Key Takeaways
- • BlackRock's Private Markets research argues private credit is in a period of heightened expansion, with declining bank lending creating replacement capital demand, and that manager selection and risk discipline are critical.
- • The direct lending market is estimated at US$940 billion within a US$2.2 trillion private debt market, per BlackRock.
- • Bank lending to the U.S. private non-financial sector, as a share of GDP, has declined since the Global Financial Crisis, with an estimated $5-6 trillion reduction in bank lending expected over the next decade.
- • More than 80% of private credit assets raised since 2022 have gone to experienced managers, according to BlackRock.
- • Private credit has historically offered an average yield premium of 4.2% over public credit over the last 10 years, but that premium has compressed over the last three years due to higher cash rates and greater competition for capital.
- • Relative value between private and public credit is assessed across lender protections, manager engagement, and valuation methodology rather than yield alone.
Summary
BlackRock's Private Markets team says private credit is undergoing a period of heightened expansion, offering investors a growing range of opportunities alongside rising complexity. The firm estimates the direct lending market at US$940 billion, the largest component of a US$2.2 trillion private debt market, and argues that the headlines around a small number of high-profile deals understate the breadth of available opportunities.
BlackRock identifies three drivers of attractive opportunities. First, bank lending as a share of U.S. economic activity has declined since the Global Financial Crisis, and an estimated $5-6 trillion reduction in bank lending over the next decade is expected to support private credit as a source of replacement capital rather than additional system debt. Second, more than 80% of assets raised since 2022 have gone to experienced managers, suggesting established firms are leading growth. Third, most private credit assets sit in illiquid and semi-liquid fund structures, which BlackRock says allows managers to deploy capital selectively with patient capital.
The firm notes that investors demand a return premium over public credit for illiquidity and bespoke structuring complexity. The average private-versus-public yield premium over the last decade was 4.2%, though it has compressed in the past three years. BlackRock also observes a shift in the Cliffwater Direct Lending Index, which tracks more than 20,000 directly originated loans, toward first lien loans and away from second lien and mezzanine exposure.
BlackRock recommends assessing relative value using several factors: lender protections such as covenants, which it says are absent from 90% of the broadly syndicated loan market; the ability to engage with management in concentrated lender groups of typically 2-5 managers; and differences between third-party private valuations, which focus on contractual cash flows and tend to stabilize reported prices, and continuous public market pricing, which can be distorted by loan ownership, index inclusion, and CLO demand.
Manager selection, including experience across multiple credit cycles, remains central to BlackRock's view. Other commentary cited in the piece, from Man Group, characterizes the current cycle as one of dispersion rather than broad-based credit deterioration.
BlackRock identifies three drivers of attractive opportunities. First, bank lending as a share of U.S. economic activity has declined since the Global Financial Crisis, and an estimated $5-6 trillion reduction in bank lending over the next decade is expected to support private credit as a source of replacement capital rather than additional system debt. Second, more than 80% of assets raised since 2022 have gone to experienced managers, suggesting established firms are leading growth. Third, most private credit assets sit in illiquid and semi-liquid fund structures, which BlackRock says allows managers to deploy capital selectively with patient capital.
The firm notes that investors demand a return premium over public credit for illiquidity and bespoke structuring complexity. The average private-versus-public yield premium over the last decade was 4.2%, though it has compressed in the past three years. BlackRock also observes a shift in the Cliffwater Direct Lending Index, which tracks more than 20,000 directly originated loans, toward first lien loans and away from second lien and mezzanine exposure.
BlackRock recommends assessing relative value using several factors: lender protections such as covenants, which it says are absent from 90% of the broadly syndicated loan market; the ability to engage with management in concentrated lender groups of typically 2-5 managers; and differences between third-party private valuations, which focus on contractual cash flows and tend to stabilize reported prices, and continuous public market pricing, which can be distorted by loan ownership, index inclusion, and CLO demand.
Manager selection, including experience across multiple credit cycles, remains central to BlackRock's view. Other commentary cited in the piece, from Man Group, characterizes the current cycle as one of dispersion rather than broad-based credit deterioration.
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