Sunny outlook: Alternative credit in 2025
After a strong 2024, private credit is starting the New Year with a growth mindset. Kathryn Gaw asks industry experts what they expect to see in the year ahead…
Crystal ball gazing is an imperfect science. But as 2024 drew to a close, there was no shortage of seers predicting great things for the private credit industry in the year ahead.
Macro outlooks have hinged around the expectation of lower rates, which could create a more attractive borrowing environment but may reduce rates for investors. Yield compression has been referenced by some analysts as a key headwind for alternative asset managers, while others are hopeful that a more active origination market could propel the sector to new heights.
There are certainly reasons to be cautious about the shape of the private credit market next year, but across more than a dozen conversations with industry insiders in the final weeks of 2024, the overall picture was one of optimism.
“2024 was without question the most robust year we have seen,” says Isaiah Toback, co-chief investment officer at Castlelake.
“2023, 2024, 2025, these are really the golden vintages, as I see it, of the asset-based credit markets, simply because we’re in that Goldilocks period where net capital is actually leaving the market not coming in.”
This sentiment has been repeated across the sector. While a few concerns have been raised around the transparency, regulation and quality of private credit in 2025, the overwhelming sense is that there is still plenty of room for growth, and an abundance of exciting new opportunities on the horizon for GPs and LPs alike.
“I think the general outlook for private credit next year is pretty bullish,” says Christian Faes, founder and chief executive of Faes & Co.
“There are a lot of big numbers being predicted by credible institutions and market players, and I’m inclined to agree. The general trend with the big banks pulling back from lending, and increased regulation and capital constraints for those players, should mean that there’s a long way to go for the private credit sector.”
So what does the year ahead have in store for private credit?
While views are mixed across the industry, there are a few issues on which the majority of people are aligned. Yields will come under some pressure should rates come down more quickly than anticipated. Direct lending and asset-backed financing will see their popularity rise, while investment grade products will remain the domain of the larger managers. Deal making activity will bounce back, creating more opportunities for loan origination. And GPs will continue to monitor default risk closely, as the next cohort of Covid-era loans reach maturation.
These predictions suggest that 2025 will require managers to be firing on all cylinders if they hope to distinguish themselves in an increasingly crowded – and visible – field.
“There will be increasing competition among private credit lenders in 2025,” says Michael Von Bevern, co-managing director, Americas, Suntera Fund Services.
Read more: What does 2025 have in store for the private credit markets?
However, Von Bevern adds that in the rush to secure new deals, GPs must be mindful not to offer too much flexibility in their debt documents, as this could ultimately have a negative impact on the market.
“The big issue for 2023 and 2024 was really the uncertainty,” adds Nicolas Nedelec, partner, private debt, Eurazeo.
“We were still in the aftermath of Covid, and there were a lot of elections – in the UK obviously, but also France, Germany and the US. Now everything is behind us. So you don’t have visibility, but you have less uncertainty, which means that people can start pricing risk and doing deals and we expect that the buyer and seller gap should reduce.”
Deal making
One of the major challenges for GPs in 2024 was the dearth of dealmaking. In the back half of 2024, M&A activity started to pick up somewhat and most GPs expect this increase to continue next year. For a start, rates are expected to go down across the board, which suggests that there will be a lower cost of financing. This is supportive of valuations, which leads to more transaction activity.
“At some point M&A will bounce back,” says Nick Holman, head of the UK and Ireland for Kartesia. “From a UK perspective, I think there’ll be a modest improvement in the M&A environment, but we have yet to see the heights of the post-Covid boom in M&A that we saw two years ago.”
However, Holman adds that he doesn’t think the new year is going to start off with a bang.
“I think it’s going to be slightly subdued, but I do expect that to pick up at some point with the M&A environment becoming more buoyant as the year progresses,” he says. “Advisors comment that there is a lot in the pipeline, but often we need a catalyst to get the market moving again.
Read more: Permira Credit: Two paths for private credit in 2025
“That said, M&A is only one driver of private credit volume. Refinancings will still continue to be a theme.
“There are also lots of opportunities for sponsorless transactions if you have the origination capability and network to find them. If M&A comes back, direct lending will have a strong year.”
Private credit is now a firmly established presence in the wider financing ecosystem, and with bank retrenchment expected to continue, there should be more opportunities for the sector to steal even more of their market share. And some GPs have their sights set on investment-grade products.
Investment-grade products
Historically investment-grade products have been beyond the remit of private credit, due to the dominance of global banks in this area and the relatively lower yields on offer. In 2024, more and more private credit fund managers began to make inroads into this space, but at the start of 2025 views were mixed on the role that private credit might play in this field in the future.
“We think that non-investment-grade products will continue to dominate the private credit market next year,” says Michel Lowy, chief executive and global co-portfolio manager at SC Lowy.
“From our position in the market, we’re seeing borrowers increasingly demand flexible, high-yield solutions that fall outside the scope of traditional investment-grade lending. This is why non-investment grade products have risen to, and will stay at, the forefront of the market.”
Eurazeo’s Nedelec agrees. “Alternative credit and private credit is about non-investment grades,” he says.
“As soon as you dip your toe into this market, it’s a different environment. It’s a high volume, extremely commoditised industry. You need access to cheap financing and that’s where you would see tie-ups with banks. But generally speaking, banks don’t have difficulties distributing that. So I don’t see that becoming a big thing next year.”
However, one leading private credit manager told Alternative Credit Investor that he sees the next phase of growth as being expansion “beyond corporate into asset-based finance, which is really conducive to investment-grade private credit”.
“We’re financing the same assets, and you’ve got the same risk-return components. It’s just a difference in liquidity,” he added.
These responses suggest that the investment grade space may be reserved for the larger GPs for now, who are increasingly competing with banks for the attention of more conservative investors such as insurers.
Yield
In 2024 private credit yields hit a 10-year high of 11.65 per cent on average, according to Brookfield Oaktree. While GPs are divided on whether 2025 could be another record-breaking year for the sector, the consensus seems to be for this year’s yields to fall within the 10 to 12 per cent range.
“We could see private credit outperform private equity when it comes to absolute return allocation,” says Von Bevern. “Some LPs could even see the best risk-adjusted returns they have ever had in 2025. We should anticipate this higher-for-longer rate environment to persist.”
Read more: Moody’s tips private credit market for $3tn growth
However, Ana Arsov, managing director, global FIG and private credit, Moody’s Ratings, believes that given the anticipated rate cuts and a favourable economic environment, along with competition from broadly syndicated loans, yields are expected to decrease in the year ahead.
This view has been echoed by several industry analysts who all point to falling base rates as a key driver. Lowy has suggested that investors might start to look towards higher-growth private credit markets such as South Korea or India in search of yield.
Regulation
As private credit funds expand and institutional participation increases, regulation is sure to follow. But GPs do not seem to be overly concerned about new regulation in 2025. In fact, US-based GPs expect the incoming Trump administration to usher in a softer regulatory environment.
“The general posture of the incoming administration is more of a deregulatory approach,” says Castlelake’s Toback. “I think that is generally considered positive and generally helpful to the markets.
“I could see the [Trump] administration, in some cases contemplating rolling back some of the regulatory impingements that have created the opportunity for private credit.”
The implementation and global implications of Basel III will be a key focus for European and Asian GPs in 2025. These regulations will continue to constrain traditional bank lending, potentially driving borrowers toward private lenders who can offer more flexible, customised financing solutions.
“Generally, I would expect increased regulation of private credit,” says Folko de Vries, partner, Clifford Chance. “However, for the foreseeable future, I would not expect there to be a level playing field for banks on the one hand and private credit on the other hand.”
Growth
The expectation is that private credit will continue to grow next year, in many different directions. De Vries thinks that this growth will take place in asset-based transactions given the diversification and additional opportunities to deploy capital that this segment offers. Kartesia’s Holman believes direct lending will boom if M&A transactions pick up. And Moody’s’ Arsov says that investment-grade property and casualty represents the next frontier of growth.
Walter Gontarek, chief executive and chair of Channel Capital Advisors, has predicted “at least a seven per cent industry net increase in new AUM generation” next year in line with Pitchbook estimates, as new investors seek out private credit opportunities.
Read more: ABF an “evolutionary step” for private debt investors
Meanwhile, the largest players in the market appear to be positioning themselves as alternatives to the major investment banks, by expanding their investment-grade product options and investing in retail solutions in anticipation of an influx of wealth market cash in the medium- to long term.
Private credit’s growth depends on a number of factors, from regulation, to investor appetite, to macro-economic issues and higher deal flow. If GPs can continue to seize upon new opportunities while managing existing and emerging risks, 2025 could turn out to be another banner year for the asset class.
