A 26-year veteran of the alternative investments sphere – including private credit – explains what 2025 may hold for an area that has expanded rapidly in recent years.

This article is from Michael Von Bevern who is the co-managing director at Suntera Fund Services, a fund administration company. A 26-year veteran in the alternatives industry, Von Bevern is an expert on private credit and its many intricacies. His perspective comes from the institutional investor and fund administrator side of private credit.

The editors of this news service are pleased to share these views; the usual editorial disclaimers apply to views of outside contributors. We invite readers to respond – jump into the conversation! Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

At the start of 2024, the private credit market was worth about $1.5 trillion – it is expected to grow to $2.8 trillion by 2028. In Von Bevern’s view, the industry could double in just a couple of years. Below, Von Beven shares private credit trends and opportunities he expects to see in 2025, including how interest rates, regulatory changes, technology, and the competitive landscape for service providers and lenders could impact private credit.  

1. Risk-adjusted returns for private credit will remain a compelling alternative to private equity for institutional investors.

Private credit, especially direct lending, has the potential to offer greater risk-adjusted returns for institutional investors in 2025 compared with other asset classes. With base rates staying elevated longer than many investors expected in 2024, and as central bankers in developed markets prepare to initiate easing cycles, private debt has emerged as a compelling alternative to private equity for institutional investors, offering attractive risk-adjusted returns. We could see private credit outperform private equity when it comes to absolute return allocation. Some LPs could even see the best risk-adjusted returns they have ever had in 2025. We should anticipate this higher-for-longer rate environment to persist. 

2. Private credit borrowers will benefit from lower interest rates and lower defaults.

In Q3 2024, private credit defaults were significantly lower than in Q2 2024, signalling improving borrower stability. While lower interest rates can further reduce defaults, their impact often takes time to filter through the system. Over time, lower interest rates provide substantial relief to borrowers, improving affordability and reducing default risk. Although lower rates may lead to reduced income for lenders, the trade-off comes with decreased risk. We anticipate even lower private credit default rates in 2025. We also expect the Fed to cut interest rates again, which we predict would be 100 more basis points.

3. There will be no significant regulatory changes that will impact private credit fund managers in the near-term.

In recent years, there has been increased regulatory scrutiny of lenders who lend money to private credit funds typically in the form of NAV-based or subscription-based loans. Consequently, there has been a notable shift of traditional lenders scaling back their involvement in private credit lending leaving a gap for non-bank lenders to step in, who will also face increased scrutiny from regulators. However, private credit fund managers themselves will not necessarily face significant regulatory changes in 2025. 

Despite these changes, the continued growth of private credit is attracting greater interest from institutional investors. As private credit funds expand and institutional LP participation increases, regulatory discipline and reporting requirements are expected to intensify. For private fund managers, maintaining a focus on transparency and risk management oversight will be required to keep pace with the sector’s growth. 

4. There will be heightened emphasis on private credit loan administration technology leveraging AI and machine learning.

In 2025, AI and machine learning will present new opportunities to streamline manual processes in private credit. Within the private investment community, GPs have seen a 52 per cent increase in AI adoption, while LPs plan to grow their AI allocations by 75 per cent in 2025. However, private credit loans are inherently nuanced with terms tailored to each deal. Credit agreements often vary significantly between lenders, incorporating covenants specific to individual transactions, which makes training AI to accurately interpret and extract critical information from these agreements extremely complex. This variability creates a gray area in how loan terms are interpreted and applied in the market, limiting AI’s ability to operate independently in these contexts. Despite these hurdles, technology is steadily advancing in the private credit space. 

5. There will be more competition for private credit deals for both lenders and service providers.

There will be increasing competition among private credit lenders in 2025, as evidenced by the flexibility of debt documents. Even during recent periods of heightened competition in lending markets where tighter covenants and stronger lender protections might typically emerge, there was only a slight shift away from borrower-friendly terms. To retain market share, we can expect private credit lenders to uphold these borrower-favourable terms and agree to provisions that are negotiated in the syndicated loan market.
  
The private credit market is poised for growth in 2025. Despite interest rate cuts and ongoing volatility, it remains a compelling option for institutional investors, offering returns that rival private equity. However, very few people are still focused on the private credit market. As it evolves, one of the key challenges will be finding solutions to keep pace with change.