Private credit for the next generation: What it is and why it matters - Brown Brothers Harriman

Brown Brothers Harriman (BBH) has published an explainer on private credit, defining it as lending that takes place outside traditional banks and public markets, where companies borrow from investment firms, funds, and other nonbank institutions rather than through public bonds or typical bank loans. The firm attributes the asset class's growth to the post-global financial crisis pullback by banks, which accelerated a development in business development companies (BDCs), direct lending, and securitized financing that had existed before 2008. Investors have been drawn by yields above traditional fixed income, potential diversification, and exposure to parts of the economy not easily reached through public markets.

BBH argues that rapid growth has introduced risks. As capital chased a limited set of attractive deals, lenders may have accepted weaker protections, tighter spreads, or riskier borrowers. The article identifies three drivers of recent scrutiny: a handful of high-profile credit events and bankruptcies that raised underwriting questions; pressure on lenders with meaningful software exposure as markets reassessed AI's long-term impact on software business models; and redemption limits at some private vehicles, which BBH says are built into fund structures from inception to prevent disorderly exits in a less liquid market. BBH partner and chief investment strategist Scott Clemons is quoted describing this as "a feature of the markets, not a bug."

BBH stresses that private credit is not a uniform market. According to the firm, about $17 trillion of nonbank loans are outstanding in the U.S., with only about $1.5 trillion in direct lending. BBH says it is highly selective in traditional direct lending given crowding and competition, while identifying opportunities in junior and senior asset-backed lending, multifamily-backed debt, and best-in-class direct lending. The firm also notes that recent market volatility has created select entry points in publicly traded BDC securities that have sold off materially. BBH's stated approach emphasizes durable loan origination, experienced management teams with proven loan performance records, and structural protections.

The article's broader message is that investors should evaluate the quality of the lending environment, including borrower quality, loan structure, collateral protections, and whether returns compensate for risk, rather than focusing on headline yield alone. BBH concludes that the asset class offers income, diversification, and access to unique opportunities for selective investors, and that disciplined underwriting matters more than market enthusiasm.