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Private credit’s power play: why direct lending is reshaping markets
The private credit space has proved its resilience through macro-economic challenges such as the COVID-19 pandemic, interest hikes and transaction scarcity, and it continues to diversify into a broader array of assets. That resilience does not surprise Nicole Drapkin, portfolio manager at Blue Owl Capital.
Drapkin is a strong advocate for the role of private credit, particularly direct lending, as a core component of diversified investment portfolios. With more than US$1.5 trillion ($2.4 trillion) in assets under management across private credit markets, the opportunity set is vast, spanning middle-market businesses, sponsor-backed transactions, and corporate cash-flow lending. Drapkin’s perspective highlights how this market has evolved into a critical source of capital and why its future remains bright.
One of the primary drivers behind the expansion of private credit is the retreat of traditional banks from middle-market lending, Drapkin told last week’s The Inside Network Alternatives Symposium. Following the 2008 financial crisis, regulatory changes significantly limited banks’ ability to hold leveraged assets on their balance sheets. This created a financing gap, which private lenders have stepped-in to fill. Direct lenders provide floating-rate loans at the top of the capital structure, offering financing solutions to private businesses in ways that are often more tailored and responsive than traditional syndicated markets. “What we’re seeing is a fundamental transformation in corporate finance, where private credit is no longer a niche – it’s a major force in the market,” Drapkin explained.
The growing preference among companies to stay private for longer has further supported the rise of private credit. Drapkin notes that 86 per cent of US companies with more than $100 million in annual revenue remain privately held, representing a significant pool of potential borrowers. These businesses, whether private equity-owned or founder-led, increasingly view private debt as a viable alternative to public capital markets. Factors such as market volatility, confidentiality concerns, and a desire for long-term partnerships make direct lending an attractive option. “For many companies, maintaining control while accessing flexible financing is a priority, and private credit gives them that option,” she says.
Private equity’s reliance on private credit also plays a crucial role in the asset class’s sustained growth. With record levels of dry powder, private equity firms need capital solutions to drive acquisitions and expansions. However, high interest rates and valuation mismatches between buyers and sellers have slowed M&A activity. As Drapkin observes, “While the M&A market has been sluggish, the demand for financing remains strong. Private equity sponsors need certainty of execution, and direct lenders provide that without the volatility of public markets.”
Cost is rarely the deciding factor for borrowers when choosing private credit over public debt markets. Direct lending solutions often come with a higher cost of capital, yet businesses are willing to pay a premium for greater execution certainty, confidentiality, and long-term flexibility. This was particularly evident during the COVID-19 pandemic and the 2022 rate spike, when public markets froze, leaving many borrowers without financing options. “In times of stress, the ability to rely on a trusted lending partner is invaluable,” said Drapkin. “We saw a major shift during these periods, as borrowers recognised the benefits of stability and consistency that private credit offers.”
From an investor perspective, private credit provides compelling attributes, including downside protection, strong collateral backing, and the ability to conduct rigorous due diligence. Drapkin highlighted the importance of active risk management, particularly in structuring loans with robust documentation and covenants. “Weak loan documentation has been a growing concern in public markets, but private credit allows us to negotiate strong protections, ensuring we have the security we need in case of distress,” she explains.
Diversification is another cornerstone of successful private credit investing. Blue Owl’s strategy involves managing a highly diversified portfolio across industries, sponsors, and loan sizes to mitigate concentration risk. “The key is to structure portfolios in a way that minimises the impact of any single default while maintaining attractive returns,” said Drapkin. “Our approach ensures that even if one borrower faces difficulties, it doesn’t materially affect overall performance.”
Despite recent spread compression, private credit has consistently delivered premium yields over syndicated loans and high-yield bonds. The illiquidity premium inherent in private lending translates to higher returns, even in a high-rate environment. According to Drapkin, “Even with tightening spreads, private credit continues to offer high-single-digit to low-double-digit yields on an unlevered basis, making it an attractive asset class for income-focused investors.”
Looking ahead, deregulation in the US could provide additional tailwinds for private credit, she said. While banks remain constrained by capital requirements, direct lenders are well-positioned to capture further market share. Drapkin believes that easing regulatory pressures on corporate activity will likely lead to increased deal flow and investment opportunities. “We’re already seeing early signs of an M&A rebound, and as regulatory barriers lessen, private credit will be a key enabler of corporate growth,” she predicted.
The ability to work through distressed situations effectively is another competitive advantage of experienced direct lenders. When loans encounter challenges, having a skilled team to restructure debt and preserve value is essential. Drapkin stresses that successful outcomes depend on proactive engagement and hands-on management. “Our job doesn’t end when we make a loan. We have the expertise and resources to work through problems and maximise recoveries, ensuring strong risk-adjusted returns for investors,” she stated.
As more institutional investors recognise the merits of private credit, demand for access to the asset class continues to rise. New investment vehicles such as BDCs (business development companies) have made direct lending strategies more accessible to a broader range of investors. Drapkin sees this as a positive development, helping to democratise private market investing while maintaining the benefits of disciplined credit underwriting. “Private credit is no longer just for large institutions – it’s becoming a core part of portfolio construction across investor types,” she said.
With a vast and expanding opportunity set, attractive risk-adjusted returns, and growing institutional adoption, private credit appears well-positioned for continued success. Drapkin remains confident in the asset class’s ability to generate strong, stable income through various market cycles. “The consistency of performance, even in volatile environments, speaks for itself. Private credit is here to stay, and its role in portfolios will only continue to grow,” she concluded.
