Insurance companies, traditional asset managers, and even banks are increasing their direct participation in private credit as the asset class enters its next phase of expansion.

McKinsey strategists noted that the growth of private credit to date has been largely concentrated in direct lending, driven by banks withdrawing from leveraged lending and the rapid expansion of private equity.

However, in response to higher rates and a slower private equity deal environment, private credit has begun to expand into new areas, including a wide variety of asset-backed financing structures.

Meanwhile, the sources of capital seeking private credit exposure are continuing to diversify, with significant inflows from retail and insurance capital pools.

Additionally, the competitive landscape has expanded and become more crowded with increasing direct participation from insurance companies, traditional asset managers, and even banks.

According to McKinsey, this transition represents a generational opportunity for existing private credit funds, asset managers and insurance companies capable of establishing reliable origination in these areas.

It also marks a key turning point for banks, which must adjust their business models to compete with various large buy-side entities that have long-term capital sources.

McKinsey expects these shifts may result in significant changes in the industry, including a separation of asset origination from the downstream segments of the value chain. This could give rise to new partnerships and open-architecture business models.

To remain competitive in the new landscape, McKinsey forecasts that market participants will need to continue to differentiate themselves in sourcing and fundraising. This can be achieved by achieving scale — measured by the depth and breadth of capital — or effectively utilizing technology.

Even though McKinsey expects that private credit will remain and is likely to grow, strategists emphasized that it is essential to closely monitor risks.