Private credit unlocked: the new growth engine in finance

The rise of private credit marks a fundamental shift in how borrowers access funding. It has grown from being a tiny part of the financial system in 2000, with assets under management of just USD40 billion, to become a substantial USD1.7 trillion market¹.

In that time, private credit has evolved from a sponsor-driven category of lending to a diversified asset class that includes everything from direct lending and asset-backed financing to fund financing and specialty finance.

“Private credit is one of the most exciting areas of finance today; and it is a market that complements its public counterpart, in an environment where there is strong demand for financing,” said Oliver Kadhim, Head of Institutional Client Group, Asia, HSBC.

There is likely more growth to come, with forecasts that private credit could more than double in size to USD4.5 trillion by 2030². This would still be much smaller than the total global fixed income market, which was USD140.7 trillion in size in 2023³, but if the growth continues, private credit will become an increasingly mainstream source of funding.

Further growth in private credit will be supported by a variety of structural factors, in combination with growing demand from a number of sectors.

There was an initial acceleration for private credit after the 2008 financial crisis, when banks became more regulated and moved towards more liquid and rated credit products, and this provided an opportunity for alternatives managers.

But more recently, the uptake of private credit further accelerated over the past few years due to the normalisation of interest rates, as well as the abundance of capital globally that is looking for a return.

Banks still have a role to play in private credit. Instead of directly extending their balance sheet to borrowers, they provide leverage to private credit funds and source deals by connecting borrowers with lenders.

It is also worth noting that corporates are taking longer to go public, making private credit an attractive source of capital. To put this in perspective: in 2014 the median age for a company to go public was 6.9 years. By 2024, the time spent private had grown to 10.7 years⁴.

On the demand side, there are several sectors that will have huge demands for funding in the coming years. These include new forms of digital infrastructure, like data centres; as well as renewable energy sources, like wind and solar.

Despite its economic significance, Asia only accounts for around 6% of the global AUM held in private credit⁵, which highlights the region’s enormous growth potential.

A key reason is that banks remain an important source of capital, which has also held back the development of the region’s high-yield bond market. There is good news however, as there appears to be rapid progress towards more diversified financing channels.

Private credit is already deployed across Asia to a wide range of projects. In direct lending for example, there is demand for hybrid solutions that combine the characteristics of both debt and equity – such as a dividend recapitalisations.

Growth companies are also a significant source of demand for direct lending, as they value the flexibility and speed of the product in a period of market volatility when banks might not be willing to extend credit.

In terms of sectors, some of the major trends playing out globally are also evident in Asia. Data centres, for example, are a big theme in many Asian markets. This will contribute to the already growing energy needs, which will increasingly be met with renewable power sources.

Real estate is another key sector in Asia, with demand for both distressed and performing property credit in markets as diverse as Hong Kong, India, and Japan.

The property sector also provides some insights into the kind of returns produced by private credit. In an opportunistic or distressed loan, returns could be as high as 18% to 20%, while lower risk loans like construction financing and senior mezzanine debt could deliver anything from 8% to 15%⁶.

Over the coming years, Asia’s private credit will develop as more institutional money gets raised and allocated into loans. This will generate the necessary liquidity to create a marketplace for debt that will allow traditional lenders to recycle some of the loans held on their balance sheets, which in turn will generate even more liquidity in the market.

Banks operating in the private credit space can take a holistic approach by enhancing their capabilities across the entire value chain: working on everything from origination, structuring, and underwriting, to syndication and trading.

HSBC for example, is injecting USD4 billion into its private credit funds, which will help attract capital from other investors to create a USD50 billion credit fund over the coming five years⁷.

“By supporting our clients across the private credit ecosystem, we are helping to drive the growth of Asia’s private credit market. And that will benefit the institutional investors that are looking to diversify into this fast-growing asset class,” said Mr Kadhim.