Developments in private credit: key takeaways from recent conferences

Growing size and scope of private credit

Traditionally, when people think of private credit they think of senior-secured, middle-market loans to fund private equity leveraged buy-outs (often referred to as direct loans). However, as the number of private credit lenders—and the size of the assets they have under management—has grown, so has the range of deals completed under the umbrella of private credit.

Private credit now provides loans of all sizes to fund acquisitions, general corporate credit, a broad scope of asset-based finance structures, distressed and opportunistic loans, and strategic risk transfers. By way of example of this broadened reach, some larger private equity lenders are now focusing on providing products in the corporate investment-grade space. Geographic scope has also broadened, as private credit lenders have become increasingly active in Europe and expanded their reach throughout North America. With such a wide range of transactions, it is difficult to make generalizations about market terms, as jumbo private credit loans now compete with (and even participate in) large public market deals, and hence must offer competitive pricing and structure.

Private credit investors have traditionally been institutional investors such as insurance companies, pension plans and endowments. Funds have also increasingly raised capital from wealthy individuals (in part driven by U.S. regulatory changes). Experts expect to see increased inflows from wealth and retail channels, further increasing the amount of capital funds need to deploy and pushing interest in an expanded range of deal types and structures. That said, the stated priority of most private credit funds continues to be originating and funding high-quality, risk-managed transactions, and so it should be expected that the expansion of private credit will lead to better deal terms for high quality borrowers—not necessarily easier access to capital for more risky enterprises.

The Canadian private credit market

The private credit market in Canada has also experienced growth; however, it remains underdeveloped relative to the United States. Canadian investors are actively involved in many aspects of private credit, and we expect to see continued interest and growth in this space. Canadian GPs continue to create private credit funds and are active as lenders; Canadian investors have invested in private credit investments as limited partners; and Canadian private equity funds and their portfolio companies continue to borrow from private credit lenders. We expect all these areas to be of growing interest to Canadian investors and businesses.

It remains to be seen whether the number of loans from private credit funds to Canadian borrowers will see similar growth as in the U.S. One prominent headwind for that possibility is the continued interest of Canadian banks in a wide range of loans. Much of the private credit growth in the United States and Europe has been driven by the banks stepping back from directly providing leverage loans due in part to increased regulatory scrutiny, which has not (yet) occurred in Canada.

In addition to strong competition from Canadian banks, loans to Canadian borrowers may be less attractive to U.S. credit funds because Canadian interest rates are relatively lower than U.S. rates thanks to differences in monetary policies, as well as the need to hedge, or otherwise address, exposure to currency exchange rate fluctuations. As a result, private credit loans to Canadian borrowers may continue to be less common and focused on areas where the banks have traditionally shown less interest, like distressed loans or complex capital structures. Often, private credit is noted for its ability to structure around unusual economic impacts and complex structures, and for filling in gaps when other suppliers of capital pull back. Canadian banks are closely watching the space (including working on structures to compete with U.S. private credit lenders on providing loans to Canadian private credit sponsor clients).

Impact of public market volatility

The public markets have experienced quite a bit of volatility in 2025, largely as a result of uncertainty around trade policy. Market volatility highlights the ability of private credit lenders to provide borrowers with certainty and fast deal execution, regardless of market conditions. This certainty and speed generally comes with a premium to lenders, which borrowers are more willing to pay when market volatility is high.

Many public market alternatives (like U.S. institutional term loans and high-yield bonds) are only available for deals sized at $100 million or more, so competition with public markets is predominantly a matter for the larger end of private credit deals. For these larger deals, the premium for private credit lenders may be short lived if their deals are refinanced with cheaper, broadly syndicated deals when market windows open, and we have seen private credit lenders take positions in some of those syndicated deals. On the smaller end, competition has traditionally come from banks which have increasingly retreated from various areas of lending in the U.S., partly fueling the growth of private credit. In Canada, it will be interesting to see whether current trade policy prompts any of the banks to back away from lending to certain affected sectors, which may create opportunity for private credit lenders in Canada.

Illiquidity premiums

An attractive feature of private credit to lenders and their investors has been increased returns relative to other fixed income assets. This premium is often attributed in part to the illiquid nature of private credit. Some interesting developments in this regard are the growing interest in creating a secondary market in private credit through the direct sales of loans (which often require borrower consent), LP-led sales of limited partnership interests in private credit funds, and GP-led sales through continuation vehicles. As liquidity in private credit grows, it will be worth watching to see whether the premiums decrease or whether the other advantages of private credit, such as deal speed and certainty, and the willingness to provide longer tenors, will continue to justify a premium.

Good versus bad PIK

Another advantage of private credit is the ability to offer flexibility on deal structures, such as providing the borrower with the option of deferring cash interest payments (i.e., allowing for a portion of interest to be “paid in kind” or “PIK’d” by being added to principal). A PIK feature is attractive to borrowers as it reduces the short-term debt service cost, which can be particularly helpful when interest rates rise (as they have in the past few years); when revenue is reduced, whether because of business softness or the impact of tariffs; or where borrowers want to allocate cash to growth projects rather than interest payments.

Key components of what is considered to be “good PIK” include PIK that is (i) established as part of the initial deal structure (as opposed to a post-closing concession to help avoid a default); (ii) established at the option of the borrower, so that the borrower can choose to pay the interest in cash and is not forced to add the interest to the debt; and (iii) a tool for the borrower to use, rather than something that is required to avoid a breach of covenants.

Generally, PIK that is added by way of an amendment as a concession to a borrower or as a result of cash flow deficits is seen as “bad PIK” by market observers, including rating agencies. Some industry insiders have raised concerns that adding PIK to private credit deals as a result of covenant amendments—which are an early warning sign that a borrower may not be able to meet its debt service obligations—could be a predictor of increased default risk in private credit portfolios. Others argue that the ability to provide short-term covenant relief via PIK is a helpful feature that private credit is able to offer (unlike traditional bank lenders), and that this can help de-stress financial conditions during temporary market downturns.

Market convergence

Observers have traditionally viewed private credit lenders as competing with public markets and banks, but increasingly the various market participants are working together. Private credit lenders have taken positions in many large, broadly syndicated deals, and banks and private credit lenders have formed several joint ventures and marketing alliances to either source deal or provide debt capital solutions that showcase the strengths of different lenders. As with most things in business—as in life—innovators find ways to succeed, and legacy participants either adapt or fall away.