Asset-Based Finance: Private Credit’s Key Diversifier

Private capital is increasingly being used to finance consumer spending.

Banks are lending less to many areas of the real economy, including the most important one: consumers, who accounted for nearly 68% of US gross domestic product in the first quarter. For investors, we think this is an opportunity to boost return potential and diversify private credit portfolios.

Disintermediation in the banking sector has been a constant since the global financial crisis forced banks to repair their balance sheets and comply with stricter regulations. These changes have helped drive the remarkable growth of direct middle market lending into a $1.5 trillion market, according to Preqin, and the foundation of most private credit allocations.

But it isn’t only corporate lending that banks are cutting back on these days. Over the past 15 years, US and European banks have sharply reduced lending to consumers and small businesses. The retrenchment has gathered speed since soaring interest rates increased deposit flight and mark-to-market losses on asset portfolios, notably at regional US banks.