Private debt financing vs bank lenders: How the market is evolving

Corporate lending was once the exclusive domain of commercial banks. However, over the last one and a half decades, a combination of economic shifts, market disruptions, regulatory reforms, and a growing hunger among investors for higher yields have catalyzed the rise of an alternative form of corporate funding known as private debt, or private credit.

Today, private debt is one of the most important components of the global business financing space.

This article looks at the growing influence of private debt financing and how it stacks up against traditional bank lending. We’ll look at why businesses are increasingly turning to it, the benefit it offers to both borrowers and lenders, and the strategies that banks are employing to stay competitive as private debt increasingly challenges their market dominance.

What is private debt financing?

Private debt financing refers to loans or credit extended to businesses by lenders who operate outside the traditional banking system. These are collectively known as non-bank lenders, and include private debt funds, asset management firms, and business development companies.

The returns for these non-bank lenders and their investors come primarily from interest payments on the loans they issue. These loans typically carry higher interest rates than traditional bank loans or publicly traded bonds. The higher rate reflects the added risks lenders take on, including the fact that private loans are typically illiquid (they can’t be easily sold or traded), and that borrowers are often small to mid-sized companies that may have less predictable cash flow or weaker credit profiles

The rise of private debt financing: A short history

Although private debt has existed in various forms for decades, its role in the financial ecosystem significantly expanded following the 2008 financial crisis.

As banks grappled with heightened regulatory scrutiny and capital constraints in the aftermath of the crisis, many scaled back their corporate lending activities. This created a vacuum in the market, particularly for middle-market companies, which were now deemed too risky for banks to lend to.

Recognizing this void, non-bank lenders quickly moved in to fill the gap, offering more flexible, accessible financing solutions to businesses that would have otherwise struggled to secure funding. 

Since then, private debt as an asset class has grown a lot. Currently, the global private debt market is valued at over $1.8 trillion (from just over $300 billion in 2010), with Preqin estimating it will reach $2.64 trillion by 2029.

The continued appetite and demand for private credit is driven by its appeal to businesses looking for financing alternatives to bank loans, and hunger among investors for yields that outpace traditional fixed-income investments.

Comparing private debt financing and bank lending

Let’s look at the primary differences between private debt.

Source of capital

As mentioned, lenders such as private debt funds and asset management firms that operate outside the traditional banking system issue private debt. These entities typically raise capital from institutional investors (such as pension funds, insurance companies, endowments, family offices, and high-net-worth individuals) with the specific mandate to grow it through investments like private debt. Since private lenders are not deposit-taking institutions, they are not subject to the same regulatory requirements as banks.

Traditional bank financing, by contrast, comes from regulated financial institutions, such as commercial banks and credit unions. These lenders use funds from customer deposits to issue loans and, as such, are subject to strict financial regulations that greatly shape how they assess credit risk and limit the types of loans they can issue.

Loan structure and flexibility

Private debt offers greater flexibility in structuring loans. Terms such as repayment schedules, covenants, interest types, and amortization are negotiated directly between the borrower and lender and thus can be tailored to their specific needs, circumstances, and preferences.

In contrast, traditional bank loans follow more standardized terms. Because banks must follow regulatory requirements and internal risk guidelines, the loan products they offer tend to be more rigid. Borrowers must meet predefined credit criteria, and there is usually less room for customization of the loan terms and structure.

Type of borrowers served

Private credit tends to serve riskier borrowers, or those who have more complex or unique financial needs, such as mid-market companies, private equity-backed firms, or those in high-growth sectors. These borrowers often struggle to meet the stringent requirements of traditional banks, particularly when it comes to having an established credit history or meeting certain size, cashflow or profitability thresholds.

In contrast, traditional banks generally serve larger, well-established companies with strong credit ratings, consistent financials, and a stable operating history.

Price of capital

The price of capital for private debt is generally higher than traditional bank financing. Private lenders charge higher interest rates and fees to offset the increased risk they are taking on, as mentioned earlier.

The price of capital from traditional banks is typically lower due to their lower risk exposure and regulated status.

Benefits of private debt financing

For borrowers

• Access to capital: Private debt provides an alternative for businesses that may not qualify for traditional bank loans. And for those who can still qualify for commercial bank loans, it allows them to diversify their sources of capital and reduce reliance on banks.
• Flexibility in terms: Private debt allows for customized loan structures, as we have seen, including repayment schedules, interest rates, and covenants. This flexibility helps businesses better align financing with their unique needs and cash flow situations.
• Speed and efficiency: Private debt deals can be processed faster than traditional bank financing (due to fewer regulations). This can give companies faster access to capital when time is critical.

For lenders

• Attractive returns: Private debt typically offers higher yields than other traditional fixed-income investments like public market bonds, making it an attractive option for lenders seeking superior returns on capital.
• Diversification and low correlation to public markets: Private debt allows funds and asset managers to diversify their portfolios beyond just traditional equity or public credit. Since private debt is not publicly traded, its performance is typically less correlated to public market fluctuations. Therefore, it can provide stability during periods of market downturns.
• Control and customization: The flexibility of private credit enables lenders to structure deals that better align with their desired outcomes and risk tolerance.

How banks are competing with private debt lenders

As private debt financing continues to gain traction, traditional banks are stepping up their game. Rather than ceding ground to non-bank lenders, banks are evolving their strategies to remain competitive and better serve the shifting needs of borrowers.

Prioritizing efficiency and speed

To match the agility of private debt firms, banks are focusing on improving the efficiency and speed of their lending processes. While regulatory frameworks limit how much banks can alter their lending models, they are finding ways to accelerate deal timelines and enhance borrower experiences. Many are streamlining approval processes, offering faster credit decisions, and creating more responsive loan servicing models.

A key driver behind these improvements is technology. For example, banks are increasingly leveraging AI and machine learning to assess credit risk more accurately and automate key parts of the underwriting workflow, resulting in quicker and more efficient loan approvals.

Developing in-house private credit capabilities

Recognizing the strong demand for private credit, major banks are building their own private lending operations. Big banks like Goldman Sachs, Morgan Stanley, and JPMorgan Chase all offer a private debt practice. These internal platforms allow banks to directly participate in the high-growth private debt space, while leveraging their existing client relationships and financial infrastructure.

Partnering with private debt firms

Rather than going head-to-head with private credit lenders, some banks are choosing to partner or collaborate with them. By forming co-lending partnerships with private debt lenders, banks can pool resources and expertise to offer larger, more flexible financing solutions. These partnerships enable banks to maintain a foothold in the private debt market without needing to create their own private credit offerings from scratch. 

Final thoughts: Private debt financing vs bank lenders

The corporate lending landscape has evolved significantly since the 2008 financial crisis, with private debt becoming a key alternative to traditional bank loans. Offering flexibility, speed, and tailored solutions, this form of debt funding has become increasingly attractive, particularly to businesses with unique financing needs or that don’t meet the criteria of traditional banks.

Meanwhile, for fund and asset managers, private credit offers an opportunity to deliver significantly higher yields than what is possible with other fixed-income instruments. For a broader perspective on how this asset class compares to its public market counterpart, explore our article on private credit vs. public credit.

As a leading provider of private debt solutions, Alter Domus offers the operational infrastructure and support fund and asset managers need to execute and manage private debt strategies with efficiency and ease.

Visit our Private Debt Solutions page to learn more about how Alter Domus can help you better capitalize on the growth of private debt financing and achieve your goals.

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