3 shifts defining the future of private credit

Why the next phase of direct lending will reward discipline over scale.

Private credit has enjoyed a remarkable run. Once a niche corner of finance, the asset class has expanded into a mainstream source of funding for private equity-backed businesses.

But as the market matures, the rules are changing. Rapid growth has brought greater scrutiny, a small number of highly publicised defaults, particularly in the US, and concerns about underwriting standards.

Indeed, the market is becoming more selective, with the strongest lenders focusing on relationships, diversification and the quality of the deals they choose to finance.

Here are three ways the next phase of direct lending is taking shape.

1. Scale is no longer the only measure of success

For much of the past 15 years, private credit managers have been focused on the size of their funds and the amount of capital they deployed. The value of assets under management has grown from around $380bn in 2010 to approximately $2.3tn today. The market is projected to reach $4.5tn by 2030.

However, as fund sizes and transactions have increased, investors have started asking more searching questions about underwriting standards and realised returns. Raising capital is no longer sufficient on its own. Managers also need to show they can deploy it carefully and generate consistent returns.

This is particularly important in the large-cap market, where a limited number of attractive deals can attract intense competition between lenders. When several providers are chasing the same transaction, pricing and leverage can overshadow the quality of the underlying credit.

That competitive pressure has already affected terms. Median private credit margins narrowed from 6.5 per cent at the start of 2023 to less than five per cent in 2025.

Investors must increasingly look beyond headline AUM and ask whether a manager has protected returns by knowing when to walk away.

2. The lower mid-market is becoming more attractive

Large private equity transactions tend to attract the most attention, but the lower mid-market is emerging as one of the more interesting areas for direct lenders.

These are businesses that are smaller than the household-name deals dominating financial headlines, but they can still offer strong growth prospects and resilient underlying businesses.

The financing dynamics are different, too. In the large-cap market, lenders often compete by offering lower pricing, higher leverage or looser terms. In the lower mid-market, there is greater focus on flexibility, local knowledge and a lender’s ability to support a company as it grows. This can create a better risk-reward balance.

For lenders, the lower mid-market offers the opportunity to negotiate more attractive pricing and protections, partly because competition is less intense. For sponsors, the right financing partner can provide more than a loan: it can offer acquisition finance, foreign exchange support, hedging and additional capital for future expansion.

Investec recently supported CBPE Capital’s investment in Brookbanks, a multidisciplinary consultancy, with senior debt facilities designed to give the business flexibility to develop and grow.

It also created a bespoke financing package for Triple Private Equity’s acquisitions of Derivia Intelligence, Extel and Euromoney. The package combined acquisition finance at operating-company level with a fund finance facility, alongside hedging and foreign exchange support.

However, this part of the market is not easy to serve well. Underwriting a smaller business can require much the same work as underwriting a larger one, while generating a smaller fee. That means lenders need deep origination networks and efficient processes to review a high volume of opportunities.

Investec reviews around 600 financing opportunities each year before completing approximately 25 to 30 new deals. That breadth allows us to be selective. 

3. Europe’s fragmented market could reward discipline

Private credit is often discussed as if it were a single, uniform market. In reality, it is made up of different regions, strategies and borrower types, each with its own risks.

The recent pressure points have been most visible in the US, particularly among semi-liquid and interval funds that have grown rapidly. Those vehicles are less prevalent in Europe, where the market has a different structure.

European private credit has an estimated $400bn in assets under management, and non-bank lenders account for around 12 per cent of the region’s lending market. That leaves significant room for further growth.

Europe’s fragmentation can be a complication, but it can also be an opportunity for lenders with the right expertise. Businesses operate across different legal systems, languages and restructuring frameworks. A financing approach that works in the UK may not translate directly to France, Germany or the Benelux. Lenders that understand those differences are better placed to provide financing that is appropriate to the needs of businesses operating in each market.

That makes relationships and infrastructure increasingly important. The strongest lenders will not necessarily be the ones with the largest balance sheets. They will be the ones able to work across multiple markets, assess them consistently and provide certainty when a transaction needs to move quickly.

Diversification is also central to that model. Direct lending returns are capped on the upside, meaning a single write-off can have a significant impact. Unlike equity investing, where a small number of exceptional deals can drive performance, lenders need to protect the portfolio as a whole.

According to industry data, direct lending defaults stood at 1.4 per cent, compared with 2.6 per cent for high-yield bonds and 3.6 per cent for broadly syndicated loans.

The figures do not remove the risks. Geopolitical uncertainty, higher borrowing costs and disruption in sectors such as software could still lead to more distressed loans. But they do suggest that concerns about private credit need to be considered in context.

Conclusion: The next phase will favour quality over quantity

Capital will continue to flow into private credit, particularly as private equity sponsors seek flexible sources of finance and banks remain selective about balance-sheet lending.

But the market is entering a more mature phase. AUM growth and deployment alone will matter less than underwriting discipline, the strength of borrower relationships and the consistency of realised returns.

The lenders best placed to succeed will be those with the infrastructure to review large numbers of opportunities, the expertise to operate across European markets and the discipline to say no when a deal does not meet their standards.

In private credit’s next chapter, sustainable growth will depend on something more difficult to measure: knowing when not to lend.