Key Takeaways
- • Private credit assets under management are approaching $2tn, according to Mercer, and the asset class has moved from a complementary financing source to a core component of corporate funding.
- • Non-bank lenders now account for a significant share of corporate lending, and in the UK private-equity-backed companies represent up to 15% of total corporate debt and around 10% of private sector employment, equating to more than two million jobs.
- • Benchmark rates rising from near zero in 2020 have reset return baselines, with private credit's floating-rate structure generating higher income and income re-emerging as a primary performance driver.
- • Rising borrower stress, including declining interest coverage ratios, more borrowers with negative free cash flow and greater use of payment-in-kind structures, has not yet fully shown up in default rates.
- • Mercer argues that public and private credit are converging, and that portfolio resilience will depend on a total portfolio approach that accounts for overlapping, less visible risk concentrations.
Summary
Mercer's analysis argues that the distinction between public and private credit is becoming less defined as capital intermediation shifts across the financial system. Private credit, once viewed as a complementary or alternative source of financing, has expanded into a core component of corporate funding, with assets under management now approaching $2tn. Mercer attributes this growth in part to regulatory changes and capital and liquidity requirements that have constrained banks' capacity to lend to more highly leveraged borrowers, with private capital filling the gap through direct lending, asset-based finance and more specialised strategies.
The scale of the shift is visible in both markets and the wider economy. Non-bank lenders account for a significant share of corporate lending activity. In the UK, private-equity-backed companies represent up to 15% of total corporate debt and around 10% of private sector employment, equating to more than two million jobs, according to the report. Mercer notes that private markets increasingly operate with debt and equity in tandem, as companies access capital outside public markets and remain private for longer.
The interest rate environment has also reset the return profile of credit. With benchmark rates rising from near zero in 2020 to materially higher levels, private credit, essentially a floating-rate asset class, has generated higher income, and income has re-emerged as a primary performance driver after a decade when returns were largely driven by rate compression. Mercer cautions, however, that borrowers are absorbing the same conditions. Declining interest coverage ratios, a growing share of borrowers with negative free cash flow and increased use of payment-in-kind structures point to emerging stress, although these pressures have yet to fully materialise in default rates.
Mercer also highlights growing interdependence. Regulators have flagged bank exposure to private credit through lending to funds and sponsor-backed corporates, often structured via subscription facilities and asset-backed financing. While such structures support liquidity in stable conditions, they can transmit pressures more widely where exposures are less transparent. Mercer concludes that public markets offer liquidity, transparency and price discovery, while private credit provides access to less liquid and more diverse segments, and that combining the two supports more integrated management of duration, yield and liquidity. It warns that overlapping exposures driven by common factors such as interest rates can create less visible concentrations of risk, and that resilience will depend on a total portfolio perspective.
The scale of the shift is visible in both markets and the wider economy. Non-bank lenders account for a significant share of corporate lending activity. In the UK, private-equity-backed companies represent up to 15% of total corporate debt and around 10% of private sector employment, equating to more than two million jobs, according to the report. Mercer notes that private markets increasingly operate with debt and equity in tandem, as companies access capital outside public markets and remain private for longer.
The interest rate environment has also reset the return profile of credit. With benchmark rates rising from near zero in 2020 to materially higher levels, private credit, essentially a floating-rate asset class, has generated higher income, and income has re-emerged as a primary performance driver after a decade when returns were largely driven by rate compression. Mercer cautions, however, that borrowers are absorbing the same conditions. Declining interest coverage ratios, a growing share of borrowers with negative free cash flow and increased use of payment-in-kind structures point to emerging stress, although these pressures have yet to fully materialise in default rates.
Mercer also highlights growing interdependence. Regulators have flagged bank exposure to private credit through lending to funds and sponsor-backed corporates, often structured via subscription facilities and asset-backed financing. While such structures support liquidity in stable conditions, they can transmit pressures more widely where exposures are less transparent. Mercer concludes that public markets offer liquidity, transparency and price discovery, while private credit provides access to less liquid and more diverse segments, and that combining the two supports more integrated management of duration, yield and liquidity. It warns that overlapping exposures driven by common factors such as interest rates can create less visible concentrations of risk, and that resilience will depend on a total portfolio perspective.
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