Meanwhile, strong absolute and relative return potential should continue to support demand among institutional investors for privately originated assets. And individual investors are now finding it easier to access private credit—often without having to lock up capital for years, thanks to a wider array of investment options.
Corporate Lending: Return Potential is Attractive
Corporate direct lending will remain the lynchpin of many private credit allocations. Lower rates in 2025 may help to relieve pressure on many private equity–sponsored corporate borrowers. Lower rates may also contribute to increased deal flow, especially if a softer regulatory environment under a new US administration greases the wheels of corporate merger-and-acquisition activity.
A decline in the base rate used to price direct corporate loans suggests the overall return potential may fall short of the outsize returns that some direct lending strategies delivered in 2023 and 2024. But the risk-adjusted return potential remains strong, underpinned by still-elevated yields and resilient borrower fundamentals.
Expanding the Opportunity Set in 2025
Among the more promising developments, in our view, is the broadening of private credit to include lending to consumers, homeowners and small businesses through the $6 trillion-and-growing asset-based finance market.
Banks are increasingly embracing a “capital light” model that enables them to maintain loan sourcing and customer relationships while partnering with asset managers to underwrite, price and invest capital on behalf of insurance companies, pensions and other investors.
This creates opportunities for investors to purchase portfolios of seasoned loans from banks and nonbank lenders, or enter into forward flow agreements to acquire new ones that meet predetermined credit criteria. It’s a vast investment universe, ranging from US auto loans to reperforming German bank loans to installment loans for boats, snowmobiles, all-terrain vehicles—and more.
Navigating this market requires a seasoned manager with strong loan sourcing and underwriting skills—and the ability to build protective features into agreements to purchase loans from nonbank lenders. In the US, for instance, auto loan and credit card delinquencies have edged up this year. But underlying fundamentals, including income and net worth, have improved. For seasoned investors, the mixed outlook offers attractive opportunities to uncover value. (Display).