Private Credit Outlook: Expanding the Universe

The journey from niche asset to core allocation looks set to continue.

The market for private credit has expanded rapidly in recent years. We expect this growth to persist as lower interest rates boost transaction volume and private financing options evolve to include a wider array of asset classes and risk/return profiles.

There may be some short-term bumps in the road. While the global economy performed admirably in 2024, with GDP growth likely to weigh in at around 2.6%, the range of potential outcomes in the year to come remains wide. Interest rates appear likely to fall further, which should ease pressure on borrowers. But in the US, the potential for higher tariffs—and stickier inflation—may limit the extent of the decline.

Growth Forecast: Still Sunny

We think the long-term secular trend for private credit still paints a pretty picture.

On the supply side, asset managers and other nonbank lenders are increasingly providing capital to a variety of corporate and noncorporate borrowers, offering customized solutions with more flexibility than those that come from traditional bank lenders (Display).

Meanwhile, strong absolute and relative return potential should continue to support demand among institutional investors for privately originated assets. And individual investors are now finding it easier to access private credit—often without having to lock up capital for years, thanks to a wider array of investment options.

Corporate Lending: Return Potential is Attractive

Corporate direct lending will remain the lynchpin of many private credit allocations. Lower rates in 2025 may help to relieve pressure on many private equity–sponsored corporate borrowers. Lower rates may also contribute to increased deal flow, especially if a softer regulatory environment under a new US administration greases the wheels of corporate merger-and-acquisition activity.

A decline in the base rate used to price direct corporate loans suggests the overall return potential may fall short of the outsize returns that some direct lending strategies delivered in 2023 and 2024. But the risk-adjusted return potential remains strong, underpinned by still-elevated yields and resilient borrower fundamentals.

Expanding the Opportunity Set in 2025

Among the more promising developments, in our view, is the broadening of private credit to include lending to consumers, homeowners and small businesses through the $6 trillion-and-growing asset-based finance market.

Banks are increasingly embracing a “capital light” model that enables them to maintain loan sourcing and customer relationships while partnering with asset managers to underwrite, price and invest capital on behalf of insurance companies, pensions and other investors.

This creates opportunities for investors to purchase portfolios of seasoned loans from banks and nonbank lenders, or enter into forward flow agreements to acquire new ones that meet predetermined credit criteria. It’s a vast investment universe, ranging from US auto loans to reperforming German bank loans to installment loans for boats, snowmobiles, all-terrain vehicles—and more.

Navigating this market requires a seasoned manager with strong loan sourcing and underwriting skills—and the ability to build protective features into agreements to purchase loans from nonbank lenders. In the US, for instance, auto loan and credit card delinquencies have edged up this year. But underlying fundamentals, including income and net worth, have improved. For seasoned investors, the mixed outlook offers attractive opportunities to uncover value. (Display).

Experienced managers can effectively dimension and compensate investors for the risk of potential losses, including by purchasing loan portfolios at a discount or building in certain protections. For example, a manager might structure a deal to purchase a certain amount of nonprime auto loans over a specific period with a requirement that the originator forego part of its servicing fee if loans don’t deliver an agreed-upon yield.

It is also becoming easier to invest across the risk/return spectrum, including in investment-grade private credit, a category once limited to corporate private placements in which a company issues debt directly to a select group of investors instead of in a public offering.

What’s Next for Renewable Energy?

The ongoing energy transition has also been fertile ground for alternative lenders, given the long-term capital needs involved. But the near-term outlook for investments tied to renewable energy development is a bit cloudier—at least in the United States.

Private credit has provided a key source of financing in recent years, but US President-elect Donald Trump has talked about rolling back federal tax credits for renewable energy projects. Potential tariffs on imports from China are a factor, too: the Asian country provides most solar panels and the lithium-ion batteries used in utility-scale storage. We think uncertainty may accelerate projects in the short term as owners look to complete them prior to any potential changes in law.

Even so, we don’t expect opportunities to disappear for investors. While federal policy is a key investment consideration, it’s important to remember that the cost to provide renewable energy such as solar and wind is competitive with conventional technology even without tax credits. State policies and utilities’ net zero goals also play large roles in advancing the energy transition.

Investors may have to be more selective about opportunities. But over the longer run, we don’t expect policy changes to fundamentally alter the role renewables play in the energy ecosystem or the investment opportunities they present. For example, the rapid growth of generative AI alone is likely to require more power than the US electrical grid can supply today, and we believe renewables will be needed to meet that demand.

The regulatory and investment outlook outside the US presents a clearer picture. In Europe, power generated by solar and wind overtook fossil fuel–generated power in the first half of 2024, according to Ember, a global energy think thank, and the market is expected to more than double in size by 2030. We expect investment opportunities across countries there to persist.