Until I started writing this series, I'd never stopped to ask why private credit became a thing. Two years on the private credit side now, and the question hadn't come up. The day-to-day doesn't require knowing the macro story. You can do origination, monitoring, valuation, all of it, without thinking about why the asset class exists in the first place. Writing this gave me a reason to actually look. So this post is me working through what I found, knowing I'm still piecing parts of it together.
When I started reading about it, the standard "low rates" explanation didn't quite add up. If low rates were the whole story, the market would have done one thing: pushed investors to reach for yield. What actually happened looks like a much bigger restructuring. Borrowers shifted away from one set of channels and toward another. Lenders changed their mental model of what "good" capital allocation looks like. Banks didn't disappear from lending, but their role moved. Three things shifted at once, and they seem to have fed each other.
What changed for banks
After 2008, the rules made it expensive for banks to hold certain loans on their balance sheets. Basel III raised capital requirements. The 2013 leveraged lending guidance from US regulators discouraged banks from holding highly leveraged loans (debt above roughly 6x EBITDA). Banks didn't leave lending. They got pickier about which parts of it to keep.
The split that matters is between arranging a loan and holding it. Arranging means sourcing the borrower, structuring the deal, underwriting it, and then distributing it to whoever will hold it. Holding means keeping the loan and its risk on your own books. The new rules taxed the holding, not the arranging. So banks kept doing the part that earns fees without tying up much capital, and shed the part that now cost them capital to keep. They're still the dominant arrangers of leveraged loans. They just hold far less of what they arrange, passing it on to CLOs, institutional investors, and funds.
That leaves a gap. The loans still need a holder. And below the syndicated tier, plenty of mid-sized borrowers never fit the bank template in the first place. Someone has to actually own this credit. That someone, increasingly, is a direct lender who both originates and holds, which means for a lot of these deals the bank isn't even in the room.
The illiquidity flip
The lender side filled that gap, but not by accident. Institutional investors (pensions, insurers, sovereign wealth funds, large endowments) were running into their own problems. Low rates compressed yields on the safe end of the portfolio. Liabilities like pension obligations and insurance payouts stretched decades into the future and needed matching duration. Reaching for yield in public markets meant taking on duration risk or credit risk in liquid form. Private credit offered something different: contractual yield from senior secured positions, with the trade-off being illiquidity that these investors could actually tolerate.
The piece that surprised me was that illiquidity went from being a cost to being a feature. An illiquid loan has to pay you extra to make up for the fact that you can't easily sell it. Pre-2008, institutions prized being able to sell and accepted lower yields for the privilege. Post-2008, with public-market yields compressed and their own payouts decades away, that extra yield for locking money up started to look like a deal worth taking. They didn't need to sell, so why not get paid for not needing to.
On the borrower side
The same forces pulled from the borrower side. Mid-market companies, PE-backed buyout targets, and anything that didn't fit a clean syndicated-loan template found themselves with a real alternative for the first time. Direct lenders could move faster than public markets, write bespoke terms, and give certainty that the money would actually show up on the timeline promised. For a sponsor competing in an auction, a lender who can commit on a tight schedule is solving a real problem the public bond process can't solve at the same speed.
The bespoke part is the piece I've actually seen, though from the software side rather than the deal side. A borrower who's already done a deal can come back for more capital. When that happens, it often isn't a tweak to the existing loan. It's a full deal in its own right that sits under the original parent deal and has to stay consistent with it. I've seen these called add-on deals. You build for structures like that because the situations really are negotiated one at a time, not stamped out from a template.
Why the funds were already there
The third leg is fund infrastructure. The big alternatives firms (the ones that grew up in private equity) already had the institutional relationships, the IR machinery, and the operational infrastructure to run a fund. Extending into credit didn't require building from scratch. Some of the largest private credit managers today started as PE shops that built credit arms. New entrants came in too, including the perpetual-capital BDC structures that opened the door for retail investors.
So when the gap opened up, there were already operators ready to step into it. The conditions for fast scale-up were in place.
What I'm still working out
How much of this was anticipated by anyone, and how much was reaction. The post-hoc explanation makes it look planned. Put those dates in order and it looks less like a plan and more like separate reactions to separate pressures that happened to line up. Nobody steering.
The one thing I keep coming back to, knowing I'm still working a lot of it out: the supply of borrowers and the supply of capital both grew at the same time. That's what makes a market really take off, not one side moving and dragging the other along.
If there's one part of this story I'd argue with, it's "low rates" as the whole explanation. It makes private credit sound temporary, like rates rise and the market shrinks back. The structural reasons (capital rules, asset-liability matching, fund infrastructure that was already there) point to something stickier. We'll find out as rates stay higher for longer.
Next week: who the players actually are.