Why have private credit funds taken market share from banks in asset-based finance?

Three structural forces drive disintermediation: (1) Basel III/IV capital requirements increase the RWA cost for banks holding certain ABF asset classes on balance sheet, making lending uneconomical relative to return on equity targets; (2) private credit funds, funded by insurance capital and institutional investors, operate without the same capital constraints; and (3) originators prefer the certainty, flexibility, and speed of private bilateral negotiations over public securitisation markets that require ratings and investor roadshows.

Do banks still play a role in ABF if private credit has taken their market share?

Yes — and the relationship has evolved from competition to partnership. Banks now frequently originate and structure ABF transactions (leveraging their originator relationships and distribution expertise) and then sell the risk to private credit funds. Banks provide warehouse facilities during the accumulation phase; private credit funds provide the long-term capital. Banks also earn structuring fees, hedging revenues, and custody income without absorbing the credit risk. The bank-fund partnership model is now the dominant structure in large ABF transactions.

How do private credit ABF funds raise capital?

Private credit ABF funds raise capital from institutional investors (pension funds, sovereign wealth funds, endowments), insurance companies (often affiliated entities), and family offices via closed-end fund structures, evergreen structures, or separately managed accounts (SMAs). Insurance affiliates — such as Apollo/Athene, Ares/Aspida, Blackstone/Everi — provide permanent capital that can be matched to long-duration ABF assets. SMAs offer institutional investors bespoke exposure with transparency into underlying assets.

What is the systemic risk concern about private credit growth in ABF?

Regulators including the FSB, BIS, and ESRB have flagged several concerns: (1) opacity — private credit portfolios are not marked to market, potentially masking credit deterioration; (2) interconnectedness — banks provide warehouse and leverage facilities to private credit funds, creating indirect bank exposure; (3) liquidity mismatch — some semi-liquid fund structures offer quarterly redemptions against illiquid underlying assets; and (4) regulatory arbitrage — activities migrating to less regulated entities. No systemic crisis has materialised, but monitoring frameworks are being developed.

Private Credit vs Banks | How Non-Bank Lenders Compete with Bank Finance

The asset-based finance landscape has fundamentally shifted over the past two decades. Where banks once dominated lending against receivables, inventory, and loan portfolios, private credit funds and non-bank lenders now command a significant and growing share. Understanding this evolution is essential for originators seeking capital, investors allocating to ABF, and anyone navigating the modern structured finance market.

Private Credit vs Bank Lending

Visual comparison of private credit and bank lending in ABF: capital sources, deal characteristics, and market dynamics.

0:5019 Jan 2026

[0:00-0:04] Title: "Private Credit vs Bank Lending" with subtitle "How the ABF landscape is evolving" [0:04-0:16] Market Evolution: Timeline showing bank dominance pre-2008, post-crisis regulatory changes, and private credit growth to $3.5T+ (end of 2025) [0:16-0:28] Key Differences: Side-by-side comparison showing banks (regulated, deposit-funded, capital-constrained) vs private credit (return-focused, LP capital, flexibility) [0:28-0:40] Complementary Ecosystem: Diagram showing banks providing warehouse facilities that fund non-bank originators who tap private credit for term financing [0:40-0:50] Summary: Key considerations for choosing between bank and private credit partners based on deal characteristics

Market Evolution

The shift from bank-dominated to hybrid ABF markets occurred in three phases:

Pre-2008

Bank Dominance

Commercial banks dominated ABL with revolvers and term facilities. Investment banks structured and distributed securitisations. Bank balance sheets absorbed significant warehouse risk.

Banks controlled the entire ABF value chain

2008-2015

Regulatory Retreat

Basel III capital requirements, liquidity rules (LCR/NSFR), leverage ratios, and Volcker Rule fundamentally changed bank economics. Banks shifted upstream to providing warehouse facilities.

60% of non-bank growth attributable to regulatory constraints

2015-Present

Private Credit Expansion

Private credit AUM grew to $3.5T+ by end of 2025 (Moody's/industry consensus), projected to reach $4T+ by 2030. Specialized funds emerged across asset classes. Pension funds, insurers, and endowments allocated to private debt. New structures emerged without bank constraints.

$3.5T AUM by end 2025, projected $4T+ by 2030

Researchers estimate that 60% of shadow bank growth from 2007 to 2015 was due to regulatory constraints, including capital requirements, and only 30% was due to technological innovation.

— Federal Reserve Research

Structural Differences

Dimension	Banks	Private Credit
Capital Source	Deposits, wholesale funding	LP commitments, leverage
Primary Constraint	Regulatory capital	Return requirements
Decision Speed	Slower (committees, policies)	Faster (smaller teams, flexible mandates)
Pricing Driver	Cost of funds + ROE on capital	Target IRR, competition
Relationship Approach	Cross-sell banking products	Transaction-focused
Investment Horizon	Indefinite (no fund term)	5-10 year fund terms

Bank Capital Structure

Banks fund through deposits (cheap, stable) and wholesale markets. Cost of funds is low (~1-2%), but capital requirements create a floor on returns. Must achieve 10-15% ROE on allocated capital.

Private Credit Capital Structure

Raise LP capital (expensive equity) with warehouse leverage to enhance returns. Target 10-15% gross returns to deliver 8-12% net to LPs after fees.

Regulatory Drivers

Basel III/IV Capital Impact

The regulatory capital treatment of ABF exposures varies significantly:

Exposure Type	Risk Weight	Capital Cost	Bank Appetite
Corporate loan (IG)	50-100%	4-8%	High
AAA securitisation	15-40%	1.2-3.2%	High
BB securitisation	250-650%	20-52%	Low
Securitisation equity	1250%	100% (deducted)	Prohibited

Under Basel III/IV endgame (CRR3 in EU, effective January 1, 2025), the output floor phases to 72.5% of standardised RWAs by 2027, materially increasing capital costs for banks using internal models. EBA estimated a 9.9% increase in Tier 1 capital requirements for EU banks, making mezzanine and equity tranches even more expensive to hold.

Non-Bank Advantages

No regulatory capital

Can hold any tranche without punitive charges

No concentration limits

Regulatory limits on single exposures don't apply

Flexible mandates

Can structure bespoke solutions for specific needs

Faster decisions

Fewer approval layers and compliance processes

Deal Characteristics

Where Banks Excel

•Large, IG borrowers: Low capital charges, relationship value
•Working capital facilities: Revolving ABL with ancillaries
•Warehouse facilities: Short-term, asset-covered
•Senior AAA tranches: Attractive capital treatment
•Syndicated deals: Distribution capability

Where Private Credit Excels

•Sub-IG borrowers: Higher returns compensate for risk
•Complex structures: Bespoke terms, unusual collateral
•Mezzanine and equity: No capital penalty
•Emerging originators: Willing to take platform risk
•Speed-sensitive deals: Faster execution, certain close

Typical Deal Sizes

<$25MSpecialty finance companies, smaller private credit

$25M-$100MMid-market private credit, regional banks

$100M-$500MLarge private credit, commercial banks

>$500MSyndicated (banks lead), large private credit clubs

Economics and Pricing

Bank Pricing Framework

Cost of fundsSOFR + 10-50 bps

+ Credit spreadRisk premium

+ Capital chargeROE required

- Relationship creditCross-sell value

Senior ABL (IG)SOFR + 150-300 bps

Private Credit Pricing Framework

Target IRR10-15% gross

+ Leverage impactReturn enhancement

+ Fee structuresUpfront, commitment, exit

- CompetitionSpread compression

Warehouse facilitySOFR + 300-600 bps

Direct lending posted an annualized return of 10.5% in Q4 2024, beating high-yield bonds and leveraged loans, even while the Federal Reserve was cutting rates.

— Morgan Stanley Research

When Private Credit is Economically Advantageous

Speed Matters

Faster close avoids opportunity cost

Certainty Required

Committed terms vs. market-flex

Flexibility Needed

Customised structures not available from banks

Relationship Absent

Banks reserve best pricing for existing clients

Complementary Roles

Rather than competing head-to-head, banks and private credit increasingly operate as complementary parts of the ABF ecosystem.

The Modern ABF Capital Stack

Bank

Corporate Facility

Corporate banking relationship

Bank + PC

Term Securitisation

Banks distribute senior; PC takes mezz/equity

Private Credit

Private Credit Ramp

Mezzanine funding during growth

Bank

Warehouse Facility

Short-term, asset-covered, low-cost

Securitisation Roles

Banks

Arrange deals, warehouses, AAA tranches

Insurance

Long-duration senior tranches

Private Credit

Mezz, subordinate, equity tranches

CLO Managers

Leveraged senior loan portfolios

Insurance-Affiliated Lenders: A Third Category

A new category sits between banks and traditional private credit: insurance-affiliated asset managers (Apollo/Athene, Ares/Aspida, Blackstone/AIG). These entities combine insurance balance sheet capital with private credit origination, enabling them to provide consistent, long-duration funding at scale. Their cost of capital sits between bank deposits and traditional LP-funded private credit.

SRT: Banks and Private Credit Collaborating

Banks and private credit managers increasingly collaborate rather than compete through Synthetic Risk Transfer (SRT). Banks transfer the credit risk of their loan books (reference portfolios) to private credit fund investors via credit-linked notes, freeing regulatory capital while keeping the customer relationship. This is a growing area of bank-private credit partnership.

Non-Bank Share in Fund Finance

In fund finance (subscription lines and NAV facilities), non-bank lenders have gained significant market share as banks retreated post-2022. Non-bank NAV facility pricing of 1,100-1,300 bps vs bank pricing of 600-700 bps reflects the premium for non-bank capital, but non-bank lenders offer structural flexibility that banks cannot match given regulatory constraints.

Risks and Considerations

Private Credit Risks

•

Illiquidity: Locked-up capital during fund term

•

Valuation: Mark-to-model vs. observable prices

•

Leverage: Fund and deal-level leverage amplify risk

•

Workout Capability: Some funds lack distressed experience

Bank Risks

•

Regulatory Change: Capital rules continue to evolve

•

Concentration Limits: Single-name and sector limits

•

Cross-Default: Broader relationship creates contagion

•

Commitment: May pull back in stress periods

Systemic Considerations: The growth of private credit raises questions about transparency, interconnectedness (via bank warehouse funding), procyclicality, and regulatory arbitrage.

Future Outlook

Growth Drivers

• Institutional allocations to private debt rising
• Illiquidity premium attractive vs. public markets
• No relief in sight from Basel capital requirements
• New funds launching across niches

Potential Headwinds

• Spread compression from capital abundance
• Credit cycle will test workout capabilities
• Non-bank financial intermediation under scrutiny
• Higher base rates change relative value

An additional $5-6 trillion of assets could shift into the nonbank ecosystem over the next decade, provided interest rates remain elevated and current bank regulation persists.

— McKinsey Global Private Markets Review

Emerging Structures

INS

Insurance Capital

Direct lending by insurers growing

EVG

Evergreen Funds

Permanent capital without term constraints

RET

Retail Access

Interval funds, BDCs democratising private credit

TEC

Tech Platforms

Digital origination and secondary markets

Key Takeaways

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Regulatory-driven shift: Basel capital rules pushed banks upstream

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Complementary ecosystem: Banks and private credit serve different roles

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Different constraints: Banks face capital limits; PC faces return requirements

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Deal-dependent choice: Right partner depends on size, speed, structure

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Continued growth: Private credit will likely continue gaining ABF share