The Shifting Boundaries of Private Credit and Traditional Bank Debt: Updated for 2024-2025

A Convergence Between Private Credit and Traditional Bank Lending

Private credit has historically served businesses that banks considered too risky for traditional lending, but the lines between these two forms of financing are blurring. Major players like Apollo Global Management and Blackstone are not only lending to smaller, high-risk firms but are also targeting large, investment-grade companies—territory once considered the exclusive domain of banks.

As of late 2024, this trend has gained momentum. In fact, Marc Rowan, CEO of Apollo, has predicted that within the next 18 months, we may see the distinction between private credit and traditional bank lending vanish almost entirely. This convergence has led to new collaborative models where asset managers and banks work together rather than compete. Citigroup, Goldman Sachs, and other global banks are joining forces with asset managers on private credit deals, enabling them to retain key relationships while offloading loans from their balance sheets.

In Europe, the regulatory environment is evolving to accommodate these shifts. Recent changes to the EU's economic governance framework (effective in 2025) are expected to impact how banks and asset managers manage credit portfolios, with an increased focus on sustainability and reporting requirements, such as those related to the Carbon Border Adjustment Mechanism (CBAM). These changes are likely to create additional opportunities for private credit players.

Rising Investor Appetite and New Strategies

Investor interest in private credit remains strong, with a growing demand for exposure to this asset class. According to a late 2024 survey by Goldman Sachs of 190 limited partners (LPs), including asset managers, private pensions, and insurers, almost 40% of LPs plan to increase their allocation to private credit in 2025. Many of these investors are also exploring secondaries and co-investment strategies, which allow them to buy stakes in private credit funds or invest directly in specific deals.

Co-investments and secondaries are increasingly seen as critical strategies for gaining exposure to private credit with greater liquidity and flexibility. These strategies are likely to become more prominent in 2025 as investors look for ways to access this growing market with lower risk and higher return potential.

Moving into Investment-Grade Territory

Historically, private credit was focused on higher-risk firms, but the landscape has changed. Firms like Blackstone and Apollo are now actively competing for investment-grade loans. For example, Blackstone's investment-grade private credit assets surged to over $90 billion in 2024, an increase of 40% from the previous year. Similarly, Apollo's collaboration with Athene has allowed it to underwrite billions in investment-grade debt for top companies like Intel and BP.

European insurers are increasingly becoming key players in this market, drawn by the attractive yields offered by private credit investments. These insurers, with their substantial pools of permanent capital, are keen to invest in assets that provide stable, long-term returns. This shift is likely to continue in 2025, with more insurers targeting private credit as a core component of their investment portfolios, especially as European regulators continue to emphasize sustainable finance and ESG factors.

Opportunities and Challenges for Alternative Investors

The evolution of private credit presents both opportunities and challenges for alternative investors. The diversification of risk profiles within the private credit market now includes both high-yield, non-investment-grade loans and more secure, investment-grade deals. This expansion is making the market more accessible and liquid, offering a broader pool of investment options.

However, competition is intensifying. As banks re-enter the leveraged loan space, direct lenders are offering more favorable terms to borrowers in an effort to compete with banks' cheaper financing options. This competition is expected to drive further innovation in deal structures, making private credit an increasingly attractive option for investors.

European investors, in particular, may face challenges related to evolving regulations, such as the EU's new Deforestation Regulation and the CBAM. These regulations will likely impact the types of companies and industries that private credit investors target, especially in the context of sustainability and long-term returns.

The Future of Private Credit: A New Mainstream?

Private credit is on track to become a mainstream component of corporate finance, increasingly viewed as a viable alternative to traditional bank loans. As the boundaries between private credit and traditional bank debt continue to blur, investors can expect a more accessible and liquid market with a wider range of credit profiles to suit varying risk appetites.

Looking ahead to 2025, the private credit market is poised for continued growth. The ongoing collaboration between asset managers and banks, coupled with the increasing role of insurers and the expansion into investment-grade lending, points to a future where private credit is not just an alternative but a central pillar of corporate finance.

In summary, private credit is becoming a foundational element of the modern financial ecosystem. The evolving dynamics between asset managers, banks, and regulators in Europe and beyond will continue to shape this transformation, creating new opportunities for alternative investors who are ready to navigate this changing landscape.