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As capital is allocated across private markets into increasingly complicated and sophisticated structures, investors will need greater transparency and clarity on their investment risk. This is true for traditional institutional investors, insurance companies, high-net-worth individuals and family offices, and rising retail investors. The ascent of mega-players with deep pockets in private credit fundraising and the bespoke nature of many of the deals further reinforces this need. Private credit can no longer be considered a niche contributor.

Next year, private credit is likely to further disrupt traditional market roles—with the growth of novel assets and structures; the expansion into asset-backed finance, project finance, and real estate; and the rise of disintermediation in new markets like Europe. And demand for private credit among long-term investors across multiple geographies will add to the disruption.

This dynamic highlights the balance required between systemic and situational transparency in the credit landscape. Systemic transparency in public markets—through clear technicals on market health and dynamics, including public ratings and pricing—provides clear lines of sight on key risks and alleviates some associated with the inherent volatility of any asset class. By contrast, transparency in private markets is more situational, where asset managers' level of information is determined by their role in the market or direct involvement in a transaction.

As investors in private markets expand allocations to more diverse and complex asset types in 2025, the limitations of the asymmetric transparency within private markets may become more apparent. As a result, mechanisms to create channels of systemic transparency will be important to support the healthy growth of private credit.

In this edition of Private Markets Monthly, Global Head of Private Markets Analytics Ruth Yang explores the innovations and asset classes that private markets will expand into and explore in 2025 with seven of S&P Global Ratings' subject matter experts.

Novel Transactions Will Evolve The Foundation And Future Of Private Markets

Marta Stojanova, Director, Leveraged Finance Corporate Ratings:  As the fastest growing asset class in recent years, private credit has established itself firmly as a sophisticated alternative capital provider at scale for corporate, infrastructure, and financial companies.

Private credit has proven its ability to provide speed and certainty of execution during prolonged periods of public debt market volatility and illiquidity, and as banks have retreated in their willingness to lend due to regulatory factors. Stepping in as a solution to diverse corporate needs for financing beyond leveraged buyouts and mergers and acquisitions (M&A), private credit is also funding deals and projects related to the low-carbon transition and digital economy. And the largest pools of capital (pension funds, insurance, and high-net-worth individuals) have increased the need for risk-adjusted returns and long-term annuities, further providing scalability of the asset class into asset-based finance (ABF), including real estate.

The confluence of these factors, even after public debt markets have stabilized, has led to an explosion of creativity and innovation when it comes to funding solutions—with a distinct blurring of lines between public and private debt markets, and increasingly between asset classes.

We have seen private credit tactics and terms influencing structures at inception in the broadly syndicated loan (BSL) markets—including the addition of delayed draw down tranches as standard for high-growth sectors such as software and health care, as well as disrupting tactics (and recoveries) during work-outs and restructurings.

Alternatively, the strong rally and stabilization of pricing in the BSL market has triggered a repricing wave in private credit, as both private and public markets contend equally for the larger and arguably more stable issuers. We expect this innovation and interplay to continue apace in 2025 beyond pricing and leverage levels.

Matthew Albrecht, Chief Analytic Officer, Financial Services Ratings:  Over the past decade, private debt has indelibly changed financial markets, and it is inevitable that it will continue to drive innovation and evolution of the debt capital markets. It is also rapidly diversifying its investor base as it is a fast-growing asset class for insurance companies and retail investors. We're watching this innovation take shape with the rise of novel financing structures. While we are seeing innovation in structures as the market attempts to solve for a variety of new or evolving constraints, the risks are not often new—just presented in a new way.

For example, alternative investment funds (AIFs) are gradually introducing mechanisms from other financing areas (like structured finance technologies) to enhance the position of their creditors. In order to attract new capital or preserve existing investment, some new structures borrow features that are common in, for example, collateralized loan obligations (CLOs) despite still being in a credit strategy fund structure. We've also recently seen a growing number of transactions where investment-grade companies sell large minority positions in joint ventures to financial investors—typically using sale proceeds to fund multiyear capital expenditure projects, make shareholder returns, or manage liabilities.

We are also observing a lot of innovation in an attempt to bring public and private money together to advance climate initiatives. These blended finance deals, utilizing development finance and philanthropic funds (where a plethora of instruments can be combined) to mobilize private capital flows to emerging economies and frontier markets, will play a crucial role in narrowing the climate finance gap.

Devi Aurora, Managing Director, Financial Institutions and Alternative Funds Ratings:  We expect the heightened interest from market participants who are eager to understand how S&P Global Ratings' criteria apply to these different areas of private markets to continue. For fund finance specifically, there has been a focus on how we could address different pools of assets. Our criteria are flexible and can be applied to various types of pools—private equity, private credit, real estate or infrastructure debt, and/or infrastructure equity and receivables.

Private Credit Will Continue Expanding Into New Asset Classes (And Combining Existing Areas)

Ramki Muthukrishnan, Managing Director, Nonbank Financial Institutions:  Private credit's growth won't be slowing down anytime soon. Recent and upcoming rate cuts will provide relief for private credit borrowers through lower funding costs in 2025, even as many have already benefitted from repricing and improving financing conditions. This will continue to support our credit estimates—which have more than doubled since 2021, from 1,200 then to nearly 3,000 now, in tandem with the strong formation of middle-market CLOs over this period and due in part to robust issuance last year. Middle-market CLO transactions were in the spotlight over the last two years as the investor base broadened and new managers entered the space.

Further, managers setting up new business development companies (BDCs) will continue to use CLOs as an alternative source of funding, given the tightening liability spreads for this asset class. BDCs continue to be an important source of funding for private credit. In S&P Global Ratings' analysis of the public filings of more than 165 BDCs and interval funds (most of which are unrated entities), we've seen that BDC assets grew 8% quarter-over-quarter (to $402 billion in the second quarter), with private-credit loans accounting for just over half of assets.

Private credit funds also have diverse risk and return profiles, whereby their participation in more junior or mezzanine classes could help to attract other sources of institutional capital for more senior exposures.

Initial declines in benchmark interest rates in 2024 have led to modest improvements in the credit metrics of credit estimated companies (borrowers with loans held by middle-market CLOs). While the impact of lower rates so far has been modest, we expect the improvements will be more pronounced next year. From a credit standpoint, we expect to see an uptick in upgrades—though we will continue to see downgrades dominating in early 2025.

Matthew Mitchell, Managing Director, Structured Finance:  The growth of private credit will continue to fuel 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, 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.

Financial innovation also continues to drive change as private funding expands into ABF, which is an enormous market and largely untapped. The potential market for private funding in ABF includes more than $5 trillion in consumer credit, along with the proliferating array of collateral in the esoteric asset-backed securitization space that stretches from intellectual property to hard assets.

Benefits of the expansion of private credit into ABF include differentiated sources of capital available to borrowers and the potential for higher alpha for investors. But while the potential for higher returns and broader diversification from ABF may be enticing investors, the lesser-understood and more complex nature of the assets brings potential risks.

Devi Aurora:  Although private credit vehicles may be seen by some as a broad and amorphous category, these common means of investment have historically and consistently been utilized to lend to the private sector over the past three decades—meaning the trends of today are crystalizing what has been building for some time.

Fund finance has recently enjoyed exponential expansion with the strong secular surge into private equity and private credit. These vehicles provide general partners (GPs) with a flexible format that can be structured and customized to the needs of an end investor, whether that is a sovereign wealth fund, pension fund, insurance company, or other private market player.

Similarly, subscription-lines and net asset value (NAV) facilities are not new, but their usage has swelled over the past few years when deal markets were depressed, exits were constrained, and liquidity was hard to come by. Across the global AIFs that we rate, we see continued interest in utilizing sub-lines and NAV facilities to manage liquidity, support the growth of portfolio companies, alleviate foreign exchange risk, and return capital to their limited partners (LPs) in an environment that's still less conducive to monetization.

Ramki Muthukrishnan:  Beyond transforming traditional investment vehicles, private markets are seeking opportunities to expand funding to other sectors. In today's market, alternative asset managers are increasingly arranging ABF transactions from direct origination to placement across their credit platforms. Several influential factors are enabling this change, which hasn't happened overnight—particularly the quest for liability matching, higher returns, regulatory shifts, and the rebalancing of the market structure.

Pablo Lutereau, Chief Analytical Officer, Infrastructure & Project Finance:  Private credit is seizing the opportunity to meet the rapid growth in demand for funding the infrastructure projects of tomorrow—including the energy transition to data centers—influenced by the redesign of supply chains. We expect this funding to increasingly complement that of commercial banks as a central funding source for project finance.

Currently, project finance and infrastructure transactions are mostly rated at an investment-grade level ('BBB-' and higher). However, the need for investment in new types of projects demands new investors and sources of funding. This may attract investors with larger appetites for risk, particularly when considering emerging markets and new geographies.

Project finance and infrastructure transactions are more difficult to structure, requiring substantial information (which is hard to come by) and specific subject matter expertise in areas that have limited precedent or are undergoing transformational moments, like data centers. They are also long-term investments, with a horizon that can easily exceed 20 years. While some of these sectors are largely uncharted waters for private markets, project finance and infrastructure generate higher returns and could be better suited for private funding due to their sophisticated, complicated, and illiquid nature, especially as banks are derisking or facing new capital regulations.

The recent lack of general partner returns in private equity, alongside regulatory changes, demographic impacts, and public market dynamics, have increasingly exposed pension and insurance funds' demand for liability matching. Infrastructure projects are uniquely positioned to provide risk-adjusted returns over a long horizon at a fairly senior part of the capital stack. Additionally, corporates at the center of these projects can benefit from monetizing part of their assets without losing control, or alternatively, co-sharing large capital investment outlays to enhance returns to stakeholders.

Regulation Could Shape Systemic And Situational Transparency

Marta Stojanova:  Our unique and holistic view on creditworthiness and defaults in private markets opened a dialogue with European private credit funds, which are increasingly recognizing the benefits of CLO structures to enhance fundraising and liquidity for institutional investors. This culminated in the first European mid-market CLO rated by S&P Global Ratings in late 2024. We will be closely watching how activity in Europe takes shape next year, particularly given the diverse market structures, reporting standards, and even currencies.

Andrey Nikolaev, Managing Director of Financial Institutions and Alternative Funds for Western Europe:  The fast growth in private credit represents a new wave of financial disintermediation in Europe—and increases diversification and funding capacity for the entire eurozone economy. This diversification of funding sources is beneficial for the European economy because it counterbalances the dominance of bank-provided financing in Europe, whose assets as a percentage of GDP exceed those of U.S. banks more than threefold. Private credit funds in Europe are gradually expanding their lending activities from mid-market entities to more credit classes.

But the rapid expansion and innovation in the private finance sector bear new financial stability risks centered on complexity, liquidity, and leverage. A core lesson from the global financial crisis is that fast growth and financial innovation can create systemic risk, as previously underestimated contagion channels can quickly appear when the cycle turns.

The opportunity for private credit in Europe is enormous, subject to the right guardrails. Europe is in dire need of investments to improve its productivity, as underlined by Mario Draghi's September 2024 competitiveness report. Ensuring a safe and sustainable flow of funds will require significant regulatory efforts and streamlining from EU authorities—while also requiring private credit funds to manage the risks they take. The LPs that invest in these funds and the banks that increasingly finance them also play a part in applying market discipline. Increasing transparency will be key to sustain investor and public confidence in Europe's private credit space.

Marta Stojanova:  Overall, the trends that will shape 2025 haven't appeared out of nowhere. As the result of private credit's decades-long expansion, the rise of new structures and new asset class opportunities are just the latest developments in how private markets are taking an innovative approach to traditional market relationships and roles.

We're watching how private players are increasingly engaging with payments-in-kind (PIK), which have increased among highly levered publicly rated borrowers seeking to release partial equity returns to GPs. In turn, GPs have struggled under rising pressure to monetize returns to LPs. The PIK feature is also heavily used to modify distressed term loan terms, in order to preserve cash flows for the issuers. Private credit is uniquely nimble to accept and utilize these terms—and as such can be a more enticing proposition for borrowers, particularly in transformational or uncertain times.

Additionally, the tension between systemic and asymmetric transparency may increasingly come into play as new investor vehicles and innovations come to private credit, particularly across private credit exchange traded funds (ETFs), the ETFs of private credit CLOs, and tokenization in private credit.

Writer: Molly Mintz