Private Credit’s Big Squeeze: How the Arms Race for Scale Is Reshaping the Market
Private credit is in the midst of an arms race as mega-managers race to dominate this booming segment of the asset management industry. BlackRock (BLK)’s announced acquisition of HPS Investment Partners in December—its second manager acquisition of the year—highlights an accelerating consolidation trend that promises both opportunities for the largest funds and potential challenges for the market. In addition, Goldman Sachs’ recent creation of its Capital Solutions Group, a business unit focused on private credit advisory and investing, and JPMorgan Chase’s partnerships with several private credit firms underscore Wall Street’s largest banks’ determination to capitalize on the growth of private credit. Could this rush of capital to industry giants leave middle-market lenders—and the vital swath of American businesses they serve—starved for capital at a time when traditional bank lending remains constrained?
The advantages of economies of scale in asset management are compelling and well-documented. Asset manager revenue is directly tied to the amount of assets under management (AUM). As firms increase AUM, their fixed costs for technology, research and infrastructure can be spread across a larger base, effectively reducing the per-dollar cost of managing client funds. Large asset managers can also negotiate better terms with service providers and counterparties, enabling these firms to develop more sophisticated investment capabilities and risk management systems, which, in theory, can lead to better returns.
In addition to scaling AUM, BlackRock’s acquisition of Preqin, a leading private market data vendor, last year highlights its intent to not only grow managed assets but also differentiate its platform by building infrastructure and capabilities that it can vertically integrate into its core investing functions.
The benefits of scale, however, may have diminishing returns beyond certain thresholds. As funds grow in size, deploying capital effectively becomes more challenging—fewer deals are large enough for these firms to allocate capital efficiently. This dynamic creates a consolidation paradox: as private credit managers achieve greater scale, they necessarily focus on mega deals, creating potential market inefficiencies that could undermine the industry’s original purpose.
The unprecedented inflow of capital to private credit has spurred the industry’s growth, but with a majority of capital flowing to the largest managers, it’s dramatically widening the gap between the large funds and smaller players. For smaller funds, this shift has been stark. Preqin data shows the 10 largest private credit funds claimed 51 percent of capital raised through the third quarter of 2023, compared to 35 percent for all of 2022. For funds outside of the top 50, the share of capital raised plummeted from 22 percent to 9 percent over the same period.
As the largest private credit managers scale, it threatens to create a void in middle-market lending. While a $50 million direct lending deal might fit with a $1 billion AUM fund, it’s inefficient for a fund with several hundred billion dollars in AUM to deploy resources to small deals that would account for a de minimis percent of overall returns. With fewer funds willing to deploy capital to middle-market deals, what happens to these businesses that find themselves with less access to capital? With nearly 200,000 such companies accounting for over one-third of U.S. GDP and employing 48 million people, the potential credit vacuum for these borrowers represents more than just a market inefficiency; it’s a structural challenge that could stifle economic growth and innovation.
This consolidation pattern mirrors developments in private equity, where mid-sized firms increasingly find themselves in an existential crisis. As Goldman Sachs’ Mike Brandmeyer recently observed, many PE firms “stuck in the middle” face a stark choice between making significant investments to scale up or selling to larger platforms that already have the necessary infrastructure. With institutional investors showing a clear preference for either the largest or newest managers, this “barbelling” effect is forcing consolidation across alternative assets.
This pattern reveals a stark irony in the industry’s evolution. The private credit industry was primarily borne out as a response to post-financial crisis regulations that made it costly for banks to serve smaller, riskier borrowers. Yet, as private credit managers consolidate and scale, they appear to follow a similar path to the banks they initially sought to replace, prioritizing larger, more profitable clients at the expense of smaller businesses.
How can small and mid-sized managers adapt?
For small and mid-sized managers, the changing landscape demands strategic adaptation. Some are finding success through sector specialization or by building stronger regional relationships. Others are exploring partnerships or technological solutions as alternatives to traditional scale advantages.
The non-sponsored deal market, or direct lending, where competition tends to be less intense, offers another avenue for differentiation. Specifically, according to the IMF, about 70 percent of private credit deals go to sponsor-backed companies, leaving a significant opportunity for managers to capitalize on direct lending transactions. While requiring more intensive origination efforts, these direct-to-company relationships can offer attractive economics and deeper borrower relationships compared to sponsor-backed deals, as lenders aren’t competing with multiple sponsors’ existing lending relationships.
While private credit operating outside the traditional banking system limits the systemic risk imposed on the overall financial system, their interconnectedness and substantial market share naturally raise questions about market stability and contagion risk during periods of stress. For example, stress at any single major private credit player could have outsized effects on market stability and credit availability to both large and mid-sized businesses
The future of private credit will be defined by those who can balance scale with efficiency. Mega-managers must find ways to serve smaller borrowers without sacrificing efficiency, while mid-sized players need to lean into specialization and innovation to stay relevant. Ultimately, the winners will be those who can adapt without losing sight of the industry’s original mission—filling the credit gaps that banks left behind. Banks are increasingly partnering with private credit funds to provide their commercial clients with alternative financing options when traditional bank loans aren’t feasible—a sign of how the market is adapting to serve borrower needs. The private credit market’s continued evolution will test whether these innovations can effectively balance the advantages of scale with the necessity of serving a diverse borrower base.