Why Private Credit Can Continue to Thrive

Private credit—loans made by non-bank lenders outside the public markets—has exploded in size over the past decade. Global private credit assets swelled to roughly $3 trillion in the second quarter of 2025. This rapid growth has led to criticism around the sustainability of the asset class. The fear is this growth has been accompanied by weaker underwriting—covenant-lite loans, high leverage and optimistic valuations are frequently cited along with press headlines warning that the sub-investment grade (sub-IG) market is entering bubble territory. However, we believe these concerns are overblown.

Delineating between two distinct universes

Private credit’s rise can be viewed as a structural shift: After the 2008 crisis, banks pulled back from lending to many businesses (due to regulation and capital rules), and private funds filled the void. Thus, much of the private credit AUM growth is simply the disintermediation of banks, not a speculative bubble on top of existing credit. Federal Reserve data point out that overall private-sector corporate indebtedness hasn’t spiked in the last decade. Companies are borrowing, but not dramatically more than before; they’re just borrowing more from private sources.

"Private credit," however, is not monolithic. It spans a spectrum from high-quality corporate loans (IG) to risky mezzanine debt (sub-IG), with IG and sub-IG private credit segments each having distinct characteristics.

• IG private credit consists of private loans made to highly rated borrowers across widely diverse sectors and maturities. These are fixed rate products that carry a rating from a third-party agency—just like their public equivalents. One example: private placements. 
• Sub-IG private credit includes loans to lower-rated, often middle-market companies (essentially an alternative to public leveraged loans or high-yield bonds). It encompasses direct lending, mezzanine financing and other types of higher-yielding private debt. These are floating rate products that are governed by custom / proprietary rating policies.

Each category is sizeable—on the order of ~$1.5 trillion each in outstanding loans—but the segments have varying investor bases and risk profiles.

Figure 1: Both segments of the private credit market are sizeable

Source: L&G – Asset Management, America.

Assessing downside risks

IG private credit

Even if we suppose the bearish case that the sub-IG side of private credit enters bubble territory, this does not automatically mean the entire private credit market would collapse or spread turmoil broadly. Several factors compartmentalize risks, especially between the two segments of the private credit market:

• Different borrowers, different risks: The IG side is lending to high-quality companies, projects and financing facilities with strong balance sheets and predictable cashflows. The sub-IG side is funding highly leveraged companies often backed by private equity. Trouble in one cohort doesn’t necessarily translate to the other. For instance, a wave of defaults in speculative B-rated retailers wouldn’t imply anything about the ability of an AA-rated infrastructure project to pay its private placement coupons.
• Different lenders, similar appetite: IG private credit investors (for example, insurers and pensions) typically hold these loans to maturity, using them to match long-term liabilities. They are not mark-to-market traders, but neither are sub-IG investors. These investors do not tend to lean on their private credit allocations for liquidity.
• Limited interconnectedness: One hallmark of the 2008 global financial crisis was interconnectivity. Banks and markets were linked by levered subprime mortgages. Private credit, by contrast, is more siloed. Loans are not broadly traded or held by leveraged intermediaries who lend to each other. Instead, they sit on the books of funds and insurance accounts that generally match them with long-term capital.
• Structural protections in IG loans: IG private loans typically have tight covenants and security packages. This means if a borrower’s financial performance slips, IG lenders can often step in early—often well before any payment default—to renegotiate terms, obtain additional collateral or even demand repayment.

Sub-IG private credit

The bearish case is not our base case. We do not expect that the sub-IG private credit segment will collapse given the following factors:

• Private equity sponsor support: A large portion of direct lending is sponsor-driven (for example, loans made to private equity owned companies). Sponsors are not passive bystanders. They typically have 30-50% equity invested in these companies.
• Active management: Private credit managers often tout their ability to be “partner lenders.” They stay close to the borrower with frequent reporting and board observation rights in some cases.
• Diversification and dry powder: The private credit universe itself is highly diversified—by sector, geography and borrower—unlike the loans that characterized the housing bubble. Additionally, many private credit funds still have undrawn capital commitments. In a downturn, that dry powder can be used to support portfolio companies or selectively buy distressed loans (providing a floor to valuations).

Conditions for private credit to thrive

Looking forward, we believe both IG and sub-IG segments have the opportunity to thrive under certain basic conditions. IG lenders must remain committed to third-party rating agency oversight to maintain rating standards. Sub-IG lenders, on the other hand, must stay focused on robust economic opportunities at measured risk levels and avoid non-economic performance objectives. Over the past twenty years, non-bank lenders have continued to offer unique and customized financing solutions to IG and sub-IG segments, as healthy capital markets require lenders in every rating category and across investment horizons.

Disclosures

Legal & General Investment Management America, Inc. (d/b/a L&G – Asset Management, America) (“LGIMA”, “LGIM America”) is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). LGIMA provides investment advisory services to U.S. clients. L&G’s asset management division more broadly—and the non-LGIMA affiliates that comprise it—are not registered as investment advisers with the SEC and do not independently provide investment advice to U.S. clients. Registration with the SEC does not imply any level of skill or training.

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