Private Credit's Golden Age Persists Despite Market Doubts

What's New

According to Hamilton Lane's latest market outlook, private credit investors remain positioned for sustained higher yields as interest rates stay elevated for longer than previously expected, dispelling concerns that the asset class's golden age may be ending. The firm's analysis reveals a significant supply-demand imbalance with a $2 trillion funding gap through 2028, supporting continued strong performance despite recent market volatility.

Why It Matters

Private credit has demonstrated positive vintage year returns for 23 consecutive years while consistently outperforming public market equivalents, establishing itself as an all-weather investment strategy. With banks retreating from lending due to regulatory constraints and market volatility, private credit's market share continues expanding, creating sustained opportunities for institutional investors seeking stable, higher-yielding alternatives to traditional fixed income.

Big Picture Drivers

• Rate Environment: Forward SOFR curve indicates 200-300 basis points of enhanced floating yield relative to the pre-2022 decade, with rates expected to remain between 3.6-4.1% through 2035

• Supply Shortage: $1.4 trillion gap exists between private equity buyout dry powder and credit origination capacity, creating structural demand for private lending capital

• Bank Retrenchment: Post-financial crisis regulations continue limiting bank participation in leveraged lending, while recent market volatility threatens further withdrawal from risky assets

• Maturity Wall: Over $600 billion in performing loans mature through 2028, requiring refinancing that traditional banks cannot fully accommodate

• Performance Consistency: Private credit shows the narrowest spread of returns across market cycles among all private asset classes, with historically superior risk-adjusted performance

By The Numbers

• 4.31%: Current 3-month SOFR rate as of March 2025, compared to sub-1% LIBOR average in the decade before 2022

• 1.23%: Latest 12-month leveraged loan default rate, below the 25-year average of 2.43%

• 9.56%: Average yield to maturity for leveraged loans from 2022-2024, up 73% from the prior decade's 5.52%

• 67%: Percentage of 2024 buyout deal exits held for more than five years, indicating extended hold periods

• $2 trillion: Estimated total funding gap through 2028 combining dry powder shortage and loan maturities

Key Trends to Watch

• Private credit's market share in LBO financing continues expanding, with deal count significantly outpacing bank-led syndicated transactions since 2022.

• Distressed ratios remain below long-term averages at 4.5%, suggesting limited near-term default risk despite higher borrowing costs.

• Evergreen fund growth and continued fundraising momentum indicate sustained institutional appetite despite broader private markets decline.

• Macroeconomic uncertainty from trade tensions may drive credit spread widening, benefiting private lenders with enhanced pricing power.

The Wrap

Private credit's fundamentals remain robust despite market skepticism, supported by structural advantages including bank regulatory constraints, superior execution capabilities, and a massive funding gap that traditional lenders cannot fill. The combination of higher-for-longer interest rates and consistent historical performance positions the asset class for continued growth, making it an attractive defensive strategy during periods of economic uncertainty.