Excessive returns halo fading, banking industry "counterattack", private equity loan boom is cooling down.

Private credit business is losing its unique advantage. Institutions like Ares Management (ARES.US) and Blackstone (BX.US) used to steal deals from giants like JPMorgan Chase (JPM.US) and seize lucrative returns by offering customized terms. The difference now is that the banking industry has strongly rebounded, while direct lending institutions are heavily investing in retail tools that provide investors with cash-out opportunities. In conclusion, the $2 trillion private credit industry is becoming more and more like the public credit industry, which means a decrease in returns. In the years following the outbreak of the epidemic, so-called direct lending institutions have become the kings of the leveraged finance field. Part of the reason is that competitors in the banking industry suffered heavy losses due to acquisitions of loans (including Elon Musk's $40 billion Twitter acquisition). This allowed private credit funds to lend directly to borrowers, while providing fast, certainty and flexible terms, despite higher interest rates. Direct lending institutions like Blackstone provided financing for some of the largest acquisitions at the time, such as the $10 billion acquisition of Zendesk in 2022. Meanwhile, rising interest rates allowed these emerging institutions to promise double-digit returns to investors, attracting the attention of pension funds and insurance companies, driving this trend. Undeniably, the giants of private credit show no signs of halting their growth. By 2024, the industry's assets had steadily grown to $2.4 trillion. According to PitchBook data, traditional closed-end fund institutions raised $113 billion in just the first half of 2025. And new sources of funding are increasingly supplementing these traditional channels. So-called "perpetual funds" like BCRED, under Blackstone, are growing rapidly, allowing redemptions within certain limits, attracting the favor of wealthy individuals. According to PitchBook estimates, in the first half of 2025, these semi-liquid products raised $48 billion, accounting for about 40% of the inflows into traditional institutional funds. And the chase for retail funds will continue. Following President Trump's signing of an executive order in August, fund managers may soon be able to attract funds from American retiree savers. Consulting firm Oliver Wyman estimates that by 2029, the scale of individual wealth funds allocated to private credit is expected to quadruple to $1.5 trillion. However, such a large pool of funds and evolving financing models have also raised new issues. As of the end of 2024, so-called "dry powder" (unused funds) amounted to as high as $543 billion. Banks, which once retrenched, are now fighting back in the credit market boom and with the relaxation of U.S. capital rules. Investors needing to pay additional premiums to offset the default risks of high-risk assets like junk bonds have decreased to post-crisis lows in 2025. In addition, sales of collateralized loan obligations (CLOs), tools for packaging bank loans, have hit historic highs. LSEG data shows that this was one of the reasons leveraged buyout activities grew by nearly 17% in the nine months leading up to the end of September to reach $587 billion. The hot debt market is putting pressure on the extra yield direct lending institutions charge borrowers (higher than similar bonds issued publicly). This extra "premium" is a key selling point for investors, usually historically about 2 percentage points higher than widely traded similar bond rates. Bankers revealed in mid-November that this figure has halved to slightly above 1 percentage point in Europe and sometimes even lower in the United States. In addition, banks' leveraged finance departments are becoming increasingly adept at structuring deals to attract borrowers like private equity firms. In Europe, for example, they are increasingly offering loans that can be drawn down in instalments, making it easier to fund multiple acquisitions. A recent example is Bain Capital's financing scheme in August for an investment of around $1 billion in the Netherlands-based HSO. Private credit management institutions are also looking for new areas of business growth. Lending institutions like Blue Owl have become key players in financing artificial intelligence assets (such as data centers). Apollo uses its robust Athene insurance department to provide customized financing for highly-rated companies. Institutions focusing on providing loans to small businesses can still avoid mainstream public bond or loan markets to achieve higher returns. However, in the traditional acquisition field, private credit is becoming an increasingly common financing tool. Borrowers are increasingly able to take advantage of the dynamics between the market and lending institutions. Today, loans underwritten by direct lending institutions are frequently refinanced in the loan and bond markets. According to PitchBook LCD data, such transactions totaled about $26 billion in the first three quarters of 2025, roughly equivalent in size to reverse transactions. Moody's Corporation investor service company noted that private lending institutions are increasingly willing to issue covenant-lite loans, further indicating intense competition in fund deployment as these lending institutions would have control over distressed borrowers. This is in line with broader trends in the debt market. Therefore, stepping back, the boundary between private credit and traditional credit is becoming increasingly blurred, with traditional credit often implying lower returns. The growth of retail funds may further narrow the gap between the two. Perpetual funds allow limited redemptions based on net asset value, meaning they must periodically prove to financial advisors and regulators that the fund's valuation matches the reality. The inevitable result of this is that private lending will need to be traded more widely. A world with lower returns and greater liquidity is approaching, which will weaken the once-unique position of private credit.