The future of private markets: convergence of public and private credit 

In this environment, distinctions between public and private credit are becoming less defined, reflecting a broader shift in how capital is intermediated across the financial system.

As these conditions have evolved, so too has the role of private credit within the wider economy. What was once considered a complementary or alternative source of financing has expanded into a core component of corporate funding, with assets under management now approaching $2tn, supported by sustained demand for more flexible forms of capital and wider structural changes.^[1]

This expansion of private credit has been shaped, in part, by the constraints facing traditional lenders as regulatory changes and capital and liquidity requirements have limited the capacity of banks to extend certain types of credit, particularly to more highly leveraged borrowers. In parallel, private capital has stepped in to fill this gap, offering more tailored financing solutions across direct lending, asset-based finance and more specialized credit strategies.

While this transition has unfolded over more than a decade, its scale is now more clearly reflected in both financial markets and the wider economy. Non-bank lenders account for a significant share of corporate lending activity, while in the UK, private-equity-backed companies represent up to 15% of total corporate debt and around 10% of private sector employment – equating to more than two million jobs.^[2] Taken together, these dynamics point to a market structure in which private credit is no longer peripheral, but embedded within the broader system of capital formation.

At the same time, the availability of private financing has enabled companies to access capital outside of public markets and, in many cases, to remain private for longer. This has reinforced the growth of the wider private markets ecosystem, where debt and equity increasingly operate in tandem.

Alongside these structural shifts, the change in the interest rate environment has altered both the opportunity set and the underlying risk profile within credit markets. With benchmark rates rising from near zero in 2020 to materially higher levels in recent years, the baseline for returns has reset. For private credit, essentially a floating-rate asset class, this has translated into higher income generation.^[3]

In contrast to the preceding decade, where returns were often driven by compression in rates, income has re-emerged as a primary driver of performance. This has strengthened the relative appeal of private credit within portfolios, particularly for investors seeking cash flows in a more uncertain macroeconomic environment.

However, these same conditions are also being absorbed by borrowers. Higher borrowing costs are placing increasing pressure on corporate balance sheets, particularly among leveraged companies. Declining interest coverage ratios, a growing proportion of borrowers with negative free cash flow and the increased use of payment-in-kind structures all point to emerging stress beneath the surface.^[4] While these pressures have yet to fully materialize in default rates, they highlight a more complex environment in which stronger headline returns can coexist with rising sensitivity to economic conditions.

As private credit has expanded, its links to the broader financial system have become more evident, with regulators highlighting banks’ exposure through lending to funds and sponsor-backed corporates, often structured via subscription facilities and asset-backed financing. 

These structures can provide flexibility in stable conditions, supporting liquidity management and capital deployment. At the same time, they illustrate how pressures within private markets can transmit more widely, particularly where exposures are less transparent. The implication is not necessarily heightened fragility, but a greater degree of structural interdependence as credit markets that were once more clearly segmented are increasingly connected through shared funding channels, overlapping common macroeconomic drivers.

Within this more interconnected system, the distinction between public and private credit is becoming less meaningful in isolation. Rather than representing separate allocation decisions, they are increasingly viewed as complementary components of a broader credit spectrum.

Public markets continue to offer liquidity, transparency and price discovery, while private credit provides access to less liquid and diverse segments of the market. Combining the two allows investors to manage duration, yield and liquidity in a more integrated way, reflecting a shift away from binary allocation decisions toward more holistic portfolio construction.

This highlights a broader change in how investors approach credit exposure, moving from segmentation toward coordination across both public and private markets. As credit markets become more interconnected, traditional approaches to diversification are increasingly being tested, with exposures that appear distinct often driven by similar underlying factors such as interest rates and broader thematic trends. In private credit, where transparency is more limited, these overlaps can be harder to identify, leaving portfolios exposed to less visible concentrations of risk.

In this context, the role of private credit is evolving beyond that of a yield-enhancing allocation, as the convergence of public and private credit shifts the focus from allocation between them to understanding how exposures interact across the portfolio as a whole. In an environment defined by structural change and increasing interdependence – resilience will depend on adopting a total portfolio perspective, grounded in a clear understanding of how risk is distributed across the system.