Private Credit: More Than Ever… Or?

Hey guys, I hope you are all doing well and everything is smooth on your side 😊

It has been a bit more than 1 month since we wrote our last blog, which was about a possible AI boom and its possible effects. Now this time we will be inside the business world but from a bit of a different perspective and area. Ahh, you might already be thinking that this one might be a bit too "business," which makes it not an ideal topic for everyone. However, I will keep it quite simple. Yeah, right now maybe you are wondering about the topic — it is going to be private credit and some banks as you can understand from the headline, I will bring them together in a different manner.

Let's begin, as I've talked a lot. First, you might think: what is private credit? Private credit is a type of credit like bank loans, but the main difference is that private credit is not given by banks but by non-bank institutions. The ones who have the money are called limited partners (such as pension funds or insurance companies), and they give it to general partners (such as Blackstone and Apollo Global Management) to manage it and give the credit. You might ask why companies get loans from these non-bank institutions while they can get them from banks, as almost everybody does. The reason underneath is simply that banks are strictly regulated and they really care a lot about their customers and their operations, and in order to be qualified and get a loan from banks, companies should demonstrate some solid features. Some companies don't want to be watched closely or limited, and that is why they go for private credit. In the meanwhile, some companies are forced to get private credit since they are not seen as eligible by banks to get loans. In this respect, they are willing to get the credit at higher rates.

So after that, let's move on to the real topic that I want to highlight and mention in this blog. Nowadays, as we can also see from the news, private credit is on the rise and we all wonder what the reason behind it is. To give you an idea of the size, the market is now estimated at around $1.5 to $2 trillion according to the Financial Stability Board — which means it is no longer a small corner of finance, it is competing with major parts of the public credit markets . Here we can talk about a couple of reasons. First of all, institutional investors still see private credit as a good path to invest in, as they are getting higher returns for lending long term, and that is why they keep investing. Another aspect is that even though retail investors are becoming distant and divesting, the institutional side can't do it easily, as they sign contracts for the long term. This is not a solid reason on its own, but it is part of the whole picture. What is more, the institutional side is diversifying its portfolio within private credit and prefers to invest in less risky areas such as Europe, moving a bit away from the US direct lending market and that way they are still willing to invest more by diversifying.

Here I want to add a small detail that I found interesting. When we look inside private credit, we see that the classic strategy, which is called direct lending (the fund gives the loan directly to the company, without any bank in between), actually fell around 10% (McKinsey, Global Private Markets Report: Private credit (2026)). But the other strategies grew about 22%. One of the rising ones is asset-based finance, which means the fund does not lend based on the future cash flows of the company but against a real asset, like receivables or infrastructure. So if the company fails, the lender still has something solid in its hands. The reason behind this shift is not really fear, it is more about returns. The US direct lending market became so crowded that the returns got squeezed, so institutional investors started to move their money to less crowded and better-paying corners, like asset-based finance or the European market. So they are not leaving private credit, they are just changing rooms inside the same house.

Now you might ask why the retail investors stopped investing in these funds, or why they aggressively tried to withdraw their money from the private credit market. First, we need to understand how their exit door works. Unlike institutional investors, who sign long-term contracts and cannot leave, retail investors have the choice to get their money back — but with a limit of 5% of the total fund per quarter. So it works like this: let's assume the fund manages 10 billion dollars, so 5% of it is 500 million. Retail investors, all together, can withdraw up to that amount per quarter, not more. If the total withdrawal requests are 300 million, everyone gets their money in that quarter. But if the requests are 700 million, the fund pays out 500 million proportionally, and the remaining requests go into a queue for the next quarter.

In calm times, nobody feels this limit because nobody is rushing to leave. But in 2025 and early 2026, some bad news arrived: defaults and losses in leveraged credit hit the headlines, and fears grew that AI could disrupt the software companies, which is exactly where a big part of these loans went. When retail investors saw this, they rushed to the exit door at the same time. For example, in one of Apollo's funds, shareholders asked to withdraw 11.2% of the shares, but the fund could only honor 5%. And here is the interesting part: when people heard that a queue was forming, even the ones who were not planning to leave said "let me get in line before it gets longer", so the queue itself created more panic, like a slow-motion bank run ( like the Silicon Valley Bank case in 2023). On top of that, new investors also stopped coming in: fundraising dropped 59% compared to the previous year, and for the first time, the money leaving these funds exceeded the money coming in, by around 2 billion dollars (HedgeCo — BDC Outflows Outpace Inflows: Private Credit's Retail Reset Enters a New Phase (May 2026)).

When we put all of these reasons together, we somehow understand the popularity of private credit, it pays a fair amount and better rates, and it is seen as manageable by institutional investors while seen as volatile and dangerous by retail investors.

And now you might be asking: "But at the beginning, Muhammet, you told us that you were going to mention some banks as well." Yeah, that is true, but I don't really want to make it too long for a reader, so I will simply mention the relationship between banks and the private credit market. As we can expect, the private credit market is quite developed and well managed in developed countries, as there are more reliable and important players. However, in developing and emerging markets, they don't really have lots of private credit activity. The main reasons for that are the volatility of the country's economy, the reliability and quality of the players, and also, somehow, the culture. When this happens, banks become more notable players in these markets, as companies or borrowers don't have another alternative to get their credit. So banks are more advantageous in these markets eventually, and they are big players in these emerging markets. For example, EBRD is one of them, as I am also a current employee of it. The main objective of EBRD and similar banks like IFC or ADB is to operate in these markets, as there are more opportunities. But these are just the MDBs, and I haven't even mentioned the commercial banks' side, as they are all around the world. For example, the main lenders in Turkiye are banks, like everywhere in the world, but a bit more so than in developed countries, since Turkiye is an emerging market for these banks.

This post somehow focused on private credit and the reasons behind its rise. But as retail investors or just ordinary people, what should we get from this rise? Like, what are the lessons or consequences, right? Let's talk a bit more on that part and finish our short blog for this time. The most important part of the story is the actions of the banks, the rise of private credit from the demand side shows that banks are becoming more strict about giving loans, and that happens in times when expectations for a recession are high. Additionally, the rise of private credit, which is less regulated, can hide the overall risk in the market and where it is concentrated. And eventually, it could be another reason for a crisis, like the subprime mortgage crisis of 2008. In this respect, this less regulated private credit might trigger another crisis as well, but that is just a possible outcome, and personally, I don't think it will cause a devastating incident on its own, though it might be one of the reasons for a bigger crisis.

With that said, we are done with private credit, and I am looking forward to seeing you in another blog.

Thanks!