Substantial $225 billion business prospect for immediate loan providers
The demand for private credit financing and the growth in supply of those funds are roughly equal, indicating little sign of overcapacity in the market. This equilibrium is a positive indicator for investors, as the strategy of private credit financing has continued to perform consistently.
According to Future Standard, direct lending in the US market remains the primary debt provider for companies seeking growth financing and continues to deliver attractive consistent returns. The strategy benefited from strong U.S. middle market firm growth in 2024, which kept credit losses low and improved credit fundamentals, resulting in a declining default rate over the last three quarters.
In the year ended March 31, 2025, direct lending returned a impressive 10.37% for investors, outperforming its historical inception return of 9.54%. Tightening new issue spreads did not significantly impact the performance of the private credit strategy.
Future Standard views the private credit market, including direct lending, as entering a "Period of Specialization," where more specialized and emerging private credit strategies may offer better value and diversification. This suggests that direct lending at the upper end of the corporate market is maturing, and investors should seek more from their allocations.
While M&A activity remains uneven, direct lending’s resilience and relatively higher yields amidst elevated interest costs make manager selection critically important. Diversification within private credit—including direct lending focused on non-traditional sectors like sports and healthcare—is advised to capture sector-specific growth trends.
The opportunity for direct lending funds remains substantial in the coming years, according to Future Standard's most recent market outlook. If non-private credit lenders continue growing at their three-year average rates, the lending opportunity available to be filled by direct lenders is approximately $225bn per year.
In 2024, US direct lenders raised approximately $160bn in equity capital. When accounting for leverage, this equates to about $229bn in lending capacity. The asset under management (AUM) of LTAFs has reached £5m.
Future Standard expects the demand for leveraged credit financing to grow with GDP at a 5% nominal rate. ISA reforms are predicted to drive growth for LTAFs. These reforms are not directly related to the private credit market but are mentioned in the same article.
In summary, Future Standard identifies direct lending as a stable, attractive private credit strategy with solid near-term performance and significant future potential through specialization and diversification in the evolving market.
Business investors often consider direct lending as a promising strategy, given its consistent returns and growth within the US market. In light of Future Standard's analysis, the demand for leveraged credit financing is expected to increase alongside GDP, opening up potentially substantial opportunities for direct lending funds in the coming years.
