Private Credit: What’s the Fuss?

The U.S. private credit market, defined as debt that is not publicly issued or traded, has expanded rapidly and now exceeds $1.7 trillion in assets under management as of the end of June 2023, according to data from the Federal Reserve cited by the American Action Forum. That figure represents a 10-fold increase since 2007, and McKinsey & Company has estimated the total addressable market for private credit in the United States could exceed $30 trillion. The asset class's growth is traced to the 2008–2009 financial crisis and subsequent policy response, when near-zero interest rates reduced yields on public corporate and government debt and post-crisis capital requirements led large banks to curb lending to middle-market companies.

Private credit differs structurally from bank lending and public credit. Nonbank lenders raise capital from investors to issue loans directly to companies, typically small and middle-market firms, and generally hold these loans to maturity. According to the IMF, closed-end funds make up 81% of the vehicle market, business development companies (BDCs) account for 14%, and collateralized loan obligations (CLOs) for 5%. Pension funds, endowments and foundations, and family offices and wealth managers are the principal investors, as the illiquidity premium and diversification benefits suit longer-term investment horizons.

Federal Reserve data show direct lending accounted for nearly half of total private debt in 2023, with almost half of private debt used for general business purposes such as working capital. Information technology (41%) and health care (14.5%) are the largest borrower sectors globally per IMF data. The Bank for International Settlements reports direct loans to AI firms have grown from nearly zero a decade ago to more than $200 billion, and estimates outstanding private credit to AI firms could reach $300–$600 billion by 2030.

The report highlights several stability concerns. Average loan maturity was 4.4 years according to the Federal Reserve, down from a 5.6-year peak in 2021, and the closed-end structure limits forced redemptions. Nearly all private credit loans are floating-rate, resetting every 30 to 90 days, which could strain borrowers if rates remain elevated for a prolonged period. The IMF has warned that valuation uncertainty could incentivize managers to delay recognition of losses, and the opacity of the sector makes it difficult for regulators to quantify its linkages to the broader financial system.