Private Debt Poised for Explosive Growth as Banks Retreat | Mercer Outlook

What's New

Mercer's inaugural "Private Markets in Motion" report reveals overwhelming optimism among private debt managers, with 80% expecting an increase in fund managers raising capital over the next three to five years and 87% anticipating growth in limited partner allocations to the asset class. The survey of 57 global firms managing over $2 trillion in assets finds wealth management clients will drive the fastest-growing inflows, as the democratization of private markets accelerates through semiliquid and evergreen fund structures.

Why It Matters

With global private debt assets now exceeding $2 trillion and an estimated $90 trillion in financing needs forecast over the next decade, private debt is transitioning from a niche allocation to a core institutional portfolio component. As traditional banks retreat under Basel IV capital requirements and regulatory constraints, private lenders are filling critical financing gaps for mid-market corporates and specialty asset classes—creating compelling opportunities for investors willing to capture illiquidity premiums once reserved for bank balance sheets.

Big Picture Drivers

• Regulatory shift: Basel IV and risk-weighted asset optimization are pushing banks toward shorter-tenor, higher-quality loans, creating structural openings for private debt funds

• Product innovation: Semiliquid and evergreen fund structures are expanding market accessibility beyond traditional institutional investors to wealth management channels

• Bank disintermediation: Traditional lenders' retreat from mid-market corporate financing creates sustained demand for flexible private credit solutions

• Investor diversification: LPs are increasingly seeking exposure beyond direct lending into specialty finance strategies with structural barriers to entry

• Market maturation: Industry consolidation and scale economies are enabling fee compression while maintaining manager profitability

By The Numbers

• 80% of managers expect GP fundraising to grow over the next three to five years

• 77% of surveyed managers plan to launch a new private debt strategy within 12 months

• 87% anticipate an increase in LP allocations to private debt

• 75% identify wealth management as the fastest-growing client segment

• 53% of managers expect fund-level fees to decrease over the next two years

Key Trends to Watch

• Asset-based finance dominance: 65% of managers identify asset-based finance as having the most growth potential over five years, far outpacing traditional direct lending strategies

• Fee compression accelerating: US managers are particularly bearish on fees, with 64% expecting decreases compared to just 20% of European counterparts

• Mid-market sweet spot: 53% of respondents see mid-market deals offering the most attractive risk-adjusted returns, though competition is intensifying at the larger end

• Credit quality concerns rising: 65% of managers expect loss rates to increase over the next two years, signaling a more challenging environment requiring selective underwriting

The Wrap

Private debt's structural transformation from complementary capital source to core lending pillar presents significant opportunities for LPs who can identify managers with differentiated sourcing capabilities and expertise in complex credit structures. However, rising competition—particularly in mainstream direct lending—combined with expectations of higher loss rates and fee compression demands increasingly rigorous manager selection. Investors should consider diversifying beyond direct lending into specialty finance segments where smaller, specialist GPs maintain structural barriers to entry and more favorable risk-adjusted return profiles.