Bank Retrenchment: the main private credit enabler

Spanning from early 2021 through mid-2025, the data clearly shows a structural shift in bank behavior—especially from Q3 2022 onward—as lenders responded to rising interest rates, regulatory scrutiny, and economic uncertainty by pulling back on credit availability. 

Notably, this retrenchment was not limited to small businesses, which are typically more vulnerable in downturns, but also extended to large and medium-sized firms. The tightening reflects a broad-based reassessment of credit risk and liquidity management within the banking sector.

The post-pandemic environment placed new stress on bank balance sheets. With deposits leaving the system, regional bank failures shaking confidence, and looming Basel IV capital requirements, many institutions became more conservative in their lending posture. 

This conservative stance is reflected in the elevated net percentages—exceeding 50% at times—of banks reporting stricter lending standards. In practical terms, this means borrowers had less access to capital, stricter loan terms, and lower approval rates, particularly for working capital and expansion-related borrowing. As banks retreated, private credit stepped in, offering more flexible underwriting, quicker execution, and an investor base hungry for floating-rate, cash-generating assets. This dataset reinforces the idea that the rise of private credit isn’t just an opportunistic trend—it’s a structural response to the ongoing withdrawal of banks from traditional lending.

• Widespread and sustained tightening post-2022 signals structural retrenchment
  Starting in Q3 2022, a sharp reversal occurred: over 24% of banks tightened standards, peaking at more than 50% by Q3 2023. This shows a decisive, coordinated risk-off shift—not just cyclical adjustment. Large and small businesses equally affected
  Unlike previous crises where small businesses bore the brunt, both large/medium (50.8%) and small (49.2%) borrowers faced equal levels of tightening in late 2023. This highlights systemic risk aversion across the board.

• Retrenchment continued well into 2025
  Even as macro conditions began to stabilize, banks did not revert to pre-2022 looseness. As of Q2 2025, a net 18.5% of banks still tightened standards for large borrowers—indicating a longer-term shift in bank lending culture.

• Macro and regulatory headwinds accelerated the pullback
  Factors like inflation, Fed rate hikes, regional bank failures (e.g., SVB), and looming capital rules (Basel IV) forced banks to conserve liquidity and shed riskier credit exposures—especially in commercial lending.

• Credit-starved businesses seek alternatives—enter private credit
  With banks withdrawing, borrowers—especially mid-market firms—have increasingly turned to direct lending, asset-based loans, and mezzanine debt provided by private credit funds. These options offer faster execution and more borrower-friendly structures, even at slightly higher cost.

• Supports the "replacement thesis" in private credit
  This data reinforces the idea that private credit is not simply complementing bank lending—it is replacing it in key segments. The rise in fundraising and deal activity by private lenders aligns directly with this tightening trend.

The Rise of Private Credit as an Institutional Asset Class

The following section captures the explosive expansion of the global private credit market, which has grown from just $0.5 trillion in 2013 to $2.1 trillion in 2023, reflecting a 15% compound annual growth rate (CAGR). The majority of this growth has been concentrated in North America, which now represents nearly 60% of global private credit assets, though Europe is showing steady gains as market infrastructure matures. 

What's notable is that this expansion has occurred during a period of bank deleveraging, regulatory capital pressure, and declining public bond issuance. As banks retrenched from riskier or bespoke lending activities, private credit filled the vacuum with flexible, direct loan solutions — often secured by cash flows and tailored to borrower needs.

Beyond capital displacement, this growth is also fueled by investor demand for yield and predictability. With traditional fixed income generating insufficient real returns for much of the past decade, institutions have turned to private credit for floating-rate, cash-generative investments with strong downside protection. 

The rise in "dry powder" (unallocated capital) — shown by the grey line — further indicates that investor appetite has not only kept pace with this growth but is anticipating continued deal flow. For LPs seeking uncorrelated yield with equity-like returns but lower volatility, private credit has become a strategic allocation rather than a tactical one. The scale and momentum shown here represent more than growth — they reflect a permanent shift in how credit is sourced, priced, and managed globally.

• Private credit AUM quadrupled in a decade
  Growing from $0.5T in 2013 to $2.1T in 2023, the asset class now rivals traditional fixed income allocations in institutional portfolios. This is not opportunistic growth — it’s structural.

• North America leads the charge
  With $1.25T in 2023, North America is the center of private credit activity, driven by middle-market corporate demand, BDC infrastructure, and long-standing bank pullback in the U.S. credit system.

• Private credit offers solutions that banks no longer can
  As banks reduce exposure to bespoke, non-investment-grade lending, private credit steps in with covenant-heavy, floating-rate loans underwritten on cash flow rather than assets. This makes it an ideal source of financing for LBOs, turnarounds, and non-sponsor-owned businesses.

• Dry powder trends upward — LP demand remains strong
  The rise in dry powder suggests that LPs continue allocating aggressively to private credit strategies, expecting deal pipelines to remain robust even amid rate hikes and macro volatility.

• Shift from appreciation to cash-flow investing
  In today’s rate and inflation environment, LPs and entrepreneurs alike are prioritizing predictable yield over capital gains. Private credit offers coupon-driven returns with tight structuring — often with downside protection mechanisms like seniority or asset coverage.

• From niche to necessity
  Once considered an "alternative," private credit is now a mainstream allocation in institutional and entrepreneurial portfolios, providing capital efficiency, yield, and diversification in one package.

• Entrepreneurs now use private credit strategically
  Borrowers increasingly prefer private lenders for their speed, certainty of execution, and flexibility — critical for acquisitions, recapitalizations, or funding growth without equity dilution.

Private Credit’s Displacement of High Yield Debt

There is a clear demonstration as to  how private credit has emerged as the dominant force in the leveraged finance landscape. Since 2005, private credit has grown by 519%, vastly outpacing both global high-yield bonds and broadly syndicated loans. The latter two—hallmarks of public markets—have shown only marginal growth, and in the case of high-yield bonds, even contraction in recent years. 

This divergence signals a reordering of credit preferences: away from market-traded instruments that rely on capital appreciation and liquidity, and toward privately originated loans that generate returns through contractual interest income and structured cash flows.

From the perspective of LPs and entrepreneurs, this shift represents more than just volume—it’s about control, predictability, and durability of returns. Private credit deals are typically illiquid by design, enabling tighter covenant structures, floating-rate terms, and stable cash flow delivery.

 The limited reliance on mark-to-market pricing shields portfolios from volatility, while higher seniority in the capital stack offers enhanced downside protection. The chart not only tracks the quantitative dominance of private credit but also implies a deeper qualitative preference for income over appreciation, security over speculation, and structure over liquidity.

• 519% growth in private credit since 2005 dwarfs public debt growth
  While global high-yield bonds and syndicated loans have grown modestly or stagnated, private credit has exploded—underscoring a structural capital rotation away from appreciation-based strategies.

• Investors favor private credit’s yield and downside protections
  Public high-yield bonds rely on market pricing and secondary liquidity, whereas private credit generates predictable interest income, typically secured by covenants, collateral, and seniority.

• Borrowers opt for flexibility and confidentiality
  Issuers increasingly choose private lenders to avoid public disclosures, ratings, and market volatility. These loans are structured around operating cash flow, not market-based valuations.

• Drawdown-based structure supports long-term allocation
  Private credit funds typically deploy capital over time, aligning with income harvesting rather than timing market exits—ideal for LPs targeting cash-on-cash returns over mark-to-market NAV pops.

• Capital markets fragmentation reinforces the trend
  With banks focusing on low-risk lending and bond markets exposed to liquidity shocks, private credit offers a middle ground: higher returns, lower volatility, and full underwriting control.

Cash Flow replaces appreciation

The following comparison between a traditional 60/40 portfolio with a "modern balanced" portfolio that includes a 10% allocation to private credit. From 2017 through early 2024, the private credit-enhanced portfolio delivers higher cumulative returns (9.84% CAGR vs. 7.67%) and does so with reduced drawdowns—especially during turbulent periods like the COVID crash and 2022 inflationary selloff. This outperformance illustrates how the integration of steady, contractual income streams from private credit not only lifts returns but also dampens volatility.

What makes this so compelling is that private credit’s value isn’t tied to capital appreciation or public market beta. Instead, the return is largely derived from recurring cash flow—typically floating-rate interest payments with downside protections built into covenant-heavy structures. Unlike public equities or long-duration bonds, private credit doesn’t rely on rising valuations. For LPs and entrepreneurs seeking capital preservation, consistent income, and resilience during equity market stress, this chart underscores why private credit is becoming a core building block in modern portfolios—not an optional add-on.

• Private credit adds yield and stability
  A modest 10% allocation to private credit boosts the portfolio’s CAGR by over 200 bps compared to the 60/40 benchmark. That excess return is primarily driven by recurring coupon income—not price appreciation.

• Cash flow buffers downside during volatility
  The modern balanced portfolio exhibits shallower drawdowns, especially in 2020 and 2022, when public markets suffered. This illustrates the stabilizing role of non-correlated, cash-flow-based assets.

• Private credit improves Sharpe ratio without increasing beta
  The return uplift doesn’t come with added equity exposure. Instead, it reflects contractual payments from illiquid, senior-secured loans, which reduce volatility while boosting total returns.

• Modern portfolios prioritize income over speculative upside
  In today’s regime of elevated rates and uncertainty, investors are less focused on appreciation and more on durable income streams. Private credit fits that need precisely.

• Illustrates strategic—not tactical—use of private credit
  This isn’t just crisis-era outperformance. The steady divergence in returns suggests that private credit's income profile is structurally additive, making it a permanent portfolio feature for modern asset allocators.

Bank Retrenchment and the Rise of Strategy-Specific Private Credit

This graph offers a comprehensive view of how private credit fundraising has evolved across different strategies from 2009 to 2023, in direct response to bank retrenchment. Following the 2008 financial crisis, traditional banks faced sweeping regulatory reforms, including stricter capital requirements, leverage constraints, and risk-based lending criteria. 

These changes discouraged banks from lending to many borrower categories—particularly middle-market firms, leveraged buyouts, and sectors with perceived volatility or low asset coverage. In this space, private credit has flourished. The chart shows how funds have stepped in to fill this financing void through increasingly specialized strategies, such as direct lending, mezzanine lending, asset-based lending, and distressed debt acquisition.

Direct lending has emerged as the leading strategy over the past decade, reaching nearly $300 billion in fundraising by 2021, before normalizing post-COVID. These loans are typically floating-rate, covenant-heavy instruments underwritten primarily on a borrower's cash flow rather than hard collateral. This "cash-flow lending" model—once dominated by banks—has now been absorbed by Business Development Companies (BDCs) and institutional private credit vehicles. 

At the same time, strategies like mezzanine and asset-based lending have grown steadily, offering investors hybrid risk-return profiles and downside protection through hard-asset collateral. The steady growth across all segments shown in the chart is a visual testament to how banks’ retreat has fostered a rich ecosystem of private lenders, reshaping the corporate credit landscape.

• Direct lending dominates due to its ability to replace traditional bank loans
  The rapid rise in direct lending, peaking at $293 billion in 2021, reflects a systemic substitution of bank-originated loans with private credit. Unlike banks, which now face capital and regulatory hurdles, private lenders can offer covenant-heavy, floating-rate loans tailored to borrower needs. These are underwritten based on cash flows—not collateral—making them ideal for middle-market firms and LBOs that banks now underserve.

• Cash flow replaces collateral as the foundation for lending
  Traditional bank loans often relied on hard collateral, but this chart shows the clear ascendance of cash-flow-based lending. Direct lending’s growth confirms the investor shift toward steady income and interest payments, even without physical asset backing. In contrast, asset-based and distressed strategies—while important—are comparatively smaller, suggesting investors prioritize yield over liquidation value.

• Mezzanine and asset-based strategies complement the bank lending gap
  Mezzanine debt, often used in corporate expansions and buyouts, gives lenders a subordinated claim with upside equity participation. Asset-based lending, meanwhile, addresses borrowers with tangible assets but inconsistent cash flow—such as infrastructure or real estate firms. The chart reflects consistent growth in both areas, especially from 2016 onward, illustrating how different borrower profiles now rely on private credit instead of banks.

• Fundraising growth accelerated during macro disruptions and regulatory tightening
  Fundraising volumes jump dramatically post-2015, peaking during 2020–2021—a period marked by pandemic-related economic uncertainty and cautious bank lending. As credit markets froze, private lenders remained agile, funding urgent corporate needs and generating premium yields, while banks tightened standards even further.

• Market normalization still favors private credit dominance
  While fundraising moderated from its 2021 peak, volumes in 2022 and 2023 remained well above pre-2017 levels. This suggests that private credit’s expanded role is not cyclical—it is structural. Investors now consider it a core fixed-income alternative, offering diversified exposure, cash-flow certainty, and enhanced yield without relying on capital appreciation or equity risk.

• Investor demand remains robust amid higher interest rates
  In a rising rate environment, private credit—especially direct lending—becomes even more attractive due to its floating-rate nature. Investors earn higher coupons with limited interest-rate duration risk, while borrowers continue to choose private lenders for their flexibility and speed, compared to banks’ rigid underwriting criteria.

Sources & References

BIS. (2025). Collateralized lending in private credit. https://www.bis.org/publ/work1267.pdf 

EY. (2024). Private Debt – An Expected But Uncertain “Golden Moment”? https://www.ey.com/en_lu/insights/wealth-asset-management/private-debt-an-expected-but-uncertain-golden-moment 

Goldman Sachs. (2024). Understanding Private Credit. https://am.gs.com/en-int/advisors/insights/article/2024/understanding-private-credit 

IMF. (2025). Global Financial Stability Report. https://www.imf.org/en/Publications/GFSR 

McKinsey. (2024). The next era of private credit. https://www.mckinsey.com/industries/private-capital/our-insights/the-next-era-of-private-credit 

Morgan Stanley. (2024). Understanding Private Credit. https://www.morganstanley.com/ideas/private-credit-outlook-considerations 

Pimco. (2024). Private Credit: Asset-Based Finance Shines as Lending Landscape Evolves. https://www.pimco.com/us/en/insights/private-credit-asset-based-finance-shines-as-lending-landscape-evolves 

PGIM. Real estate investment research. https://www.pgim.com/content/dam/pgim/us/en/pgim-real-estate/active/documents/research/PGIM_Real_Estate_Investment_Research_Expanding_Opportunity_for_Private_US_RealEstate_Credit.pdf

HarbourFrontWealth. Beyond the 60-40 case. https://www.harbourfrontwealth.com/2025/02/06/beyond-60-40-the-case-for-private-market-investments-in-the-modern-balanced-portfolio/