Investors Are Shifting Billions Into Private Credit Away From Private Equity

A seismic shift is unfolding in how American companies secure funding. Private credit, once overshadowed by private equity, now commands attention with assets nearing $1.7 trillion and direct lending volumes soaring to $145 billion in 2024. Investors, including prominent figures like Chamath Palihapitiya, highlight private credit’s reliable returns and steady cash flows, which contrast with private equity’s recent underperformance. This trend is redefining the financial landscape.

The implications reach far beyond Wall Street. The rise of private credit influences how businesses expand, how investors allocate capital, and how economic risks emerge. Companies now face a wider array of financing options, but the rapid growth of private credit prompts questions about oversight and long-term stability. This transformation touches startups, corporations, and the broader economy.

Private credit’s strength lies in its adaptability. It provides loans with customized terms, such as flexible repayment schedules or relaxed financial conditions, appealing to businesses seeking capital without sacrificing control. Institutional investors, from pension funds to endowments, have fueled this growth, increasing private credit assets from $1 trillion in 2020 to $1.5 trillion in 2024, drawn by consistent income and lower volatility.

Private equity, however, is losing ground. Its returns have weakened, with North America’s 10-year internal rates of return declining by 3 percentage points. Many private equity funds struggle to distribute cash to investors, prompting a shift toward private credit’s predictable yields. This reallocation reflects a broader search for stability in an uncertain economic environment.

Private credit’s ascent is reshaping corporate finance dynamics. Rather than merely supporting private equity buyouts, credit funds now directly finance companies aiming to remain independent. This competition is altering the traditional playbook, encouraging firms to stay private longer and bypass the costs and scrutiny of public markets.

The data underscores this shift. Global private equity deal values hit $2 trillion in 2024, yet exits lagged, and uninvested capital fell to $2.1 trillion. Private credit, by contrast, has grown tenfold since the 2008 financial crisis, matching the size of leveraged loan and high-yield bond markets. To stay relevant, some private equity firms are launching their own credit divisions, intensifying the rivalry.

For companies, private credit unlocks new possibilities. Businesses can access funding without diluting ownership or navigating public market pressures. This flexibility has fueled a trend of delayed public offerings, with IPO volumes expected to drop to 150 in 2025 from 266 in 2024. Firms like Klarna and Chime are opting for private capital to fuel growth.

Yet, challenges loom. The opaque nature of private credit markets raises concerns about valuation accuracy and regulatory oversight. Banks’ significant exposure to private credit, through lending lines representing a quarter of nonbank financial intermediation, could amplify risks if defaults spike. A tightening economic cycle could test the sector’s resilience.

Opinions on private credit’s rise diverge sharply. Supporters argue it empowers businesses by offering financing free from government-backed institutions, fostering innovation and reducing taxpayer exposure. Critics, however, warn that the sector’s lack of transparency concentrates risk, potentially destabilizing the economy. They advocate for stricter disclosure rules to safeguard borrowers and investors.

Both viewpoints carry weight. Private credit’s flexibility drives economic activity, but its projected growth to $3 trillion by 2028 demands careful monitoring. Regulators are increasingly focused on the sector’s systemic ties, particularly through complex financial instruments and concentrated corporate lending.

Private credit’s momentum shows no signs of slowing, promising to reshape how capital flows through the economy. Companies will likely continue favoring private financing, potentially thinning public markets as fewer firms pursue listings. This evolution offers businesses and investors new opportunities but introduces unfamiliar risks.

The task ahead is to balance innovation with accountability. Private credit’s growth can fuel economic progress, but ensuring transparency and stability will be critical to protecting the financial system and sustaining public trust in a rapidly changing landscape.