The Growth in Private Credit Is Moving to Investment Grade. Direct Lending Is Already the Small Part.

Aug 30

4 min read

What's New

The expansion in private credit that matters is happening above the middle market, in investment grade rated assets currently sitting in liquid public markets. John Waldron, President and COO of Goldman Sachs, makes the case on The Bridge by iCapital. He sizes private investment grade at roughly $2 trillion today, about $1 trillion held by alternative asset managers and another $1 trillion privately owned inside insurance companies. Against that sits somewhere between $20 trillion and $40 trillion of investment grade credit deployed in public markets. Direct lending, which has absorbed nearly all the commentary, is the below investment grade middle market slice.

Why It Matters

The current debate treats private credit as a single asset class with a single risk profile, and the redemption headlines have been about retail vehicles lending to sponsor-backed companies. Waldron is arguing the growth engine sits somewhere else entirely, and that a migration of investment grade fixed income into private structures would dwarf everything direct lending has done. It also implies the loudest current risk conversation is aimed at the part of the market that is furthest from where capital formation is heading.

Big Picture Drivers

Froth has come out of direct lending, which Waldron reads as healthy: When AUM growth made deployment the priority, competitive behaviour weakened terms and pricing. That has reversed, and Goldman is taking institutional inflows from clients who see the dislocation as an entry point.
Banks are re-entering as an offset: Deregulation has made banks more active lenders, which partly counteracts the improvement in terms that private lenders would otherwise capture.
Equity is the first loss, and it is getting less scrutiny: Waldron argues that if software credit is a concern, software equity deserves attention first. Goldman's own software credit exposure is secured by substantial collateral, and he says problems would surface in equity before credit.
Rates only matter relative to growth: A 4.5% to 4.75% ten year is workable alongside roughly 5% nominal GDP. The same rate against 1.5% to 2% growth is a different economy. Inflation is running closer to 3% than 2%, with oil supply the swing factor.
Compute supply will outrun enterprise deployment: Waldron expects an extraordinary build over two to three years while adoption lags on two constraints, data quality and cultural change. He declines to call a bubble on that gap.
Semi-liquid is the wrong word: Goldman does not use it. Waldron says people hear liquid and miss that these vehicles are largely illiquid, and that the manufacturer carries an obligation to explain suitability, duration, and expected return.

By The Numbers

$2 trillion: Current private investment grade, split roughly evenly between alternative managers and insurance company balance sheets.
$20 trillion to $40 trillion: Investment grade credit deployed in liquid markets, which Waldron sees migrating over time.
$600 billion: Goldman Sachs private markets assets under management.
20% to 40%: Productivity gains Goldman is seeing in software development from generative AI coding tools, higher in individual cases.
50%: Year to date growth in equity capital markets volumes, which Waldron expects to make for a strong year beyond the headline IPOs.
5%: The quarterly redemption cap that Waldron says investors must treat as a structural feature rather than a liquidity source.

Key Trends to Watch

Investment grade migration into private structures: The test is whether insurance and pension allocations move measurably out of public investment grade, and whether private structures deliver better absolute returns on comparable credit.
A record M&A year running into 2027: Waldron describes corporate ambition for scale as the strongest he has seen, with spins, splits, and carve-outs firing simultaneously. Private equity participation is notably absent, so volumes have room to rise further if sponsors re-engage.
Very large IPOs test institutional price discovery: Companies coming to market are unprecedented in scale, with retail participation likely higher than in prior cycles. Waldron still expects institutional demand to set price.
Coders get redeployed rather than cut: Goldman expects to push more output through a similar headcount rather than reduce it, with the same logic applied to back office process re-engineering.

Memorable Quotes

“5% is 5%” Waldron's summary of the redemption lesson from early 2026, and of what disclosure around evergreen structures has failed to convey.
“when deployment becomes the main thing, you get competitive behavior” His explanation of how private credit terms weakened, and why the current slowdown in AUM growth improves underwriting.
“I would be circumspect about calling for a bubble.” On the gap between compute supply and enterprise AI deployment, which he expects will take years to resolve either way.
“sometimes you need a business cycle to clean things out” Waldron on persistent fiscal and monetary support, and his concern that suppressing downturns builds a larger problem later.

The Wrap

The thesis holds if private investment grade formation accelerates while direct lending growth moderates, and if the current stress stays contained to retail vehicles rather than reaching institutional portfolios. It fails if inflation settles above the low twos and back end rates rise without matching growth, since Waldron's own framing makes the rate level meaningless in isolation and dangerous alongside weak output. He concedes the biggest variables are outside anyone's forecast: whether the oil supply shock resolves, and whether AI capital expenditure starts returning on invested capital. Both are binary, and both land within his two to three year window.