Private Credit Evolves Beyond Direct Lending Into New Strategies

In Brief:

Private credit has exploded from a niche post-financial crisis strategy into a nearly $2 trillion asset class, but the market is rapidly diversifying beyond traditional direct lending as institutional allocators become more sophisticated and seek higher returns. Industry leaders warn that the days of simple sponsor-backed deals dominating the space are ending, with asset-based lending, evergreen fund structures, and non-sponsor opportunities creating new white space for managers willing to develop specialized expertise. A panel of senior executives from Square Nine Capital, HSBC, StepStone, and Schulte Roth & Zabel gathered at an iConnections event to discuss how banks and private credit funds are forming deeper partnerships while allocators push for greater transparency and fee reduction through co-investment strategies.

Big Picture Drivers:

• Institutionalization: Major pension funds and sovereign wealth funds are rapidly increasing allocations from 5% to 15% of portfolios as private credit proves its asset-liability matching benefits

• Bank Partnership Evolution: Traditional adversarial relationships between banks and private credit are transforming into collaborative joint ventures and risk-sharing arrangements

• Strategy Diversification: Direct lending is becoming the "core" allocation while institutions add "core-plus" strategies like asset-based lending and specialty finance

• Structural Innovation: Industry is moving from traditional private equity-style funds toward evergreen vehicles that give institutions more control over exits and reduce serial underwriting burden

Key Topics Covered:

• Asset-Based Lending: Emerging as the hottest new strategy, covering non-corporate, esoteric and hard assets beyond traditional direct lending scope

• Evergreen Fund Structures: Alternative to traditional closed-end funds that allows institutions to redeem at will while avoiding repeated manager underwriting

• Non-Sponsor Opportunities: White space targeting the 80% of mid-market companies in North America that aren't sponsor-backed

• Transparency Demands: Institutional clients increasingly demanding better visibility into portfolio performance and underlying loan data

Key Insights:

• Market maturation is creating specialization opportunities as large direct lenders focus on scale deals, leaving smaller sponsor-backed transactions and founder-led businesses underserved with potential for 200-300 basis points of additional returns.

• Banks are discovering that private credit partnerships allow them to generate high-return income from treasury, insurance, payroll and trade finance services without putting balance sheet capital at risk.

• Evergreen structures appeal primarily to smaller institutional teams that lack resources for constant manager re-underwriting, while sophisticated allocators with in-house capabilities still prefer traditional fund structures for maximum control.

• The industry's evolution mirrors broader institutionalization trends, with allocators moving from simple allocation increases to sophisticated co-investment strategies and strategic partnerships designed to reduce fees and increase access.

• Domain expertise rather than financial modeling is becoming the key differentiator in private credit, particularly for specialty strategies like music royalties, aircraft leasing, and other esoteric asset classes.

• Transparency is emerging as the next competitive frontier, with institutions demanding better visibility into their credit portfolios beyond basic performance metrics to understand underlying loan composition and risk factors.

Memorable Quotes:

• "Private credit isn't the thing. It's probably you pick it a half a dozen or ten different things, different types of investment strategies." - David Nissenbaum, when explaining the complexity of the current market landscape

• "In North America alone, where at least 80% of mid-market companies are not sponsor back, there really is this large white space to go after." - Nicole Musico, describing the opportunity in non-sponsor deals

• "Everyone has their specific niche. And, you know what? The variety of managers and capital and flexibility are being provided." - Tom Curran, on why bank-private credit partnerships are replacing competitive dynamics

• "I want to do more with fewer managers." - Todd Trabocco, capturing the institutional investor sentiment driving consolidation trends

• "It's not really so much, a spreadsheet finance game. It's one about domain expertise." - Todd Trabocco, emphasizing the importance of specialized knowledge over financial modeling

The Wrap:

The private credit industry stands at an inflection point where traditional direct lending strategies are becoming commoditized while new opportunities emerge in specialized asset classes and innovative fund structures. As the market approaches $2 trillion in assets, success will increasingly depend on managers' ability to develop deep domain expertise, forge strategic partnerships with banks and allocators, and provide the transparency that sophisticated institutional investors now demand. The winners will be those who can navigate beyond the crowded sponsor-backed lending space into the white space opportunities that require specialized knowledge and operational excellence.