The extension of credit has been a core human social activity for thousands of years. The practice of lending was first recorded in ancient Mesopotamia around 3,000 BC, when early farmers began borrowing seeds and paying the debts with their harvest. Lending flourished in Ancient Greece, where the market became more structured and interest rate limits were imposed. Since then, lending has evolved continuously but society’s need to channel capital from savers to those aiming to consume or invest today has remained consistent. In our view, private debt is yet another example in this long history of lending innovations, and one that is delivering benefits to borrowers, investors and society.

Private debt has grown and become more institutionalized following the Global Financial Crisis (GFC). The key driver of the now $1.6 trillion-dollar market’s growth has been the pullback of banks from non-core lending activities, which has created an opportunity for private lenders to step up. This, in turn, has helped broaden access to credit, allowing a new class of small and medium sized borrowers to tap into high-quality capital.

In our view, the robust growth in private debt reflects multiple ongoing structural shifts in capital markets. Since the GFC, regulation has increasingly limited the spectrum of risk that banks can take, causing them to retreat from certain areas of lending and market making. Access to public markets remains critical, although that channel is not always an option for all businesses as it can be difficult to execute transactions during periods of volatility. Meanwhile, demand for financing continues to grow, boosted by small and mid-sized borrowers and companies that are choosing to remain private for longer.

Key takeaways

• Private debt has grown from niche asset class to a heavyweight due to multiple structural shifts in capital markets. In our view, many of those changes are set to accelerate in the coming years.
• For investors, the appeal of private debt comes not only from its income generation, but also its diversifying potential as a reversal in the stock/bond relationship takes hold. 
• Borrowers have increasingly preferred private debt solutions due to the improved execution, tailored nature and ability to have direct contact with one or a few lenders.
• In our view, the continued growth in private debt presents benefits not only for investors and borrowers, but also for the functioning of the economy overall.