Private credit beyond the headlines

Private credit has grown from a niche strategy to a broad and diverse investment opportunity. But the vast majority of the financial press, and many industry professionals still struggle to make sense of it. 

Precisely because it includes many different types of assets with different drivers of risk and return, we define private credit by “exclusion” - as any form of credit transaction happening outside of fixed income markets. 

Beyond direct lending (which is the most well-known), asset-based finance, secondaries, and specialty credit can all be classified under the broader “private credit” umbrella. Understanding which opportunity you're considering—and why each matters—is essential for making informed allocation decisions.

The article is contributed by PIMCO. 

Private Credit Is Broader Than Direct Lending

When most people hear "private credit," they think of direct lending—loans that  are privately negotiated between the borrower and single or multiple lenders (“syndicated”) . It's the most visible part of the market, and it's grown dramatically. 

Direct lending typically focuses on corporate borrowers with enterprise values of $50 million to $500+ million (but it is no longer uncommon for private credit managers to be writing single unitranche loans of US$1 billion or more for large sponsor-backed companies). 

But private credit goes beyond direct lending. It includes asset-based finance, which underwrites mortgages, auto loans, equipment leases, and aircraft financing amongst other niche areas 

Each of these operates with different economics, risk profiles, and competitive dynamics. The asset quality, return potential, and liquidity characteristics can vary significantly.

Asset-Based Finance Operates on Different Economics

Asset-based finance (ABF) is attracting attention as many managers see it as an opportunity that carries a different risk-return profile compared to direct lending, potentially offering less correlated exposure. 

In direct lending, the lender underwrites the borrower (typically a company)—evaluating its management quality, cash flow stability, competitive positioning, and exit optionality. The risk is idiosyncratic to the company. In asset-based finance, the lender underwrites the asset itself. A credit card loan-backed security draws income from cash flows from cardholders payments. A student loan-backed security pays a coupon from student loan repayments. And so on.  

The growth of asset-based finance was the direct consequence of banks retrenching from the sector. As capital requirements became more stringent, the amount of capital that banks were forced to hold against these loans made it unprofitable or inconvenient to hold them on their balance sheets. So large portfolios of mortgages, equipment leases, and auto loans migrated to private capital.

Market Size Claims Need Healthy Skepticism

You'll hear that private credit's addressable market is $25 trillion. Or $40 trillion. Or larger. But these numbers may make little sense. 

The $25 trillion figure typically represents all outstanding loans in the U.S. economy—the total stock of credit. But not all of that is addressable to private capital. Much of it sits in categories where banks have no incentive to exit: prime mortgages with pristine credit profiles, large syndicated loans to blue-chip companies with public bond market access, and specialty assets held by insurance companies determined to hold on to them. 

When you strip out assets already securitized, those held by insurers, and those currently owned by existing private funds, you're left with a much smaller slice: roughly $6–8 trillion of loans and contractual cash flows that could realistically migrate into private capital over time. That's still enormous—comparable to the entire U.S. investment-grade corporate bond market—but it's an order of magnitude smaller than the headline numbers.

• $3.2T Global private credit AUM (current)
• $6–8T: Realistic long-run addressable market

Source: PIMCO https://www.pimco.com/gbl/en/insights/how-large-is-private-credits-total-addressable-market-really

That suggests a 2–2.5x growth runway from today's asset base. Growth is plausible. Saturation is not imminent. 

Underwriting Standards Matter More Than Asset Class

Disciplined underwriting is the basis for risk-mitigation in private credit - be it direct lending or asset-based lending. 

In a competitive, capital-rich environment, the temptation to chase yield by loosening standards is enormous. Direct lending managers face pressure to do larger deals, extend longer tenors, and accept weaker covenants to keep deployment rolling. ABF managers might be pushed into riskier collateral classes or lower-quality borrowers. 

Specialty finance managers might fund assets that have less obvious risk profiles.

The difference between a private credit fund that captures real opportunities and one that's simply chasing growth targets becomes apparent only after credit stress emerges. By then, return damage is already done.

In fact, performance dispersion among managers is such that a top quartile manager may offer consistent outperformance and a bottom quartile manager, consistent underperformance. This is a key difference with traditional fixed income, where debt issues are typically standardized. 

Institutional Investor Demand Is Still Growing, But Selectivity Matters

Private credit has attracted substantial amounts of institutional capital—pensions, endowments, insurers, and asset allocators. This demand is structural and isn't going away. Institutions need diversification into alternatives, and private credit offers more stable return streams than venture equity or traditional buyout funds.

But "demand is growing" doesn't mean "all private credit is equally attractive." Larger pools of capital have gravitated to the most liquid strategies (direct lending to large middle-market companies). Smaller, more specialized pools exist in areas with less direct institutional competition—niche ABF segments, secondaries, and emerging specialty finance categories.

The concentration of capital in the most visible strategies has compressed returns for some direct lending managers. At the same time, less crowded segments may deliver better risk-adjusted returns precisely because there's less capital competing for deals.

For Allocators, don't assume all private credit managers benefit equally from institutional capital inflows. Assess where your prospective managers sit in the competitive landscape—are they in a hot, crowded segment fighting for deals, or in a less visible niche where excess returns are still available?

The Bottom Line

Private credit is a broad asset class, with a diverse set of opportunities. It is important to understand how a specific opportunity fits into one’s portfolio - and for that investors should understand what a manager is focused on, understand the specific economics of the strategy(ies) being considered, and understand return expectations are not a promise - they should instead be a realistic projection of potential performance.

Interested To Find Out More?

PIMCO is hosting an exclusive luncheon during our flagship event, Endowus Wealth Summit on 31 Oct 2026 at 11am to share more on asset-backed finance and the opportunity beyond private credit. Sign up for the event here. For accredited investors only.

Endowus Private Wealth is for accredited investors only. Investment involves risk. Please refer to our full disclaimer at https://sg.endow.us/mas.

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