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Private credit: A structural source of lending stability and growth

August 26, 2025

Christian Floro, CFA, CMT

Market Strategist

Credit availability is often one of the first casualties when uncertainty rises. Traditional sources of financing—public credit markets and banks—tend to retrench during periods of volatility, amplifying stress on the broader economy. The April “Liberation Day” tariff announcements were a recent reminder: public markets sold off, spreads widened, and credit issuance faltered, leaving many businesses with fewer funding options.

Private credit, however, demonstrated a different dynamic. Although activity slowed alongside broader markets, lending remained comparatively resilient. Most private credit lenders adjusted terms only modestly, and the market saw less severe repricing than its public counterpart. In fact, the relative stability of private credit encouraged some borrowers to shift away from public markets, underscoring the asset class’s growing relevance as a complementary source of financing across market environments.

This contrast is central to private credit’s growing importance. Today’s macro environment remains unsettled—characterized by trade frictions, geopolitical risks, questions around monetary policy credibility, and fiscal sustainability concerns. Such pressures will likely sustain volatility in public credit markets and constrain traditional bank lending. Against this backdrop, the structural features of private credit—ample dry powder, lower cyclical sensitivity, and direct lender–borrower relationships—position it to act as a stabilizer, supporting quality businesses, particularly small and mid-sized enterprises, with tailored financing solutions throughout the cycle.

Dissecting the sources of credit supply

During times of normal economic conditions, businesses usually have access to a broad spectrum of financing, which helps facilitate capital investment, job growth, and balance sheet resilience. Traditional sources of credit like public credit markets and bank lending are typically very sensitive to cyclical conditions, and as economic stress picks up, they are likely to either pull back lending activity or tighten conditions dramatically as credit spreads widen.

For public credit, this is largely driven by its more fluid capital base, which itself is a function of its liquidity as corporate bonds can be easily traded on secondary markets. Meanwhile, banks must manage around strict capital cost considerations and regulatory scrutiny, making them highly risk-averse to negative market shocks.

In the context of a volatile economic environment, this, in effect, exacerbates macro pressures as the cost or access to credit from these traditional sources becomes increasingly challenged when it is needed the most.

While these traditional sources continue to play an important part in financing activity, the credit landscape has drastically shifted since the Global Financial Crisis. Tighter regulations and more onerous capital requirements since then have led to a pullback in bank lending appetite—coinciding with a nearly 50% drop in the number of banking institutions since 2003—with the remaining banks positioning their balance sheets away from commercial and industrial lending activity.

As a result, more importance has been placed on alternative sources such as private credit, which saw its share of total debt outstanding to the U.S. corporate sector grow from only 2% in 2003 to 6% in 2023. The secular decline in bank lending has also been particularly acute for smaller businesses who have historically relied solely on banks as a source of credit.

Structural factors benefiting private credit

Private credit is privately originated corporate lending that takes place outside public markets or the traditional banking system. It occurs directly between private investors (the lenders) and businesses (the borrowers) and is highly illiquid.

While private credit as a whole is not completely immune to a riskier macro backdrop, it benefits investors by being less cyclically sensitive. Unlike public markets, which tend to have greater exposure to highly levered borrowers, private credit lending activity is more skewed toward higher quality and lower leveraged firms, with smaller exposures to highly cyclical sectors like consumer discretionary or energy.

Risks are also less uniformly distributed across the asset class, owing to several structural factors. These factors not only enhance stability during periods of stress, but also support more consistent credit delivery across the entire economic cycle.

Limited burden to mark-to-market factors: Public credit markets are subject to rapidly shifting market sentiment and technical or flow backdrop, leaving it open to potentially large swings in price. Moreover, given the pricing transparency and inherent liquidity of public credit, it is also likely to be more actively traded than private credit. In times of market stress, this could exacerbate public credit price volatility as its liquid nature means lenders may sell these assets first to generate any needed portfolio liquidity. By contrast, owing to its illiquid nature, private credit spreads are not as sensitive to swings in market sentiment and exhibit much less periodic volatility compared to public credit markets. Its floating rate structure and generally higher coupon rates also help better insulate it from volatility due to rapidly changing market interest rates or spreads.

Long-term capital base: Given the lack of liquidity within the asset class, the investor base for private credit tends to be stickier compared to traditional alternatives. With private credit investments usually held through maturity, this means major investors in this space, including insurance, pension funds, or family offices, tend to have a longer investment horizon when deploying capital into the market. Redemption risk is also limited as many private credit funds also employ gating mechanisms or lock-up periods to ensure investor capital remains deployed in the market. Moreover, the ample amount of so-called “dry powder,” or lender capital that has yet to be deployed to borrowers, suggests that private credit is also poised to act as a strategic source of credit for lenders taking advantage of market dislocations.

Flexible loan terms: The private credit market often does not have a single standard when it comes to lending, and both lenders and borrowers typically negotiate directly to agree on terms. This means that, unlike traditional bank lending or public credit markets, both parties often come to a more bespoke set of loan terms, allowing for customization around interest rates, repayment schedules, and collateral requirements. This typically leads to faster deployment of capital and financing solutions even in unique market environments. Because private credit lenders are also more focused on allowing targeted business growth and ensuring ongoing business viability, this flexibility allows borrowers to work directly with lenders to address any near-term liquidity challenges.

Navigating a heightened macro risk environment

While these structural forces benefit private credit especially during negative market conditions, given the elevated uncertainty facing the macro environment, the private credit space is not completely immune to systemic or financial market-wide risks that could potentially emerge.

Opacity
Because private credit operates outside the traditional banking system, it is harder to monitor for emerging risks—especially those related to leverage, the practice of borrowing additional money to increase lending capacity and enhance investor returns. If this borrowing grows too high without oversight, it can lead to the risk of losses becoming magnified if credit conditions sour. Yet, this risk appears exaggerated, at least for now. While certain private credit funds do utilize banks as a source of leverage, the practice is not evenly distributed across the market, and is instead skewed heavily toward publicly traded Business Development Companies (BDCs). These entities typically lend to larger companies and are structured to employ leverage to enhance returns.

BDCs make up less than a fifth of the total private credit market, yet they account for the lion’s share of all leverage activity. Even within this segment, however, leverage levels are not necessarily problematic. Indeed, they have been roughly stable over time, with the amount of loans banks extended to BDCs making up around 5-10% of total private credit debt since 2013. The structure of these loans also suggests that liquidity is by far the primary use of leverage, with revolving lines of credit making up about 80% of total bank loans to this segment.

Defaults
Private credit lenders typically have a higher pain threshold relative to traditional sources of credit. But given its more stable capital base, to the extent macro conditions sufficiently deteriorate, it could trigger a rise in defaults which would see credit conditions tighten. Measures of defaults remain below historically stressed readings, but they are elevated relative to recent history as borrowing costs have remained high and economic conditions continue to soften. Moreover, a measure of so-called “payment-in-kind” income, or deferred cash interest payments added to the principal balance instead, has also remained elevated. While not always problematic, it potentially points to more companies preferring to preserve liquidity given uncertain business conditions. Both indicators could act as early warning signs that some market strain may be building in certain pockets of the private credit market.

Deteriorating macro conditions may also lead to a decline in credit quality, particularly for riskier non-sponsored—or non-private-equity-backed—borrowers, where credit demand has remained steady despite the rise in uncertainty. While this presents ongoing opportunities for lenders, it also highlights the importance of deep underwriting and credit controls, together with a focus on less cyclical sectors—like business services, technology, and healthcare over cyclical ones like consumer discretionary and energy—to minimize exposure to downside economic risks and, ultimately, losses.

Implications for investors

Despite recent volatility, credit fundamentals remain solid. Corporate leverage is well below prior peaks, interest coverage ratios have improved, and realized credit losses remain low by historical standards. These conditions, combined with the U.S. economy’s resilience, suggest that defaults should stay manageable in the near term.

Against this backdrop, private credit’s role has become increasingly important. Since the Global Financial Crisis, the asset class has expanded to fill gaps left by banks and public markets, and its ample dry powder and structural features enable it to provide financing with consistency—whether traditional channels are expanding or retrenching. This countercyclical capacity adds a measure of stability to the broader credit ecosystem.

That said, private credit is not immune to broader macro shocks or the credit cycle. Concerns around leverage and potential spillovers into the banking system highlight the need for discipline. Investors who focus on strong underwriting standards, robust credit structures, and sectors with more stable cash flows will be best positioned to navigate uncertainty.

Ultimately, private credit’s differentiated characteristics—resilience in dislocated markets, structural advantages, and growing significance in the financial system—make it a vital component of today’s capital landscape. With careful risk management, the asset class can continue to provide both stability for borrowers and opportunity for investors through the cycle.

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For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in other Permitted Jurisdictions as defined by local laws and regulations.

Risk considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Investments in private debt, including leveraged loans, middle market loans, and mezzanine debt, are subject to various risk factors, including credit risk, liquidity risk and interest rate risk. Private credit involves an investment in non-publicly traded securities which are subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.

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"These Terms & Conditions explain certain legal and regulatory conditions and restrictions in relation to the Principal Global Investors (Europe) Limited website, and in relation to the Principal Global Investors Funds (‘the Funds’). This information may be changed by Principal Global Investors at any time without notice.

In these terms and conditions, references to 'Principal Global Investors' means Principal Global Investors (Europe) Limited or any affiliate of the Principal Financial Group, Inc. or Principal Global Investors, LLC.

Before you proceed, you must acknowledge that you have read, and agree to, our terms and conditions.

Information in relation to the Principal Global Investors Funds is available through this web site to institutional investors resident in the following countries of: Belgium, France, Finland, Germany, Guernsey, Ireland, Italy, Jersey, Netherlands, Spain, Sweden, Switzerland and the United Kingdom. By proceeding this far you are representing and warranting that you are an institutional investor resident in one of these countries. Not all of the Funds are available in all these jurisdictions, and investors are directed to the Country Registration document for detailed information. What follows is not an offer or invitation to acquire an investment to, and should therefore not be relied upon by, any person anywhere other than the countries noted. Persons in respect of whom such prohibitions apply must not access this web site. This web site is reserved exclusively for non-U.S. persons and should not be accessed by any person in the United States.

Yes, I certify to be an institutional investor and resident of a country listed above.

Cookies
Use of cookies on this site is outlined in the Privacy and Security Policy. In accepting these terms and conditions, you accept the terms of the Cookie Policy and the use of cookies from this site.

Legal Entity Disclosure and Regulation
In Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland.

In the United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).

In Switzerland by Principal Global Investors (Switzerland) GmbH. This website is considered as advertising and information contained herewith be treated as such. Investors can obtain free of charge the prospectus, trust deed, the prospectus, the key investor information document (KIID), and the annual and semi-annual reports from the representative in Switzerland.

In Europe and United Kingdom, this website is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID and FCA respectively). If you are viewing the material as a retail investor, you should seek independent investment advice before deciding whether the products and services in question are suitable to meet your investment needs and objectives, as the language has not been complied to a retail client standard.

Principal Global Investors Funds
Principal Global Investors (Ireland) Limited is the issuer of the Funds. Investments may only be made on an application form attached to a current prospectus and following receipt by the investor of the KIID in respect of the Fund in which they intend to invest. The latest version of the prospectus of the Funds is dated 14 December 2012.

For Real estate investors in the European Economic Area (“EEA”), this website and the information on it is only directed at persons who are professional investors for the purposes of the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”), professional clients or eligible counterparties for the purposes of the Markets in Financial Instruments Directive (Directive 2014/65/EU) (“MiFID II”) or as otherwise defined under applicable local law and regulation and at whom this website and the information on it may lawfully be directed in any relevant jurisdiction (“Eligible Persons”). In relation to each member state of the EEA (“Member State”) which has implemented AIFMD (and for which transitional arrangements are not/ no longer available), this website may only be accessed and interests in Funds may only be offered or placed in a Member State to the extent that: (i) the relevant Fund is permitted to be marketed to professional investors in the relevant Member State in accordance with AIFMD (as implemented into the local law/regulation of the relevant Member State); or (ii) this website and its information may otherwise be lawfully distributed and the interests in Funds may otherwise be lawfully offered or placed in that Member State (including at the initiative of the investor). In relation to each Member State of the EEA which, at the date of accessing this website, has not implemented AIFMD, this information may only be distributed and interests in Funds may only be offered or placed to the extent that this information may be lawfully distributed and the interests in Funds may lawfully be offered or placed in that Member State (including at the initiative of the investor).

Persons who are not Eligible Persons, including but not limited to those individuals or other persons who fall within the FCA’s definition of ‘retail clients’, should not use or rely upon this website or the information contained therein and may not engage the services of Principal Real Estate or any of its affiliates, or invest in any Fund. Potential investors are advised that all or most of the protections provided by the UK regulatory system will not apply and that the UK Financial Services Compensation Scheme may not be available in relation to an investment in a Fund or separate account.

The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

Click ""Accept"" to indicate your acknowledgement and acceptance of Principal Global Investors Terms of Use and to continue."

This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.