Private Credit Prepares for Its Big Test

War, inflation and recession fears proved to be devastating for financial markets in 2022. Yet in private credit-one of the most opaque corners of Wall Street, where small groups of institutions and financiers make loans directly to companies—the picture has never looked brighter.

Private credit has grown quickly, hitting $1.4  trillion of assets under management globally at the end of 2022, up from about $500 million in 2015, putting it on par with the US junk bond market. Research firm Preqin expects private credit to grow to $2.3 trillion by 2027.

The industry has become a magnet for high-flying finance executives and a hunting ground for asset managers seeking to branch out of traditional investing strategies. KKR & Co., itself one of the largest managers of alternative assets, has argued investors should ditch the traditional 60-40 stock-and-bond portfolio in favor of a more diversified mix with 10% of assets in private credit.

Private credit, like private equity, raises capital from investors, typically large institutions such as pension funds and insurance companies. But instead of taking ownership of a company, as private equity funds do, private creditors lend the money to companies, bypassing banks.

Because the loans are often used to finance acquisitions by private equity funds, the two industries are intertwined. Many of the largest private equity firms have developed massive private credit operations. The largest, such as Apollo Global Management, Ares Management and Blackstone, have become a force in capital markets, often carrying enough weight to make or break multibillion-dollar acquisitions.