Executive Summary
Private credit has emerged as one of the most dynamic and fast-growing segments within the alternative investment landscape. As we step into 2025, the market continues to demonstrate resilience and adaptability, offering attractive, risk-adjusted opportunities for both institutional and private investors. With global assets under management (AUM) nearing $2 trillion by the end of 2024, private credit has become a key pillar in the portfolios of those seeking higher yields, stable cash flows, and diversification from traditional equity and fixed-income markets.
In this detailed update, Kingsbury & Partners explores the key trends, opportunities, and challenges shaping the private credit market in 2025, along with insights on how investors can position themselves to capitalise on this promising asset class.
A Decade of Growth
The rapid expansion of private credit has been nothing short of remarkable. Over the past decade, it has evolved from a niche strategy into a mainstream asset class with a compound annual growth rate (CAGR) of approximately 13%.
Its appeal lies in its ability to deliver risk-adjusted returns that often outperform traditional fixed-income products, particularly in a low-yield environment. The proliferation of private equity activity and the retreat of traditional banks from middle-market lending have further accelerated this growth, creating a significant demand for non-bank lending solutions.
As 2025 begins, the momentum in private credit shows no signs of slowing. The sector’s growth is underpinned by several structural tailwinds, including:
- Institutional Demand: Pension funds, insurers, and family offices are increasing their allocations to private credit as they seek stable returns and portfolio diversification.
- Stable Yields: Private credit funds returned an average annual yield of 8%-10% in 2023, significantly outperforming traditional fixed-income benchmarks (Cambridge Associates, 2024).
- Middle-Market Financing Needs: Small and medium-sized enterprises (SMEs) continue to rely on private credit for tailored financing solutions, particularly as traditional bank lending becomes increasingly restrictive (McKinsey & Company, 2024).
- Global Economic Shifts: Emerging markets are presenting new opportunities for private credit providers as they seek capital for infrastructure, technology, and industrial projects.
The Macroeconomic Backdrop
Interest Rates: A Catalyst for Growth
After a series of aggressive rate hikes in 2022 and 2023, central banks are entering a phase of stabilisation. The Federal Reserve is forecasted to maintain rates within a range of 3.5%–4.0% in 2025, while the Bank of England is expected to hold rates steady at 4.25% (Bloomberg Economic Research, 2024). The European Central Bank (ECB) is predicted to keep its key rate around 3.75%, reflecting its cautious approach to managing growth and inflation.
For private credit investors, the interest rate environment offers several advantages:
- Revitalise M&A Activity: Lower borrowing costs are likely to drive a 15%-20% increase in merger and acquisition (M&A) activity in 2025 compared to 2024 (Refinitiv, 2024).
- Improved Credit Quality: Stabilising rates will ease pressure on borrowers, reducing default rates, which peaked at 4.2% in 2023 and are expected to decline to 3.1% in 2025 (Moody’s Analytics, 2024).
For private credit investors, the combination of floating rate structures and declining base rates creates a favourable scenario. Yields remain competitive, while the risk environment becomes more manageable.
Inflationary Pressures
While inflation has moderated since its peak in 2022, it is expected to remain slightly elevated compared to pre-pandemic levels. Projections for 2025 include:
- US Inflation: Stabilising at 3.0%
- UK Inflation: Averaging 3.5%
- Eurozone Inflation: Around 2.8% (OECD Economic Outlook, 2024).
The floating-rate structure of most private credit instruments provides an effective hedge against inflation, maintaining competitive real returns for investors.
Sector-Specific Opportunities
Private credit’s versatility allows it to tap into a wide range of sectors. In 2025, the following industries are expected to offer compelling opportunities:
1. Infrastructure
Infrastructure continues to be a cornerstone of private credit investments. The global push toward decarbonisation and modernisation of essential services creates a wealth of opportunities for private lenders.
Data Centre Infrastructure
The surge in digital transformation and cloud computing is driving exponential growth in data centre infrastructure. Global investment in data centres is projected to exceed $300 billion by 2025, with Europe leading the charge. Private credit is increasingly providing tailored financing solutions to developers building hyperscale facilities that meet the demands of tech giants and AI-driven enterprises (CBRE Research, 2024).
2. Consumer Debt: Student Loans
The consumer debt market, particularly in education financing, is emerging as a significant area of opportunity for private credit investors in 2025. The global student loan market is projected to reach $3.5 trillion, with an increasing segment of that comprising distressed or non-performing loans. This creates a niche asset class that can deliver attractive returns for private credit funds with expertise in restructuring and managing such assets (MarketWatch, 2024).
A notable development in this space was Carlyle’s and KKR’s acquisition of $10 billion in student loans in 2024, a move that underscores the growing interest of institutional investors in this asset class (WSJ, 2024). This transaction highlights the potential for private credit funds to purchase portfolios of distressed student loans at significant discounts, restructuring them for long-term profitability.
Key characteristics of distressed student loans as an asset class include:
- Attractive Entry Points: Distressed loans are often sold at a significant discount to their face value, creating opportunities for private credit funds to generate outsized returns by restructuring terms or collecting on the underlying debt.
- Counter-Cyclical Nature: Distressed debt, including student loans, tends to perform well during economic slowdowns, making it a valuable diversifier in broader portfolios.
- Regulatory-Driven Opportunities: In regions where governments are stepping back from direct intervention in student loan markets, private lenders are stepping in to fill the gap, often acquiring distressed portfolios from public entities or financial institutions.
Navigating Risks
While the private credit market is ripe with opportunities, it is not without its challenges. Investors must remain vigilant and proactive in addressing potential risks:
Credit Quality and Default Risks
While default rates are forecasted to decline, the credit environment remains uneven across sectors. Borrowers in industries such as retail and traditional energy face heightened challenges, requiring careful underwriting and risk management.
At Kingsbury & Partners, our approach prioritises:
- Thorough Due Diligence: Leveraging industry insights and financial modelling to assess borrower viability.
- Diversification: Spreading exposure across sectors and geographies to mitigate concentration risks.
Regulatory Landscape
Private credit’s rapid growth has attracted scrutiny from global regulators, particularly concerning transparency and systemic risk. In the EU, the implementation of the Markets in Financial Instruments Directive II (MiFID II) could impose stricter reporting requirements on private credit funds, while similar frameworks are under consideration in the US (PwC, 2024).
The Role of Private Credit in Your Portfolio
For investors seeking stable income, diversification, and downside protection, private credit offers a unique value proposition. Its ability to deliver predictable cash flows, makes it an attractive alternative to traditional fixed-income investments.
Additionally, private credit provides access to opportunities that are often unavailable in public markets. By lending directly to businesses, investors can play a more active role in structuring deals and negotiating terms, resulting in potentially higher returns.
Kingsbury & Partners: Your Private Market Specialists
At Kingsbury & Partners, we pride ourselves on our ability to navigate the complexities of the private credit market and deliver tailored solutions to our clients and partners. Our approach is underpinned by:
- Rigorous Due Diligence: Every opportunity we present is thoroughly vetted to ensure it meets our stringent risk and return criteria.
- Global Reach: Our extensive network of partners and market participants allows us to access a wide range of investment opportunities across geographies and sectors.
- Client-Centric Focus: We work closely with our clients to understand their unique needs and objectives, ensuring that our recommendations align with their long-term goals.
Looking Ahead
The outlook for private credit in 2025 is underpinned by favourable macroeconomic trends, sector-specific growth drivers, and the asset class’s inherent resilience. With AUM expected to grow at double-digit rates and new opportunities emerging across industries, private credit remains an essential component of a well-diversified portfolio.
For more information or to explore how private credit can enhance your investment strategy, please contact us directly. Let us help you unlock the full potential of this dynamic asset class.
Sources:
- Cambridge Associates, 2024, Private Credit Insights and Performance Benchmarks
- McKinsey & Company, 2024, The Next Frontier in Private Credit: Middle-Market Lending and Growth Trends
- Bloomberg Economic Research, 2024, Global Monetary Policy Outlook: Interest Rates in 2025
- Refinitiv, 2024, M&A Trends and Forecasts: A Rebound in Activity
- Moody’s Analytics, 2024, Default Rates and Credit Quality Trends in the Private Credit Market
- OECD Economic Outlook, 2024, Macroeconomic Trends and Inflation Projections for 2025
- CBRE Research, 2024, Data Centre Development: Global Investment Trends
- MarketWatch, 2024, Education Financing and the Growing Market for Student Loans
- PwC, 2024, Navigating the Regulatory Landscape: Challenges for Private Credit Funds
- The Wall Street Journal, 2024, Carlyle and KKR Win $10 Billion Student Loan Portfolio
