[Private Credit Blooming]① Private Credit Fills Banking Gaps... Korean Market Opening Up

Expansion of U.S. Private Credit Amid Stricter Bank Lending Regulations
Private Credit Surpasses PE Investments at Firms Like Blackstone, Apollo, and KKR
Korean Institutional Investors, Including the National Pension Service, Increase Overseas Priva

Editor's NoteThe private credit market is showing signs of emerging in South Korea. While it has already established itself as an alternative to bank loans at the forefront of the capital markets in the United States, the domestic market is still in its infancy. Before the market enters full bloom, we take a closer look at its trends, structure, and concerns.

Private credit refers to a method in which alternative investment institutions, other than banks, provide funds directly to companies in the form of loans or bonds. The main providers are non-bank financial institutions such as private equity fund (PEF) managers and securities companies. They offer flexible loan structures to companies willing to accept relatively higher interest rates. Although the risks are greater than with bank loans, the higher returns have made private credit a favored asset class for major institutional investors such as pension funds and insurance companies.

U.S. Private Credit Fills Structural Gaps

In the United States, private credit has already become a major channel for corporate financing, going beyond simply supplementing bank loans. According to alternative investment market analytics firm Preqin, global private credit assets under management (AUM) grew from $1.2204 trillion (about 1,775 trillion won) in 2020 to an estimated $2.2801 trillion last year. The market is projected to expand dramatically to $4.504 trillion by 2030.

One decisive factor behind this market growth was the tightening of banking regulations following the financial crisis. After the 2008 global financial crisis, the Dodd-Frank Act was enacted in the United States, resulting in stricter regulations for banks. The collateral that banks could accept was limited to solid assets such as real estate, movable assets, deposits, and bonds. As a result, companies with ineligible collateral or poor credit ratings found it difficult to obtain bank loans.

Non-bank financial institutions quickly entered this structural funding gap. In the prolonged low interest rate environment that persisted until the COVID-19 pandemic, institutional investors such as pension funds and insurance companies turned to private credit to make up for insufficient returns from traditional assets like stocks and bonds. In response, large asset managers such as Blackstone and Goldman Sachs established private credit funds, leading to rapid market growth.

According to financial market analytics firm S&P Global, the share of private credit in the assets managed by major global asset managers such as Blackstone, Carlyle, and Kohlberg Kravis Roberts (KKR) has already surpassed that of the private equity (PE) segment.

Targeting Medium Risk and Return... Strengths in Customization and Speed

Private credit can be divided into various types depending on the target and structure. Representative examples include direct lending to small and medium-sized enterprises, mezzanine financing such as convertible bonds (CB) or exchangeable bonds (EB) that combine features of stocks and bonds, non-performing loan (NPL) investments, and asset-based lending (ABL) secured by accounts receivable, machinery, inventory, and other assets. According to the Korea Capital Market Institute, as of 2022, direct lending accounted for about half of the market, followed by non-performing loans (16.9%) and mezzanine financing (10.4%).

Private credit has penetrated the market by offering stable cash flows even amid market uncertainty, thanks to its floating interest rates and collateral-focused structures. For providers, it offers stable medium-risk, medium-return opportunities. For corporate borrowers, it provides products that can be tailored to individual circumstances and executed quickly.

However, relatively high interest rates and the uncertainty surrounding collateral valuation are cited as drawbacks. Unlike real estate, which banks commonly use as collateral and which has a well-established market price, other types of collateral rarely have such clear market values or may not reflect market changes quickly. There are no standardized valuation methods in the market, so asset managers must rely on their own internal criteria, leading to wide variations in risk management.

The Domestic Market Takes Its First Steps... Expectations for Full-Scale Growth

South Korean institutional investors are already increasing their presence in overseas markets. Major pension funds, mutual aid associations, and insurance companies-which regularly pay out pensions, mutual aid, and insurance benefits-have naturally shown interest in private credit, which offers stable cash flows, and have invested large amounts in overseas funds. The National Pension Service has established a dedicated private credit investment team and is not only increasing its investment share but also diversifying its strategies and regions.

In contrast, the domestic market has only just begun to take its first steps. In the United States, private credit specialist managers such as Ares Management and Apollo Global Management have built multi-trillion dollar markets based on decades of track records. In South Korea, however, IMM Private Equity launched IMM Credit Solutions for the first time in 2020. Since then, other private equity firms such as VIG Partners and Glenwood Private Equity have also established dedicated credit units. However, there are still virtually no independent private credit specialist asset managers.

Structurally, the environment has not been conducive to rapid growth of the private credit market. This is due to differences in the roles and authority of banks. In South Korea, a significant portion of corporate lending has been handled by banks and securities companies using their own capital. It has been difficult for asset managers to build track records, and only relatively small-scale transactions have occurred sporadically. There is also a lack of sophisticated institutional infrastructure for non-financial institutions to specialize in direct lending, such as collateral valuation standards, management of overlapping collateral, and structured accounting standards. In many respects, the conditions for private credit to establish itself as a standalone industry have been limited.

However, there is now an emerging 'deal pipeline' as gaps in acquisition financing, refinancing burdens for listed mid-sized companies, and increased demand for restructuring all converge. One private equity industry insider commented, "Unlike buyout funds, which have accumulated 20 years of experience, this means there is still significant room for the credit fund market to grow. Now that both limited partners (LPs) and asset managers are starting to move, the Korean private credit market could enter a period of full-scale growth."