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.
- • Mercer reports that 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.
- • Higher benchmark rates, up from near zero in 2020, have lifted income from floating-rate private credit, but borrowers face rising pressure, including falling interest coverage, more negative free cash flow and greater use of payment-in-kind structures.
- • Regulators have highlighted bank exposure to private credit through lending to funds and sponsor-backed corporates, often via subscription facilities and asset-backed financing, creating structural interdependence across credit markets.
- • Mercer argues that the public-private credit distinction is becoming less meaningful, and that portfolio resilience will depend on a total portfolio approach that examines how overlapping exposures interact.
Summary
Mercer's analysis argues that the boundary between public and private credit is eroding as capital intermediation shifts across the financial system. Private credit, once viewed as a complementary or alternative financing source, has expanded into a core component of corporate funding, with assets under management now approaching $2tn. Mercer attributes much of this growth to constraints on traditional bank lenders, where regulatory changes and capital and liquidity requirements have limited banks' capacity to extend credit to more highly leveraged borrowers. Private capital has filled that gap through direct lending, asset-based finance and more specialised strategies.
The scale of the shift is now visible in both markets and the wider economy. Non-bank lenders account for a significant share of corporate lending. In the UK, private-equity-backed companies represent up to 15% of total corporate debt and around 10% of private sector employment, which Mercer equates to more than two million jobs. The availability of private financing has also allowed companies to remain private for longer, reinforcing a private markets ecosystem in which debt and equity increasingly operate together.
The rate environment has reset return expectations. 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, which has become a primary driver of performance after a decade in which rate compression dominated returns. Mercer cautions that the same conditions are pressuring borrowers. 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. Mercer notes these pressures have yet to fully show up in default rates.
Mercer also highlights growing interdependence. Regulators have flagged bank exposure to funds and sponsor-backed corporates through subscription facilities and asset-backed financing. Such structures offer flexibility in stable conditions but can transmit pressure 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. Combining both allows investors to manage duration, yield and liquidity in an integrated way. Because exposures that appear distinct are often driven by common factors such as interest rates, Mercer argues resilience will depend on a total portfolio perspective that maps how risk is distributed across the system.
The scale of the shift is now visible in both markets and the wider economy. Non-bank lenders account for a significant share of corporate lending. In the UK, private-equity-backed companies represent up to 15% of total corporate debt and around 10% of private sector employment, which Mercer equates to more than two million jobs. The availability of private financing has also allowed companies to remain private for longer, reinforcing a private markets ecosystem in which debt and equity increasingly operate together.
The rate environment has reset return expectations. 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, which has become a primary driver of performance after a decade in which rate compression dominated returns. Mercer cautions that the same conditions are pressuring borrowers. 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. Mercer notes these pressures have yet to fully show up in default rates.
Mercer also highlights growing interdependence. Regulators have flagged bank exposure to funds and sponsor-backed corporates through subscription facilities and asset-backed financing. Such structures offer flexibility in stable conditions but can transmit pressure 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. Combining both allows investors to manage duration, yield and liquidity in an integrated way. Because exposures that appear distinct are often driven by common factors such as interest rates, Mercer argues resilience will depend on a total portfolio perspective that maps how risk is distributed across the system.
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