Understanding the Private Debt Market
Table of Contents
Evolution
It’s amazing how private debt has transformed from a niche alternative investment category in just over a decade. Before the 2008 financial crisis, when I had just started out, private credit funds played what I can describe as a “complementary” role, often providing the final slice of financing and assuming the highest credit risk in traditional capital structures. When banks suddenly retreated from middle-market lending post-crisis due to heightened regulatory pressures, private debt managers seized the opportunity, evolving from the gap fillers to primary capital providers.
Today, this asset class has expanded nearly tenfold to reach approximately $1.5 trillion in 2024, effectively creating an entirely parallel banking system. What’s particularly striking is how private debt has shifted from being viewed as opportunistic capital to becoming the financing option of choice for many borrowers, particularly in the middle market where traditional lenders have left a significant void.
I’ve witnessed this transformation firsthand, working for a leading service provider to some of the earliest European direct lending funds that emerged around 2012-2013. What began as an opportunistic play has developed into a sophisticated ecosystem of specialised strategies, each with distinct risk-return profiles and operational characteristics.
Growth drivers
I think there are several interconnected factors that helped propel private debt’s remarkable expansion:
First, the regulatory pressure on banks has been relentless. Basel III implementation forced banks to fundamentally reassess their balance sheets, creating a lending gap that private credit rushed to fill. This was not merely cyclical, it was a structural shift in capital provision that has permanently altered the corporate financing landscape.
Second, private debt offers superior execution advantages. In today’s fast-paced deal environment, the certainty and speed provided by private lenders often outweigh pure pricing considerations. We’ve seen transactions where borrowers willingly pay premium rates for the flexibility and reliability that private debt provides, particularly in competitive acquisition scenarios where execution certainty determines success.
Third, the symbiotic relationship with private equity cannot be overstated. Current estimates suggest that 85% of leveraged buyouts are now funded by private credit, compared to just 60% five years ago. As private equity firms have raised increasingly larger funds, they’ve required debt providers capable of matching their scale and speed – a need perfectly aligned with private credit’s evolution.
Finally, structural innovation has accelerated adoption, particularly the unitranche facility, which combines senior and subordinated debt into a single instrument. The market has evolved from modest $50-100 million unitranche facilities to routinely executing $500 million-plus transactions, demonstrating both borrower appetite and investor capacity for these streamlined solutions. Originally designed for middle-market transactions, unitranche facilities are now regularly used for financings exceeding $1 billion, and in some cases, even up to $3 billion.
Future growth projections
Private debt appears poised for continued expansion, with projections suggesting the market could reach $3.5 trillion by 2028. This growth, however, won’t be uniform across geographies or strategies.
Geographically, we see a maturation curve developing: the U.S. market represents the most developed ecosystem, Europe is experiencing accelerating adoption (particularly in Germany and southern European markets where regulatory barriers to direct lending have recently fallen), while Asia presents the greatest untapped potential, evidenced by significant fundraising activity in the region.
Strategically, we’ll likely witness greater specialisation. While direct lending remains the dominant strategy, we’re seeing increasing appetite for specialised lending in sectors requiring deep domain expertise such as infrastructure, healthcare, technology, and sustainability-linked financing.
The current interest rate environment has created what some describe as a “golden age” for private credit, with investors enjoying double-digit unlevered returns on senior secured debt while benefiting from the inflation protection offered by floating rate instruments. While rates will inevitably fluctuate, I think the structural advantages of private debt positioning should sustain its growth trajectory through various market cycles, because businesses still have working capital requirements even during a market downturn.
Institutional adoption
According to KPMG’s Private Debt survey in 2024, institutional investors constitute approximately 84% of the private debt investor base, with retail investors representing just 7%. This institutional dominance reflects both the asset class’s relative youth and the sophisticated approach required for effective allocation.
The institutional investor spectrum has broadened considerably over the past decade. Initially dominated by pension funds and insurance companies with prior private market experience, the investor base has expanded to include sovereign wealth funds, endowments, foundations, and family offices worldwide.
Allocation approaches have similarly evolved. While commingled flagship funds remain the primary access point, approximately 80% of managers now offer custom solutions. These range from managed accounts (available at increasingly lower investment thresholds) to co-investment programs, which 68% of managers expect to grow further based on investor demand for enhanced economics on specific transactions.
The main drivers of institutional adoption are portfolio diversification, yield enhancement, and inflation protection. As public fixed income markets experienced prolonged yield compression, private debt offered a compelling alternative with potentially superior risk-adjusted returns. Even in today’s higher-rate environment, the floating rate nature of most private debt investments provides inflation protection characteristics that many fixed-rate alternatives lack.
What’s next?
Private debt is an essential component of both the corporate financing ecosystem and institutional portfolios. Its continued evolution will likely feature greater specialisation, enhanced regulatory frameworks, and potentially broader retail access through vehicles designed to bridge the liquidity gap between investors and underlying assets.
If you are considering private debt allocation for the first time, make sure you spend time understanding this market. This is essential for selecting strategies that align with specific portfolio objectives and risk profiles.
This article is a brief overview about private debt investments based on my involvement in the structuring/administration of private debt fund structures. It does not constitute investment, legal, tax, or accounting advice.
Date: 22 May 2025
Written by: Asad Bukhory