The removal of leverage lending guidelines will not cause a simple shift from private credit back to banks. Instead, it will accelerate the convergence of public and private credit markets. Banks will now compete across the entire financing continuum, further blurring the distinctions in terms and cost between the two.
Regulatory leverage lending guidelines, which capped bank participation in highly leveraged deals at six times leverage, created a market void. This constraint directly spurred the growth of the private credit industry, which stepped in to provide capital for transactions that banks could no longer underwrite.
The financing required for the digital transformation is so vast—trillions of dollars—that the market is in an unusual state. Analysts lack visibility into both the total capital required (demand) and the total capital available (supply), as both are growing simultaneously without a clear ceiling, a unique condition for capital markets.
As private credit finances the digital infrastructure boom, risk shifts from market cycles to project execution. The main challenges will be managing operational problems like construction delays, cost overruns, and labor shortages as these massive build-outs mature. The market has not yet been tested by these inevitable setbacks.