The evolving specialized credit landscape: market dynamics and growth opportunities
The specialized credit market continues to expand in terms of investor profiles, asset class diversity and transaction volumes. No longer the preserve of niche market players, private credit has truly gone mainstream, and is now creating more opportunities for traditional financial institutions.
According to a recent report by the U.S. Federal Reserve1, banks are “increasingly originating their own private credit deals by using minority stakes in private debt funds and Business Development Companies.”
“Banks have also engaged in other activities in the evolving corporate credit landscape,” says the report, “By increasing their interconnections with private credit and other non-banking financial intermediaries (NBFIs).”
Craig Boardman, Industry Principal for Lending at Finastra, says that one sign of this greater market maturity is that: “Every bank on Wall Street either has a private credit arm, is investing in it directly from their balance sheet, or is partnering with a buyside firm.”
So which investments does private credit encompass, what are the drivers that fuel the sector, where are the opportunities for banks, and how will technology help to achieve growth?
Padraig Sherry, Head of Private Market Operations, LGT Capital Partners, says that while every asset manager from the buy-side will have their own definition of the private credit market, his includes a range of different verticals.
“On the liquid side we have investment-grade investments,” he explains. “We also have higher yielding sub-investment grade investments, semi-liquid syndicated loans, fund-of-funds and our direct loan book.”
Peter Irvine, Head of Loan Agency Client Services, Europe, HSBC agrees that the private credit market is “pretty varied these days” and includes a range of different assets. “We expect to see that grow and develop further in the future,” he says.
From single asset class to ecosystem
Cory Olsen, Director of Agency and Loan Operations, Consultant, Loan Market Association (LMA) highlights that at its core, private credit was all about non-bank lending but, as financing needs evolved, stepped in to support borrowers and has since grown into a broader network of funding and financing.
“As the market has needed more finance across different sectors that’s where private credit has kicked in,” she explains. “Instead of being a single asset class, private credit is now an ecosystem of different players.”
Private credit is starting to mature, agrees Padraig. “We’ve gone through the first significant growth phase and we’re now seeing some changed realities, both in terms of the marketplace and in fund structures and liquidity. It’s a natural correction, but for good managers with strong credit discipline, this is a big opportunity.”
Peter adds that he has seen increased operational complexity of some private credit transactions. “So while we might see things like simpler covenant structures, we’re also seeing more bespoke parameters around how we service those transactions.
“We’re looking at different types of payments and interest arrangements – we are very much working with the banks and our clients to ensure the transactions work in practice. It’s really important to get ahead of the game on the private credit side and make sure we’re involved in those journeys from the start of documentation right through the life of that facility.”
There have been concerns about how private credit will perform as the market evolves, observes Cory, but she suggests some of this likely reflects a mismatch in expectations. Private credit funds typically invest in illiquid assets, and pressures can arise when investors seek liquidity before those assets are ready to be realised.
“The point remains that underwriting is a lot stronger now, which is why the strongest managers will excel,” she says.
Regulation coming down the track
More reform and regulation of the UK private credit market may be on the way, adds Cory: “The Bank of England is looking into different ways to monitor systemic risk in private credit. It’s not like regulation of an individual bank, where the regulator is going to monitor an actual firm, but more of an investigation and stress test, working with a number of participants over the year.”
Progressive regulation could play a role in the private credit market, (in similar fashion to recent T+1 settlement cycle changes). Whatever comes next, it’s likely that investors will require more real-time information, greater reliance on digital processes than on paper documents, shorter turnaround times and the ability to service complex, often bespoke deals. Business models will need to continue to evolve to meet those timeframes.
Peter agrees that private credit transactions increasingly require shortened timelines, and that the need for real-time information will be ‘a natural further development in the market’: “As agents we need to understand what the new asks will be and ensuring that we are set up for success.”
“We’re seeing a lot of AI tools come into play as well as automatic reporting, and we’ll see more of that as we go through the next six months to a year,” he adds.
Investors want more information
End investors will also increasingly expect to have greater access to real-time information, believes Padraig. “They want to be able to look through their investments and see what their underlying exposures are, and whether they relate to sectors, interest rate, risk, geography or any other macro events.”
The speed with which investors expect private credit deals to complete makes providing such information quickly a challenge, particularly when there could be data security risks.
“It’s a complex equation but one that we are happy to meet,” Padraig says. “Being able to work with software partners like Finastra is an important part of the jigsaw. That’s where AI, systems and services can play a big part in expediting deliverables to investors and portfolio managers.”
Finastra believes that one of the benefits of private credit deals is that they can meet highly bespoke terms and conditions, for both borrowers and lenders. Managing a portfolio without the right tools and technologies can be challenging, which is why it makes sense to consider introducing a lending platform that can support private credit transactions.
A lending platform like Finastra’s Loan IQ, for example, has the capabilities required to manage the complexity associated with private credit loans and cover all aspects of the loan lifecycle, including loan onboarding, servicing, syndications and trading.
Looking ahead, the private credit space is positioned for continued growth, concludes Craig. “As lenders capitalize on growth opportunities in the space, leveraging AI and other technology advances to boost capacity and efficiency will be vital to thriving in a quickly evolving landscape.”
It’s clear that the private credit marketplace has grown by transaction volume and asset class over the past few years, creating an ecosystem in which banks can play an increasingly important role. In preparation for ongoing developments, including the need for greater transparency, speed and variable terms and conditions, financial institutions need to determine which business model is right for them, then introduce the processes and underlying tech platform to ensure they can manage private credit deals across the board.
1https://www.federalreserve.gov/econres/notes/feds-notes/bank-lending-to-private-credit-size-characteristics-and-financial-stability-implications-20250523.html
