How Technology is Transforming Private Credit Lending: Key Trends and Challenges

Demand for private financing is on the rise. Private credit as a solution to fill financing gaps came to the fore in the aftermath of the great recession of 2007-09, when the conservative banks had to retrench on lending. It has since, emerged as one of the quickest segments to expand in demand and scope within the financial services spectrum, according to various market analysts. Over a 15-year span, the global private credit market achieved almost 10x growth to reach $2 trillion by the close of 2023.

By definition, private credit is a loan arranged and issued to a private firm – small or mid-sized – by a non-bank lender. Operating beyond the periphery of conventional banks and public debt markets, it specifically helps private businesses that struggle with cash flow fluctuations and are deemed too large or high-risk by traditional lenders or too small to be listed on the public exchange. It serves as a practical and long-term financing alternative for these borrowers who might be forced to apply for a traditional bank loan or issue a bond, otherwise.

Over the years, private credit lenders have established their abilities at enabling capital access to borrowing companies while bettering traditional lenders (banks) in terms of performance. In fact, analysts like McKinsey have predicted that the overall revenue opportunity for private credit, solely in the United States, could reach well over $30 trillion.

The bright outlook for private financing has set the stage for a highly competitive landscape among lenders of all kinds – non-banking and traditional. However, market differentiation and long-term growth is elusive for most lenders, which underscores the need to improve scale and performance in a strategic manner.

In this article, we explore the drivers, challenges in the exciting space of private credit lending and potential solutions offered by technology.

What’s driving the growth in private credit

Private credit lending is extended by non-bank financing entities, including those involved in funds and business development. By definition, it does not come under the stringent regulatory scrutiny that applies to traditional lenders like banks. Such loans are secured for the most part, offered at floating interest rates and not listed in public markets. Private credit lenders are usually asset managers and act as the go-between during loan negotiations between the end investor and end borrower.

The rise in demand is stemming from borrowers as well as investors. The Fed’s lowering of interest rates in recent years have alleviated the borrowers’ burden and boosted financing demand.

Meanwhile, the potential for returns from private credit continues to be high. It is even more lucrative as private credit can now be extended to a wider range of businesses across sectors including commercial real estate where traditional banks consciously seek to limit their lending due to its inherent high risk.

Asset-backed financing/lending has also emerged stronger as an alternative to the traditional cash-flow-based approach. More asset classes as well as risk/return profiles can now be included in the market for private financing. This benefits a great variety of businesses – manufacturing, wholesale, retail, distribution – that are typically asset-rich but face cash flow inconsistencies and need steady capital access.

Moreover, over the years, private credit has presented resilience, with deals of all sizes and forms being struck, achieving more income compared to traditional asset classes that helps cushion investors during times of market uncertainty.

Given these advantages, the private credit market is expected to further expand in 2025 with more investments flowing in – lenders have the confidence to seek more deals on the back of this abundant pool of invested capital at their disposal.

However, despite the positive outlook, private credit lenders have their share of deterrents that could set back yields and growth opportunities in the future.

Challenges to private credit lenders

Competitiveness is on the rise, which is not a problem in itself. So far, private credit lenders have thrived on the intrinsic advantages of private credit structures – they can offer long-term-value and growth-oriented borrowers such as private equity firms, the assurance of deals as well as extra capital for future requirements and fast turnaround times.

However, going forward, smaller players may struggle to sustain themselves if they are unable to scale and raise funds to match prospective large deals, especially from banks. According to McKinsey analysts, only the largest lenders are expected to compete for multibillion-dollar financings, including investment-grade companies, major infrastructure projects, and large-scale commercial real estate deals.

Besides struggling to cope with fundraising complexities, private credit lenders must also navigate through long-winded and complicated processes associated with underwriting, due diligence, and risk assessments.

Moreover, the rapid expansion of the market has raised regulators’ concerns around inherent opaqueness and vulnerabilities leading to potential credit losses. International institutions like the IMF have called out the need for stronger regulatory measures in the private credit landscape to drive more thorough risk assessments, monitoring, reporting and management.

These trends have implications for lenders as investors will expect their support in ensuring more transparency around reporting and communications. While benefiting from the growing demand for private financing, they must take extra care to ensure the terms of agreement are documented and maintained at the highest levels without compromising the quality of underwriting or covenant packages.

The role of technology in easing the lending journey

Private credit lenders are increasingly leaning on technology and data-driven solutions to help streamline and automate their loan and collateral processes while also levelling up their competitive game. With advancements in AI/ML/NLP, they can harness alternative data sources, and digital platforms to execute more efficient underwriting decisions and portfolio tracking especially when asset pools are vast.

Based on data analytics and understanding of specific borrowers’ needs and credit-worthiness, these managers are better positioned to offer tailored terms and repayment options best suited to the borrower. At the same time, they must rely on technology and automation to support them with scalability when loan volumes explode, and managing customized portfolios and loans becomes cumbersome.

However, many investment/asset managers continue to use MS-Excel and manual documentation methods which are prone to duplication of effort as well errors and missing data, especially when loan volumes are rising. Functional silos and lack of data consolidation further hamper transparent communication, productivity and operational efficiencies that are essential today.

Digital platform solutions such as the one offered by Decimal Point Analytics are crucial under these circumstances to match up to the modern needs of the private credit landscape.

A one-stop destination – Custom private credit lending platform by Decimal Point Analytics

Decimal Point Analytics empowers private credit lenders with cutting-edge AI, machine learning, and data-driven solutions that optimize risk assessments, automate loan processes, and enhance portfolio management. By leveraging our advanced analytics capabilities and digital platforms, lenders can achieve greater scalability, accuracy, and compliance, positioning themselves for sustained success in the evolving private credit landscape.

Beyond lending, we provide comprehensive data analytics and AI-powered solutions for fund managers and private equity professionals across key areas, including fund administration and accounting, portfolio analytics, performance evaluation, reporting, portfolio construction and monitoring, and investor engagement. Explore this page for more.

Visit our page for more details on how Decimal Point Analytics can help set up a comprehensive digital platform to streamline all your private credit management activities.