BREAKINGVIEWS-Private credit will become plain old credit

By Neil Unmack

LONDON, Dec 30 (Reuters Breakingviews) - The private credit business is losing its special sauce. Groups like Ares Management ARES.N and Blackstone BX.N once stole deals from under the nose of JPMorgan JPM.N and its ilk, and extracted juicy yields thanks to their ability to offer bespoke terms. What’s different now is that the banks have roared back to life, while direct lenders are betting heavily on retail vehicles, which offer investors the ability to cash out. Add it all up, and the $2 trillion private credit industry is looking increasingly like the public kind, meaning lower returns.

In the years following the pandemic, so-called direct lenders became the kings and queens of the leveraged finance world. It was partly because the rival banking sector was pummelled by paper losses on buyout loans, including for Elon Musk’s $44 billion Twitter takeover. That left the field clear for private credit funds to make loans directly to borrowers while offering speed, certainty and flexible terms, albeit at a higher interest rate. Direct lenders like Blackstone financed some of the largest takeovers of the era, like the $10 billion buyout of Zendesk in 2022. Meanwhile, rising rates allowed these upstarts to promise double-digit returns to their investors, which appealed to pension groups and insurers, helping to fuel the wave.

Admittedly, the private credit juggernauts show no signs of stopping. The sector has grown assets steadily to $2.4 trillion, as of 2024. Classic closed-end institutional funds raked in $113 billion in the first half of 2025 alone, per PitchBook. And new sources of capital are increasingly supplementing those traditional avenues. So-called evergreen funds like Blackstone’s BCRED, which appeal to wealthy individuals because they allow redemptions subject to limits, are growing quickly. These semi-liquid products raised $48 billion in the six months to the end of June 2025, PitchBook reckons, equivalent to roughly 40% of the money that flowed into classic institutional funds. And the reach for retail cash will continue. Managers may soon be able to court American retirement savers, following an August executive order by President Donald Trump. Consultancy Oliver Wyman estimates that the volume of individual wealth cash allocated to private credit could nearly quadruple by 2029, reaching $1.5 trillion.

Yet all this cash, and the evolving funding model, raise fresh questions. Capital that has already been raised is struggling to find a home, with $543 billion of so-called dry powder at the end of 2024. And banks who were once in retreat are now fighting back, egged on by buoyant credit markets and softer U.S. capital rules. The extra premium that investors need to compensate for default on risky assets like junk-rated debt was at post-crisis lows in 2025. And sales of collateralised loan obligations, or vehicles that hoover up loans packaged up by banks, are also at record levels. That’s one reason why leveraged buyout activity rose nearly 17% in the nine months to the end of September to $587 billion, according to LSEG data.

Red-hot debt markets are putting pressure on the extra yield that direct lenders can charge borrowers over and above public alternatives. That added “premium”, which is the key selling point for the asset class from an investor’s point of view, was historically around 2 percentage points relative to the rates on more widely traded similar debt. According to bankers, speaking in mid-November, this figure had halved to just over 1 percentage point in Europe and sometimes less in the United States.

Moreover, banks’ leveraged finance desks are getting better at structuring deals to appeal to borrowers like private equity firms. For example, in Europe they are increasingly offering loans that can be drawn down over time, making it easier to fund multiple acquisitions. One recent example is the financing package for Bain Capital’s roughly $1 billion August investment in Netherlands-based HSO.

Private credit managers are finding new ways to keep busy. Lenders like Blue Owl have become key players in funding AI assets like data centres. Marc Rowan’s Apollo uses the firepower from its Athene insurance unit to offer bespoke funding for higher-rated companies. And players that specialise in loans to small companies can still surf below the radar of mainstream public bond or loan markets, obtaining juicier yields.

Still, in the world of classic buyouts, private credit is becoming just another item in the toolbox. Borrowers can increasingly play the two sides against one another. It’s also common now to see loans that were originally underwritten by direct lenders get refinanced in loan and bond markets. PitchBook LCD data shows some $26 billion of these deals in the first three quarters of 2025, roughly matching the volume that moved in the other direction. In another sign of the race to deploy funds, Moody’s Investors Service has noted that private lenders are increasingly happy to make loans without covenants, which would give them power over struggling borrowers. That echoes a trend in broader debt markets.

Step back, then, and it’s becoming increasingly hard to tell the difference between private credit and the conventional kind, which points to lower returns. The growth of retail funds threatens to close the gap between the two worlds even further. Evergreens allow limited redemptions based on a net asset value, which means they must regularly show financial advisers and regulators that a vehicle’s marks are in touch with reality. The logical consequence is that private loans will need to be increasingly widely traded. A world of lower returns and greater liquidity looms, undermining what once made private credit unique.

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This is a Reuters Breakingviews prediction for 2026.