Although some have drawn parallels between private credit and the “wildcat banking” of the past, today’s private credit landscape is far from disorderly. It has evolved far from the email chains and v6_final_final_final spreadsheets of yesteryear, into a data-driven solution that addresses key gaps left by traditional financing options.
Rising during the risk-averse banking regulation post-2008 financial crisis, private credit has proven a stabilising force against traditional investments. Instead of a bubble ready to burst, the steady rise of private credit signals a maturing industry that shows no signs of slowing—analysts expect it will be a $2.8 trillion market by 2028. And one poised to address systemic gaps with innovation, transparency and resilience.
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Far from a precarious boom, private credit represents a measured financial evolution—an industry using technology to bring together transparency, governance, and opportunity in underserved markets.
Filling the void
Post-2008, measures were placed to regulate the financial sector’s activities, clamping down on big institutions and increasing requirements. As risk-averse banks re-evaluated, options dampened for small- to medium-sized businesses looking for capital. Making up one-third of the private sector GDP, this middle market needed to find flexible, scalable capital to survive: Enter private credit.
Low-interest rate environments and diversification from the public market sparked initial demand, but what makes private credit continue to stand out as an alternate lending solution is the flexibility and speed of deployment. As an investment vehicle, private credit offers robust underwriting standards, asset-backed structures, and rigorous due diligence, enhanced by technology and standardisation as the market matures. The flexible and scalable financial solution unlocked growth potential in the SMB sector, and is continuing to do so elsewhere.
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By GlobalDataIn fact, in 2022 private credit created 1.6 million jobs, earning $137 billion of wage and benefits and generating $224 billion of GDP—funding innovation in sectors like fintech, logistics, and affordable housing. Amongst this are institutional investors and RIAs relying on private credit to diversify their portfolios and provide higher yields—in the last three years, 80 percent of asset managers launched new private market funds.
The “time bomb” is not ticking
The inadequate regulation that led to the 2008 crisis cast a shadow on the banking industry years before the crash. A housing bubble and risky mortgage lending were running amok without standardised practices, leading to a downfall that doubled unemployment and caused the U.S. gross domestic product to fall 4.3 percent.
Private credit is not an “unchecked market” — it stands apart from these mistakes by flourishing on platforms that prioritise transparency and governance, and is plenty regulated. Innovative technology is being developed in data analytics to enable smarter risk assessments and provide investors with unprecedented clarity.
Platforms offering private credit now give investors tools to directly manage and mitigate the risk of their own investments, proving that heightened regulation and transparency are positives for this asset class, not negatives.
Regulation as an opportunity, not a threat
In the rise of private credit as an asset class, regulation is seen as complementary instead of conflicting. Frameworks such as the Basel III securitisation framework—aimed at increasing resilience in the banking sector by providing incentives to improve risk management and enhance comparability—harmonise with private credit’s rising focus on transparency, rather than stifle the rapid growth.
Additionally, increased bank regulatory capital requirements, like those in respect of loans to large corporates and real estate financing, create a position for non-bank lending to competitively offer better terms. This, along with the tightening of capital ratios under revised regulatory capital regime, will create opportunities for private credit lenders to purchase these portfolios, as they do not fall under the same requirements.
Both the difference in regulation for the private credit market, and its own requirements, can be seen as a strength. While operating alongside a prudently-watched banking system provides an opportunity to fill a needed gap, the rules in place for private credit also enhance it as an offering. The SEC requires private fund advisers to confidentially report detailed information on funds, highlighting transparency and authenticity.
Many leading private credit platforms are also already employing safeguards such as documentation monitoring and negotiated terms to protect investors and reduce risk, demonstrating an industry commitment to responsible growth.
Innovation: The key to sustainable growth
A market that’s expected to double in the next four years, private credit has shown itself resilient in high-interest environments. Offering higher yields and more flexible terms, diversification within direct lending options—across geographies, deal types, and industries—only continues to drive its staying power as an alternate lending option.
Innovative technology that is developing within the market only continues to scale it responsibly. Tokenization and block chain-based transactions enhance liquidity and fractional ownership, and increase investor participation. Automated diversification tools, standardized documentation, and secondary market functionality are offering investors enhanced returns and expanding the market sustainably.
While there are valid concerns surrounding the rapid growth of private credit and the differing regulations from traditional banking, this alternative asset class deserves recognition as a stabilizing force in modern finance. As an asset class, it has rapidly matured to the point of nearly becoming an obligatory asset class for sophisticated investors. Rather than see it as an explosive, temporary lending solution, the financial system should try to see it as a modern solution that addresses the many gaps in today’s markets.
No asset class is without risk, but the maturation and innovation within the private credit market help ensure that it plays an essential and vital role in the current financial ecosystem. As long as private fund advisers remain transparent and there is informed dialogue between policymakers, investors, and platforms, the growth of private credit can continue while mitigating risk.
Non-bank lending is an essential option for SMBs in the U.S. and fills a gap left by traditional banking. It’s not a systemic disruption waiting to happen—rather, a cornerstone of a healthy, diversified financial ecosystem.
Nelson Chu, founder and CEO of Percent.
