Institutional investors’ appetite for private credit is fueling growth in middle-market collateralized loan obligations, business development companies, asset-based finance, and other investment vehicles.
Investors’ intensifying demand for private credit is fueling growth across different funding structures that invest in these assets—including middle-market collateralized loan obligations (CLOs), business development companies (BDCs), interval and private credit funds, separately managed accounts (SMAs), collateralized fund obligations (CFOs), and other asset-based finance facilities (such as data centers, music royalties, and beyond).
While other credit asset classes have experienced outflows alongside the rapid escalation in interest rates, investors have increased their private credit allocations—reshuffling their exposures due in part to the attractiveness of these primarily floating-rate assets in an environment of still-high rates.
We believe the proportion of middle-market CLO issuance is likely to grow as the investor base continues to expand and direct lenders strategically seek out these structures for funding. S&P Global Ratings provides ratings on more than 200 middle-market CLO transactions and more than 2,800 credit estimates on middle-market companies. While this issuance is centralized in the U.S., we expect the European market to expand moving forward—especially considering the tremendous amount of capital waiting to be deployed with limited investment opportunities. At the same time, we increasingly see private credit fund proposals that include credit tranching for some capital structures or feeder funds, making them more comparable to CLOs.
Capital flows have continued to fuel BDCs, even as investors have rebalanced their portfolios. With close to $325 billion in assets—of which approximately 83% are private credit loans to U.S.-based borrowers—BDCs provide an important source of funding to private markets. We rate 14 of the largest BDCs, representing about 50% of BDCs' assets. The most recent growth in BDCs is predominantly due to asset managers launching perpetual, nontraded direct lending vehicles that cater to high net-worth individuals, alongside growth in the publicly-traded BDCs they may also manage.
We’ve also observed an expansion of private credit in asset-based finance, including digital infrastructure (such as data centers and fiber networks), transportation (like aircraft and railcar), music royalties, supply chain finance, and commercial real estate, alongside traditional retail sectors such as residential mortgages and autos.
The growth of private credit has fueled an expansion of investment vehicles offering a range of investment objectives with different liquidity and risk profiles. While the underlying assets may be similar in some cases across investment vehicles, the issuer's structural features and level of flexibility of the fund manager can influence our credit rating analysis.
For example, common vehicles investing in middle-market loans include CLOs, BDCs, and open- or closed-ended private credit funds, each of which S&P Global Ratings considers through a different analytical approach. Our sector-specific methodologies describe our analytical framework for assessing the creditworthiness of each of these investment vehicles.
In this Credit FAQ, S&P Global Ratings presents frequently asked questions from investors about the differences in how we rate common types of private credit investment vehicles.
READ CRITERIA FAQ
