The significant opportunity of the private credit sector

The significant opportunity of the private credit sector

Private credit has existed as an asset class since the 1980s. It was born from borrowers seeking a form of credit that mainstream lenders either didn't have an appetite for or servicing a market that mainstream lenders were not servicing. Private credit has been nimble and seen opportunity for strong returns in niche markets historically.

Growth has been very strong since the global financial crisis when many banks retrenched from the leverage buyout market in particular. This rapid growth - the market multiplying twelve times since 2007¹ - has predominantly been driven by an increase in direct lending, providing credit to the companies that private equity invests in, which makes up about 70% of that market.

Some say this is creating a bubble that will burst - I see a private credit market that continues to grow and diversify.

The private credit market is estimated to have over US$1.7 trillion in assets under management, while the total fixed income market is about US$103 trillion. Bank debt is globally still the largest part of the debt market for most borrowers. So while there's a lot more money in private credit now than there was, it's still quite small when compared to the wider credit market.

While occasionally there may be issues with some private credit investments - as there can be with any form of investment or financing - these are individual cases and we do not necessarily see a systemic risk to the whole market.

Growing business

Despite conflicting views on whether there's a bubble or not, investors are looking to increase their investment into private credit. Many of them haven't invested in that market yet or are underweight in their own portfolios.

There's a significant investment opportunity as the private credit market is forecast to grow to over $3.5 trillion by 2028². There's plenty of capital looking to be put to work, and there are significant product areas in the market where HSBC Asset Management can do that.

As one of only a few banks with an asset management business, HSBC is well positioned to offer investors proprietorial deal flow from an unrivalled global platform.

At HSBC Asset Management, we expect to almost triple the size of our private credit business from about US$7 billion under management (as of June 2024) to more than US$20 billion in the next 5 years or so.

Investment trends

While we're seeing an increase in investor allocation across the private credit spectrum, one of the biggest opportunities is in infrastructure.

About US$150 trillion or more needs to be invested in infrastructure over the course of next 20-25 years in order to achieve global net zero ambitions and support the developing economies of the world. Private credit will have a significant role to play in this.

So, far from the bubble bursting, there's a lot more appetite for private credit and a lot more opportunities in the market. At HSBC Asset Management, we're continually innovating and adding to our product suite to cater to this growing demand.

¹PitchBook. Data as of September 2024
²https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/aerial-view/the-inexorable-rise-of-private-credit.pdf(opens in new window)