Board of Governors of the Federal Reserve System

August 11, 2026

Private Credit and Leveraged Loan Markets: Similarities, Differences, and Substitution

Ayelen Banegas, Sophia Castelo, Ahmet Degerli, Christine Dobridge, and Will Kennedy ¹

Private credit (PC) and leveraged loan (LL) markets are two key sources of financing for below-investment-grade middle-market firms, typically those with revenues between $10 million and $1 billion.² Although these two markets have different structures and rely on different lenders, they have become increasingly interconnected in recent years, with some firms seeking financing in both markets.

Recent deterioration of investor sentiment in the PC market has raised concerns that a contraction in credit availability in this market may curtail the ability of some middle-market firms to obtain financing. This note examines lender composition and borrower characteristics of PC and LL markets, substitution patterns across these two markets, and the broader financing implications of a PC pullback for risky, middle-market firms.

The analysis shows that, while both markets serve broadly similar industries and credit profiles, they differ substantially in market structures, liquidity, and funding mechanisms. As a result, financing conditions in PC and LL markets may diverge significantly. When conditions diverge, we document that larger middle-market firms are better able to substitute between these two markets, shifting to PC when LL conditions tighten and moving back when LL conditions become more accommodative.³ Smaller firms have less capacity to substitute and therefore may be more exposed to a deterioration in PC financing conditions.

These findings suggest that if the recent deterioration in investor confidence remains confined to the PC market, larger middle-market firms with access to the LL market may be less affected than smaller firms by further tightening in PC financing conditions. Because larger and smaller firms each account for about half of PC loan volume, substitution to the LL market could mitigate, but not eliminate, the broader effects of a PC pullback.

Market Size, Lender Composition, and Market Structure

PC and LL markets are roughly equal in size—approximately $1.4 trillion as of the end of 2025—and together account for around 45 percent of total lending to private nonfinancial corporations (Figure 1).⁴ Both PC and LL markets have grown considerably since the Global Financial Crisis (GFC), with PC experiencing particularly rapid expansion in recent years, reflecting demand for bespoke financing terms by borrowers, the increased role of private equity, and post-GFC regulatory and supervisory changes (Aramonte and Avalos, 2021; Degerli and Monin, 2024; Chernenko et al., 2025). This expansion has made PC an increasingly important part of the broader corporate credit landscape for risky middle-market firms, alongside the LL market.

Figure 1. Nonfinancial Debt Outstanding of Privately Held Corporations

PC and LL markets differ in the composition of lenders and in how credit is funded, originated, and distributed. In the PC market, financing is provided by private debt funds and BDCs, which together account for about 90 percent of the entire market, as well as interval funds and middle-market CLOs (Figure 2). The ultimate capital providers to private debt funds and middle-market CLOs are institutional investors, while BDCs and interval funds are also accessible to retail, high-net-worth, and accredited investors. PC lenders typically originate and hold loans directly, often lending bilaterally or as part of a small group of lenders to borrowers and private equity sponsors. Because loans are privately negotiated and held by a relatively small group of lenders, PC lenders can offer customized terms, faster origination, and greater flexibility in renegotiation.

Figure 2. Lender Shares in PC Market

In the LL market, loans are typically originated by large commercial and investment banks and distributed to a broad set of institutional investors, including broadly syndicated loan CLOs, loan mutual funds, exchange-traded funds, insurance companies, and other asset managers (Figure 3). Ultimate investors in these vehicles are largely institutional, especially through CLOs, while limited retail investor participation exists through loan mutual funds and ETFs. The LL market is more standardized and more liquid than private credit, with loan terms often shaped by investor demand in syndicated markets. Borrowers in the LL market typically benefit from lower borrowing costs than in the PC market, especially when institutional demand is strong.

Figure 3. Lender Shares in LL Market

Banks have distinct roles in the two markets. In the PC market, banks do not originate loans directly, but instead provide financing to private credit vehicles. In the LL market, banks arrange, underwrite, and syndicate loans; they distribute large portions of term loans to institutional investors while retaining some portions of term loans on their balance sheets and providing revolving loans to firms.

The differences in lender composition and market structure can lead to diverging financing conditions across the PC and LL markets. In the LL market, conditions can tighten when arranging banks reduce underwriting activity or when institutional investor demand weakens. In the PC market, financing conditions depend on committed capital being available for lending, net capital flows into private debt funds, BDC equity issuance, and the availability of leverage from banks. The growing role of retail-oriented vehicles in PC may also make funding conditions in PC more sensitive to changes in investor sentiment and redemption pressure.

Borrower characteristics and growing overlap across PC and LL markets

PC and LL markets both serve highly leveraged, risky middle-market nonfinancial firms (Table 1). However, relative to LL borrowers, PC borrowers are smaller (with revenue typically below $250 million) and more leveraged (with a median debt-to-EBITDA ratio of 5x). PC borrowers mostly lack public credit ratings; however, as shown in Table 1, estimated credit ratings indicate that PC borrowers are more concentrated in lower rating buckets relative to LL borrowers.⁵ That said, the two markets have broadly similar industry composition, with technology and business services representing a somewhat larger share of issuance in the PC market than in the LL market. Both PC and LL markets provide medium-term floating-rate loans for similar purposes. LBO and M&A transactions account for a sizable portion of issuance in both markets (38 percent in LL and 32 percent in PC).⁶

Table 1: Borrower and Loan Attributes

As the PC market has grown over time, it has become increasingly able to accommodate larger borrowers that generally borrow in the LL market. As shown in Figure 4, although small firms represent the borrower base in the PC market, larger firms have tapped the PC market at an increasing rate in the years post-GFC, with the share of large firms borrowing in this market reaching a peak of 50 percent in 2022, before declining recently. This post-GFC trend suggests that PC's growth has been propelled by larger firms seeking bespoke, fast financing in the PC market as an alternative to traditional leveraged loans, rather than by small firms migrating from the LL to the PC market.

Figure 4. Share of Firms with New Borrowing in the PC Market, by Firm Size

This migration has created significant overlap between the LL and PC borrower bases. The share of loans issued by borrowers with access to both markets has increased over time, intensifying the competition between LL and PC markets. Overall, among middle-market firms that have issued debt since 2020, roughly one-third have accessed only the LL market and roughly one-third have accessed both LL and PC markets (Figure 5). The remaining share of middle-market firms have accessed only the PC market.

Figure 5. Distribution of Borrowers by their Debt Profile, as of the End of 2025

Firms' access to PC and LL markets differs by firm size. Larger firms are able to access both markets, while smaller firms typically have access only to PC. As shown in Figure 6, about 41 percent of larger firms have accessed both markets, 43 percent are only present in the LL market, and 16 percent are only present in the PC market. Among small firms, only about 25 percent have accessed both markets, while 57 percent are exclusively PC borrowers (Figure 7).

Figure 6. Borrower Distribution by Debt Profile, Large Firms

Figure 7. Borrower Distribution by Debt Profile, Small Firms

Borrower substitution patterns

Motivated by recent discussion on substitution between PC and LL markets, we next examine the switching patterns in our sample of middle-market borrowers. Hinzen et al. (2026) show that firms are more likely to move from the LL to the PC market when syndicated loan market conditions tighten, suggesting that PC can act as a backstop during LL market stress. We build on their analysis to examine whether switching capacity differs by firm size and industry, which has implications for how a potential PC-specific pullback may affect different types of middle-market firms.

Firms with access to both PC and LL markets tend to substitute between them when borrowing conditions diverge. In particular, as shown in Figure 8, the share of firms switching from LL to PC (the blue line) increases during periods of restrictive financial conditions in the LL market. For example, the share of borrowers that moved from LL to PC, where credit is less dependent on banks and syndicated loan investor demand, reached about 50 percent (or roughly 25 percent of total PC issuance) in early 2023, at the peak of the recent monetary policy tightening cycle. Conversely, when LL conditions become relatively more accommodative, these firms moved back to the LL market (the dashed brown line) from the PC market where borrowing costs are typically higher.

Figure 8. Share of Firms Switching between PC and LL Markets

As reported in Figures 9 and 10, substitution patterns differ by firm size. Larger firms switch across PC and LL markets while smaller firms are less likely to move from PC to LL. Although smaller firms can move from LL to PC, a relatively low share of smaller firms have access to the LL market in the first place. More recently, PC-to-LL switching has increased among larger firms as PC market conditions have become less accommodative, while such substitution has remained muted among smaller firms. This size-based segmentation has important implications for financing conditions; larger borrowers may be able to respond to tightening in one market by shifting to the other one, while smaller borrowers face limited alternatives during PC market tightening.

Figure 9. Share of Firms Switching between PC and LL Markets, Large Firms

Figure 10. Share of Firms Switching between PC and LL Markets, Small Firms

Substitution patterns also differ across industries in ways that are consistent with the size-based segmentation documented above. The software industry is especially relevant as software firms account for a meaningful share of both markets—about 21 percent of PC issuance and 16 percent of LL issuance since 2020—and have been a focus of recent credit quality and valuation concerns. Although software firms in PC and LL markets are heterogeneous and include both large and small borrowers, they are smaller on average than non-software firms and therefore tend to rely more heavily on PC financing. About half of software borrowers have accessed only the PC market (Figure 11). This distribution suggests that a sizable share of software firms may have limited ability to shift away from the PC market if conditions tighten in that market. For software firms with access to both markets, LL-to-PC switching also tends to increase when LL conditions tighten (Figure 12). However, among these firms, PC-to-LL switching has remained relatively muted, especially in recent years, suggesting that the ability of software borrowers to move to the LL market may be more limited than other borrowers.

Figure 11. Borrower Distribution by Debt Profile, Software Firms

Figure 12. Share of Firms Switching between PC and LL Markets, Software Firms

Conclusion

PC and LL markets are distinct but have also become increasingly interconnected. The two markets differ with respect to their borrower and lender base, but also in terms of market structure, liquidity, and the role of banks. At the same time, both markets finance highly leveraged firms and serve an increasingly overlapping borrower base. As a result, the implications of tighter financing conditions in one market for broader financing conditions depend on firms that are able to substitute across the two markets. Smaller borrowers remain heavily dependent on PC and therefore face limited financing alternatives when conditions tighten, whereas larger borrowers, which can switch financing sources across PC and LL markets, are better able to adjust to relative changes in financing conditions across these two markets.

References

Aramonte, Sirio, and Fernando Avalos. 2021. "The Rise of Private Markets." BIS Quarterly Review, 69–82.

Chernenko, Sergey, and David S. Scharfstein. 2026. "Private Credit and Financial Stability." https://doi.org/10.2139/ssrn.5930356.

Degerli, Ahmet, and Phillip Monin. 2024. "Private Credit Growth and Monetary Policy Transmission." FEDS Notes. Board of Governors of the Federal Reserve System.

Hinzen, Franz J., Giorgio Mondini, Paul Rintamäki, and Sascha Steffen. 2026. "The Cyclicality of Direct Lending." https://doi.org/10.2139/ssrn.6490423.