The Rise of Private Credit: Opportunity Meets Responsibility
Current 25 - Insights
In the years since the Great Financial Crisis (GFC), one of the most striking evolutions in global finance has been the emergence—and now near dominance—of private credit as a core asset class. Once considered a niche strategy confined to opportunistic lenders and distressed specialists, private credit has blossomed into an estimated $1.7 trillion market, drawing in pensions, endowments, and sovereign wealth funds along with the usual suspects: families, foundations, hedge fund and assorted yield hounds. But as the asset class has grown, so too has its complexity. And with this complexity, the drumbeat of disciplined underwriting has grown ever louder.
The foundation for private credit’s rise was poured during the regulatory spasm that engulfed global capital markets following the near-death experience of 2008. I recall a blog piece I wrote, observing that the conventional banking sector had just suffered a direct hit; its timbers, I-beams, marble columns and bricks lay strewn across the financial landscape. Yet I predicted that specialty lenders would gather the material to build an entirely new, alternative asset class. I had no idea how prescient that observation would prove to be.
Initially, banks pulled back from mid-market and leveraged lending due to tighter capital requirements and more conservative risk appetites. But almost immediately demand for credit reached a fever pitch, as viable enterprises pursued operating lines that would allow them to fight another day. And investors craved yields that escaped the ZIRP policy pursued by the Fed. If nature abhors a vacuum, finance takes it to another level: non-bank lenders - asset managers, private equity firms, and institutional capital - saw both opportunity and inefficiency, and stepped into the demand with both intensity and deep pockets. These lenders could move faster, price risk more precisely (and more creatively), and often structure bespoke solutions that banks, constrained by regulatory and bureaucratic inertia, could not. Market share capture followed. The bonanza was on.
For those of us who experienced it, it was as if the love child of a phoenix rising, a Frankenstein stumbling from his castle and a “bread and circuses” event during Imperial Rome had emerged into the world and started yelling for money. And it was breathtaking in its ambition.
But private credit is more than a clever workaround by greedy private equity firms looking to end-run post-GFC banking reform. It reflects a deeper transformation in the architecture of capital markets: a shift from balance-sheet lending (where banks hold loans they originate or, in the CDO world, syndicate and tranche those loans out to eager investors) to an originate-to-manage model (where asset managers raise capital to make and hold loans on behalf of limited partners). In this sense, private credit is not simply an alternative to bank lending - it is an evolution of it.
This evolution comes with clear benefits. For investors, private credit offers attractive yields, low-correlation diversification and access to borrowers previously inaccessible to them, all in a world where traditional fixed income has been distorted by years of monetary stimulus. For borrowers—particularly mid-sized companies and niche sectors—private credit can offer flexible, long-term capital not available from traditional banks. And for capital allocators with an eye toward impact, private credit opens access to direct lending strategies that can be deployed in underserved geographies or sectors, such as renewable infrastructure, affordable housing, or minority-owned enterprises - areas that traditional lenders typically eschewed.
Yet private credit is not without its perils. Most notably, since these asset managers typically borrow from banks, it has become a perverse example of what I’ll call “circular evolution”: the risk sits once again on the bank’s balance sheets… but from a regulatory perspective the loans reflect lower counterparty risk. And as more capital flows to the asset class, credit standards are relaxing. Some of the worst excesses of the pre-Great Financial Crisis era - covenant-lite and no-covenant loans, Payment In Kind applied to initial interest payments, tranched and securitized Collateralized Debt Obligations - are all making a reappearance in today’s frothy market.
Any newly-minted MBA understands that with credit investing, underwriting is paramount. But in the private markets - where loans are often illiquid, covenants are negotiated privately, and transparency can be lacking (to say the least) - the margin of error is smaller and the consequences for getting it wrong more severe. A single loan that hits the pond can wipe out years of returns. Worse, because private credit portfolios tend to be concentrated - as few as 15 - 30 loans per fund is not uncommon - the failure of one or two loans can materially impact overall fund performance.
This is especially critical given that some of the sectors most attractive to private lenders are also those with elevated structural risk: commercial real estate, sponsor-backed healthcare, venture debt, and certain areas of consumer lending. These sectors are vulnerable not only to cyclical downturns, but also to regulatory shifts, fickle consumer tastes, margin compression, and technological disruption. Lending into these markets without rigorous underwriting, independent diligence, and a well-defined downside scenario is not just irresponsible - we argue that it is reckless. While the variables in private credit diligence constantly shift, we are steadily incorporating these diligence dimensions into our understanding of this moment.
Moreover, private credit does not yet benefit from the kind of systemic risk oversight applied to the banking sector. While this is part of its allure—it enables speed, customization, and higher returns—it also means that responsibility for risk management falls squarely on the shoulders of the lenders themselves. There is no central bank backstop for a private debt fund, no public bailout for a collapsed direct-lending vehicle. And the perverse incentives can be strong: income from fees plus carry for private credit hedge funds can mint generational wealth in the lifespan of a single fund series. In this light, the importance of underwriting is not just financial; it is ethical. Poorly structured deals don’t just threaten investors—they can endanger the very businesses and communities they were meant to serve.
Some argue that private credit is in the midst of a bubble, driven by yield desperation and a decade of easy money. That is likely to be proven true in some corners of the markets. But the asset class also represents a necessary adaptation to a financial system that continues to decentralize. Disintermediation is no longer a trend; it is a feature. The challenge—and the opportunity—for investors is to engage with private credit thoughtfully, allocating capital to managers with not only origination skill but also patience, judgment, and a demonstrated commitment to long-term value creation.
Adding a critical dimension to this faceted asset class is the potential for private credit to drive impact in ways public markets cannot, and in ways that clearly pass the additionality litmus test. Because private credit is negotiated deal by deal, terms can be shaped to align with borrower behavior—whether that means carbon reduction targets, job creation benchmarks, or improved governance standards. In this way, underwriting becomes a lever for change, a mechanism for embedding values into capital flows that reflects Align’s central thesis around the evolution of the capital markets and the power of capitalism.
But that same customization also opens the door to abuse: overly complex structures, hidden fees, overly aggressive leverage. This is where transparency, alignment of interest, and governance must serve as ballast, and where much of our private credit diligence is focused. Not all private credit is created equal—and investors should be skeptical of managers who promise high returns without volatility, or scale without compromise.
In sum, the rise of private credit is neither good nor bad - it is inevitable. The question is whether it will be stewarded wisely, and whether the promise of deep impact can be realized. The lessons of the banking crisis still echo: risk cannot be eliminated, only priced and managed. For private lenders, that means embracing the responsibility that comes with freedom - prioritizing underwriting, transparency, resilience and steady values alignment over short-term gains.
The asset class will continue to grow. But whether it matures into a force for economic stability and inclusive capital—or degenerates into a levered grab for yield—will depend on the choices being made today, in credit committees, investment memos, and manager due diligence.
As ever in finance, the devil is in the underwriting.
Disclaimer: The information on this page contains opinions, which should not be interpreted as factual statements. This material is provided for informational purposes only and should not be construed as investment advice. There is no guarantee that the views and opinions expressed in this material will come to pass. Investing involves the risk of loss and may not be suitable for all investors.
