In the evolving landscape of alternative investments, the tug-of-war between private credit and private equity is intensifying. As macroeconomic conditions shift and institutional priorities recalibrate, capital flows are revealing a nuanced story of resilience, adaptation, and strategic repositioning. So, where is the money going—and why?
Private Credit: The Rising Star
Private credit has emerged as a formidable force in 2025, with fundraising momentum accelerating despite market volatility. In H1 alone, the asset class attracted $124bn, putting it on pace to surpass 2024’s full-year total of $215bn. Direct lending remains dominant, but over half of new fund launches now target opportunistic credit and specialty finance, reflecting investor appetite for diversification and inflation-hedged returns.
Key drivers of this surge include:
Bank retrenchment: As traditional lenders pull back, private credit fills the void with flexible, bespoke financing solutions.
Evergreen structures: These vehicles, now exceeding $500bn in AUM, are gaining traction among high-net-worth investors and retirement platforms.
Institutional adoption: Allocators like Washington SIB and Nebraska Investment Council are scaling exposure, embedding private credit into core portfolio mandates.
Private credit’s appeal lies in its yield potential (8–12%), low correlation to public markets, and ability to offer tailored capital structures. However, rising interest rates have exposed stress among borrowers, with increased use of payment-in-kind (PIK) facilities and declining interest coverage ratios.
Private Equity: Emerging from the Fog
Private equity, while facing headwinds, is showing signs of recovery. Fundraising for traditional commingled vehicles declined 24% YoY in 2024, marking a third consecutive year of contraction. Yet, distributions to LPs finally exceeded capital contributions—an encouraging signal for liquidity-starved investors.
Notable trends include:
Dry powder deployment: PE firms are under pressure to deploy a record $1.6tn in dry powder.
Deal resurgence: Large-cap deals (>$500m EV) and sponsor-to-sponsor exits are rebounding, aided by a more benign financing environment.
Structural innovation: GPs are tapping new capital sources—separately managed accounts, co-investments, and retail-friendly vehicles—to offset fundraising challenges.
Despite muted returns relative to public markets, PE continues to attract long-term capital due to its historical outperformance and ability to drive operational transformation.
Investor Sentiment: Shifting Allocations
Institutional investors are not abandoning private equity—but they are recalibrating. According to McKinsey, 30% of LPs plan to increase PE allocations in the next 12 months. However, private credit is gaining ground as a core allocation, particularly in Europe and among pension schemes seeking semi-liquid structures.
The convergence of public and private markets is also blurring traditional boundaries. Venture-backed companies are staying private longer, creating demand for hybrid capital solutions that span both equity and credit.
Conclusion: A Complementary Landscape
Rather than a zero-sum game, the capital flow between private credit and private equity reflects a broader evolution in portfolio construction. Private credit is no longer just a niche—it’s a strategic complement offering yield, flexibility, and downside protection. Private equity, meanwhile, remains a cornerstone for long-term growth and value creation.
For fund finance professionals, understanding these dynamics is critical. Whether structuring NAV facilities, underwriting GP-led secondaries, or advising on capital calls, the interplay between credit and equity will shape the next chapter of private markets.
Disclaimer:
For informational purposes only. This material does not constitute investment, financial, legal, or tax advice of any kind. Always conduct your own independent due diligence and consult a relevant qualified professional to discuss your situation before undertaking investment decisions.
