Bank Retrenchment Led to the Surge in Private Credit

Over the past decade, the global financial landscape has undergone a radical transformation, reshaped by the withdrawal of traditional banking institutions from core lending activities.

August 26, 2025

Introduction

This retrenchment, accelerated by rising interest rates, regulatory pressures, and macroeconomic uncertainty, has opened the door for alternative forms of financing to flourish. Chief among these is private credit, a once-niche segment of the market that has matured into a formidable institutional asset class. With over $2.1 trillion in assets under management as of 2023, private credit has not only filled the void left by banks but has also redefined how borrowers access capital and how investors seek yield in a world of fluctuating economic dynamics.

The intersection between bank retrenchment and the rise of private credit is not merely a matter of cyclical substitution. It is structural, rooted in fundamental shifts in risk tolerance, capital allocation, and regulatory frameworks. As traditional banks became increasingly constrained by capital adequacy requirements, liquidity rules, and risk-weighted asset limitations, they began to retreat from sectors that demanded bespoke, high-touch, and often higher-risk lending solutions. This withdrawal created a vacuum for direct lending, mezzanine finance, asset-based lending, and other private credit strategies to proliferate. As a result, borrowers ranging from mid-sized enterprises to large corporations have turned to private markets for financing solutions that are faster, more flexible, and better aligned with their operational realities.

At the same time, institutional investors, weary of low yields in public fixed income and wary of equity market volatility, have eagerly embraced private credit's promise of floating-rate returns, downside protection, and predictable income streams. This dual demand—from both borrowers and investors—has fueled explosive growth. From a global market size of $500 billion in 2013, private credit now commands over four times that amount, with North America accounting for the lion's share. Yet, as we will explore in this report, the story is not simply about size. It is about influence, strategy, performance, and permanence.

The New Lending Order: How Bank Retrenchment Reshaped Credit Markets

The clearest signal of systemic change began to emerge in the aftermath of the pandemic. Starting in early 2021 and accelerating dramatically through 2022 and 2023, U.S. banks reported increasingly tight lending standards for commercial and industrial (C&I) loans. This trend, tracked meticulously by the Federal Reserve’s Senior Loan Officer Opinion Survey, paints a striking picture of an industry stepping back from its traditional role as the lifeblood of corporate credit. By Q3 2023, more than 50 percent of surveyed banks had tightened their lending criteria for large and medium-sized businesses. This level of synchrony is rare and speaks not to idiosyncratic risk assessments, but to a coordinated shift in institutional behavior. Banks, faced with inflationary pressures, heightened regulatory scrutiny, and the specter of depositor flight following high-profile bank failures, adopted a risk-off posture that persists into 2025.

Importantly, this retreat is not merely a defensive, temporary adjustment. It reflects a longer-term recalibration of credit exposure, especially in commercial lending. The triggers are multifold. On the regulatory front, Basel IV and its accompanying capital requirements have made certain categories of lending less attractive from a return-on-equity perspective. On the balance sheet side, the pandemic-induced exodus of deposits, coupled with a revaluation of mark-to-market securities, eroded liquidity buffers and stressed regional banks disproportionately. These structural headwinds, amplified by macroeconomic volatility and geopolitical uncertainty, have led to a sustained pullback from working capital lending, acquisition finance, and even basic expansion capital. Borrowers who would have easily secured term loans five years ago now find themselves facing restrictive covenants, reduced facility sizes, or outright denials.

This is where private credit has entered not as a stopgap, but as a strategic replacement. Armed with unregulated pools of capital, flexible underwriting standards, and an investor base eager for yield, private credit funds began to seize the opportunity. They offered borrowers something banks could no longer guarantee: speed, certainty, and customization. For companies navigating uncertain markets, the ability to secure a tailored debt package within weeks—rather than months—proved invaluable. Thus began a migration of credit demand from regulated to unregulated lenders, from banks to funds, and from public to private markets.

Private Credit's Meteoric Rise: From Alternative to Essential

What followed was a decade-defining expansion of private credit as an institutional asset class. Between 2013 and 2023, private credit assets under management grew at a compound annual rate of 15 percent, ballooning from $500 billion to over $2.1 trillion globally. North America, with its deep private equity ecosystem, mature investor base, and advanced financial infrastructure, accounts for nearly 60 percent of this total. Yet, the phenomenon is not confined to the United States. Europe, too, has seen rapid acceleration, growing at a CAGR of 17.3 percent over the same period. These figures are more than mere statistics; they represent a paradigm shift in how capital is sourced, structured, and deployed across borders.

What makes private credit particularly compelling is its alignment with modern investor priorities. In an era marked by prolonged yield suppression, pension funds, insurers, endowments, and sovereign wealth funds have sought refuge in assets that offer consistent income without excessive volatility. Private credit fits the bill perfectly. With most deals structured as floating-rate instruments, these loans provide a natural hedge against inflation and rising base rates. Moreover, the illiquidity premium associated with private credit—traditionally seen as a drawback—is now recognized as a source of enhanced return in exchange for duration commitment.

This investor enthusiasm is evidenced by the dramatic increase in "dry powder" — capital committed but not yet deployed. As of 2023, global private credit dry powder exceeded $490 billion. This is not idle cash; it is a war chest, poised to support deal flow even in volatile conditions. Indeed, the resilience of the private credit market during recent macroeconomic shocks underscores its maturity. During the inflationary turmoil of 2022 and the banking crisis of 2023, private credit deployment remained robust, with funds continuing to lend where banks demurred. The combination of investor confidence and borrower demand has created a virtuous cycle that reinforces private credit’s ascent as a cornerstone of modern capital markets.

Displacing Bonds and Syndicated Loans: A Structural Reordering of Credit Preferences

One of the most telling indicators of private credit’s systemic rise is its divergence from traditional fixed-income markets. Since 2005, private credit has grown by over 500 percent, vastly outpacing the relatively stagnant performance of global high-yield bonds and broadly syndicated loans. This is not a cyclical anomaly but a structural realignment of investor and borrower preferences. The public debt markets, with their reliance on mark-to-market pricing, liquidity-driven volatility, and stringent disclosure requirements, have become less appealing. In contrast, private credit offers an environment of contractual cash flows, covenant-rich structures, and deal confidentiality.

For borrowers, especially those in the mid-market and sponsor-backed segments, private credit offers the ability to bypass ratings agencies, avoid restrictive capital markets timing, and negotiate directly with lenders who understand their business models. This bespoke nature of private credit transactions enables companies to optimize capital structures, extend maturities, and align covenants with business cycles. For lenders, the benefit is equally clear: tighter control, enhanced yields, and insulation from public market swings.

Building Modern Portfolios: The Cash Flow Imperative

Institutional portfolios have begun to reflect this structural shift. Increasingly, allocators are moving away from traditional 60/40 equity-bond portfolios in favor of strategies that prioritize recurring income and downside protection. Private credit fits seamlessly into this new paradigm. A portfolio that integrates just 10 percent private credit, reducing bond exposure equivalently, generates higher long-term returns and experiences lower volatility during crises.

Private credit enhances cumulative returns without increasing beta exposure. Its contractual yield nature acts as a buffer during inflationary cycles, Fed hikes, or equity drawdowns. The income generated is not tied to mark-to-market valuations, making it ideal for long-term investors seeking capital preservation and consistent cash flows.

The Risk-Return Profile: Superior Across Market Cycles

Over multiple time horizons, private credit has demonstrated a superior internal rate of return compared to leveraged loans and high-yield bonds. More importantly, the Sharpe-like profile is higher due to the senior-secured and covenant-heavy structure of most direct lending deals. Even during periods of high interest rates and macroeconomic distress, such as 2022–2023, private credit outperformed in both absolute and risk-adjusted terms.

Understanding the Capital Stack: Credit Structures and Sectoral Spread

The composition of private credit deals across sectors reveals much about the asset class’s structural strength and adaptability. At the heart of its resilience lies the predominance of secured lending—a strategy designed to maximize capital preservation while delivering consistent yields. According to recent data, approximately 55.8% of all private credit deals across sectors are secured loans. This is particularly pronounced in industrial machinery (63.5%), healthcare (57.4%), and IT infrastructure (50.2%), sectors characterized by significant capital expenditures and tangible asset bases that can be pledged as collateral. Secured loans offer downside protection in times of volatility and create a senior position in the capital stack, shielding investors from default cascades and recovery shortfalls.

However, the story does not end with senior-secured debt. The next layer of the capital stack—mezzanine financing—comprises a substantial 25.7% of deal volume. Mezzanine instruments, by nature subordinated to senior loans, are a strategic choice for investors seeking to capture incremental yield without full exposure to equity risk. Interestingly, mezzanine lending is particularly significant in the software sector, where 30.5% of private credit transactions involve this structure. This makes intuitive sense: software companies, while often asset-light, can exhibit high recurring revenues and scalable business models, creating an environment where mezzanine debt offers attractive risk-adjusted returns.

In between these poles lies the unitranche structure, a hybrid model combining senior and subordinated tranches into a single facility. Unitranche deals simplify the borrower experience by eliminating the inter-creditor complexities of traditional multi-tranche arrangements. Though they make up a smaller portion of total deal flow—only 7.1% across all sectors—unitranche structures are disproportionately favored in the software (22.4%) and healthcare (11.0%) industries. These sectors, often backed by private equity sponsors, require bespoke capital solutions that support both working capital and growth initiatives. The flexibility of unitranche lending enables lenders to tailor amortization schedules and covenant packages, allowing for maximum alignment between operational realities and capital structures.

The final category—“Other” structures—comprises around 11.6% of total deals. These include payment-in-kind (PIK) toggles, preferred equity-like instruments, and revenue-based financing mechanisms. Interestingly, IT infrastructure stands out in this category, with 20.6% of its private credit volume structured under non-traditional formats. This reflects the evolving nature of the sector, where long-term contractual revenues (e.g., SaaS, cloud hosting, or data centers) offer predictable cash flows that can support innovative capital solutions beyond conventional term debt.

Taken together, this rich diversity of structures enables private credit managers to customize deal terms to both borrower and investor needs. More importantly, it underlines private credit's agility compared to traditional bank lending or public market debt, where uniformity often outweighs nuance. By optimizing the capital stack on a deal-by-deal basis, private credit funds not only deliver superior risk-adjusted returns, but also reinforce their critical role in modern capital formation.

Defaults and Credit Performance: Sponsored vs. Non-Sponsored Loans

Default rates in private credit remain lower than comparable public instruments, particularly among sponsor-backed transactions. Private equity sponsors often bring operational oversight, faster corrective action, and capital infusions during stress periods. As a result, default rates on sponsored loans have declined below 2.5 percent as of 2023, while non-sponsored loans remain above 7 percent.

Sizing the Opportunity: A $30+ Trillion Addressable Market

While the private credit industry has already crossed the $2.1 trillion mark in assets under management, its current footprint merely scratches the surface of its long-term potential. According to recent estimates, the total lending balance across U.S. financial markets stands at approximately $34 trillion as of 2024. This includes credit provided by both banks and nonbanks across a wide range of asset classes, from commercial real estate to infrastructure, corporate finance, consumer loans, and securitized products. Within this massive credit ecosystem, private credit’s current allocation represents only a small fraction—suggesting that the sector is still in its early innings of growth, with enormous headroom ahead.

A closer examination of the lending landscape reveals where the most immediate opportunities lie. In commercial and corporate finance, which comprises approximately $5.7 trillion in outstanding credit, nonbank lenders already contribute $1.8 trillion, or nearly one-third of the market. This signals a significant level of displacement from traditional banks, and also an established foundation for further expansion. Similarly, the $4.6 trillion commercial real estate market includes $1.5 trillion in nonbank credit—a sector where private credit funds can scale further, particularly as regional banks reduce their exposure in response to rising interest rate risk and asset valuation uncertainty.

Infrastructure finance remains a particularly underserved area. Of the $0.3 trillion in current lending volume, virtually all comes from bank lenders. This underpenetration highlights a white-space opportunity for private credit to step in, especially as public-private partnerships, ESG mandates, and energy transition initiatives call for massive capital outlays. Private credit strategies structured around infrastructure debt—whether through long-dated mezzanine tranches or green project finance—could easily claim a larger slice of this pie as regulatory headwinds and balance sheet limitations deter banks from increasing exposure.

Another area ripe for private credit disruption is consumer finance. With over $9.2 trillion in total lending—$1.9 trillion of which already comes from nonbank sources—consumer credit represents a broad and fragmented market where specialized lending strategies, such as installment finance, point-of-sale credit, and non-prime lending, are flourishing outside the bounds of traditional banking. As financial technology platforms and alternative underwriting models mature, private credit funds are increasingly stepping in to fund these innovations, offering capital in areas where banks remain risk-averse or constrained by compliance hurdles.

Finally, securitized products—an umbrella that includes collateralized loan obligations (CLOs), asset-backed securities (ABS), and mortgage-backed securities (MBS)—comprise another $12.1 trillion in U.S. credit markets. Although this segment is largely public and regulated, the increasing use of private credit structures to originate, warehouse, and tranche bespoke portfolios suggests that the boundaries between securitization and direct lending are beginning to blur. As private credit managers integrate vertically—sourcing, structuring, and sometimes securitizing their own loans—they are positioned to capture value at multiple points in the capital value chain.

Taken together, the numbers point to a $30–34 trillion total addressable market for private credit in the United States alone. While not all of this market is immediately available for substitution, even modest shifts in lending behavior or regulatory posture can have profound effects. If private credit were to gain just 10 percent additional share across these segments, it would imply another $3–4 trillion in assets—more than doubling the current market size. As regulatory constraints, capital requirements, and structural inefficiencies continue to challenge the banking sector, private credit is uniquely positioned to fill the void—not as a temporary alternative, but as a permanent fixture in the architecture of modern credit.

Conclusion: Private Credit as the Cornerstone of a New Credit Paradigm

The retrenchment of banks from traditional lending functions has done more than disrupt short-term credit availability—it has fundamentally altered the landscape of capital formation. In response, private credit has emerged not merely as a substitute, but as a superior model in many respects. It offers borrowers greater flexibility, investors better yield and protection, and allocators more control over cash flow timing and risk.

As of 2025, private credit is no longer an "alternative." It is central, essential, and likely permanent. The remaining question is not whether this market will grow, but how quickly it will reach maturity. The dry powder is ready. The borrowers are lining up. And the banks? They're not coming back anytime soon.

Sources & References

BIS. (2025). Collateralized lending in private credit. https://www.bis.org/publ/work1267.pdf 

EY. (2024). Private Debt – An Expected But Uncertain “Golden Moment”? https://www.ey.com/en_lu/insights/wealth-asset-management/private-debt-an-expected-but-uncertain-golden-moment 

Goldman Sachs. (2024). Understanding Private Credit. https://am.gs.com/en-int/advisors/insights/article/2024/understanding-private-credit 

Hamilton Lane. (2025). Has the Golden Age of Private Credit Lost its Shine? https://www.hamiltonlane.com/en-us/insight/private-credit-2025 

IMF. (2025). Global Financial Stability Report. https://www.imf.org/en/Publications/GFSR 

Morgan Stanley. (2024). Understanding Private Credit. https://www.morganstanley.com/ideas/private-credit-outlook-considerations 

MSCI. (2025). Private-Credit Funds Eclipsed Private Equity in 2024. https://www.msci.com/research-and-insights/quick-take/private-credit-funds-eclipsed-private-equity-in-2024 

Pimco. (2024). Private Credit: Asset-Based Finance Shines as Lending Landscape Evolves. https://www.pimco.com/us/en/insights/private-credit-asset-based-finance-shines-as-lending-landscape-evolves 

Proskauer. (2025). Proskauer’s Private Credit Default Index Reveals Rate of 2.42% for Q1 2025. https://www.proskauer.com/report/proskauers-private-credit-default-index-reveals-rate-of-242-for-q1-2025 

S&P Global. (2023). Default, Transition, and Recovery: U.S. Recovery Study: Loan Recoveries Persist Below Their Trend. https://www.spglobal.com/ratings/en/research/articles/231215-default-transition-and-recovery-u-s-recovery-study-loan-recoveries-persist-below-their-trend-12947167 

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