often mix banks, commercial mortgage-backed securities, real estate investment trusts and private credit, said Bannister. The most “evident convergence” lies between direct lending — customized loans provided by private credit players — and broadly syndicated loans — traditionally offered by a clutch of banks — said Danielle Poli, managing director at Oaktree Capital Management. The terms and pricing are becoming more alike between private credit and traditional bank-arranged loans, with fund managers increasingly “agnostic” to tapping into either, said Poli. “We’re observing the two markets settling into a symbiotic coexistence, as distinctions continue to blur between direct lending and broadly syndicated loans.” Growth drivers Private lenders are expanding across industries and credit profiles, just like bond market players. According to industry veterans, that convergence is being propelled by multiple forces: banks pulling back from certain types of lending, borrowers seeking more bespoke capital — loans whose size, structure and covenants are customized to borrowers’ needs — and investors searching for higher yields and diversification. The convergence is also happening because private credit managers accumulated massive pools of capital largely driven and accelerated by investors hunting for yield when public rates were near zero, particularly during 2020 to 2021, said Christopher Acito, CEO of Gapstow Capital Partners. In 2022, when public debt markets seized up as the U.S. Federal Reserve aggressively raised rates, private lenders stepped in to fill the gap. As investors chased higher returns, private lenders ballooned in size, expanding beyond traditional mid-market loans into much larger financings. Ticket sizes that once averaged $75 million quickly scaled to the hundreds of millions, and the market now routinely supports billion-dollar deals, said Acito. That shift means large companies can raise the same amount of money in either the public or private markets, making the two effectively interchangeable options, he added. Underwriting worries The blending of the two markets raises worries. With more private lenders chasing fewer blockbuster deals, competition is pushing underwriting standards to look more like the looser norms seen in syndicated markets pre-2020, experts warned. Loans to highly leveraged, mid-sized companies that may find it harder to service or refinance their debt if growth slows or funding costs rise are a key risk to the private credit market. “One implication of private-public convergence is that increased competition in some segments of the market can impact credit profiles by increasing the risk of aggressive underwriting and weaker covenant protections,” Bannister said. Selectivity is critical, Oaktree’s Poli warned. Amid intensifying competition, “risks might include managers getting caught in a fight for deal flow and thus accepting credit risk that comes without commensurate reward.” The recent First Brands fiasco underscored those concerns. The auto-parts maker defaulted on more than $1.5 billion of private loans after a sudden liquidity crunch , blindsiding its lenders and exposing how quickly the market can experience stress when underwriting is aggressive and private lenders do not have enough visibility into deteriorating fundamentals. Private credit investors also risk unintentionally doubling exposure to the same large borrowers given limited mega-deals, Putri Pascualy of Man Group’s direct lending team, said. “Investors might actually double or triple down in their exposure to select names rather than getting the diversification they were seeking.” Another concern is liquidity, or the lack of it. Some investors have raised concerns that the growing resemblance to public markets could also bring public-style volatility without public-style liquidity. The breakneck growth of private credit has also prompted warnings that parts of the market may be drifting toward bubble territory. The industry has attracted hundreds of billions of dollars in new capital in a relatively short period, compressing yields and encouraging ever larger, more complex deals, experts said, warning that if this surge continues unchecked, it could develop into a new source of systemic financial risk . In the drive to deploy more capital, managers may relax lending standards, increasing the likelihood of defaults. Pascualy said that private credit still doesn’t have a true secondary market, meaning it’s hard to sell positions quickly if needed. While new tools are emerging, she said it’s “too soon to say whether these new solutions will provide meaningful liquidity.” Regulatory reports have also flagged the risk that highly leveraged non-bank lenders , operating in relatively opaque structures, could amplify stress in a future downturn .
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