@Wikimedia Commons.
Rewriting rules around any class of financial assets often turns into a game of consequences, many of them unintended.
The UK’s Labour government has set itself ambitious targets for growing the economy and sees stimulating greater investment into UK plc as a key element in delivering that plan. This has put banks and lenders in the spotlight, and the Chancellor of the Exchequer, Rachel Reeves, has offered them plenty of encouragement with a series of measures to relax the rules surrounding bank lending that were tightened up in the wake of the 2008 Global Financial Crisis.
One consequence of that stricter regime was to spawn a complex array of private debt mechanisms as banks were forced to become more risk averse. These not only ensured there were routes for businesses to raise investment capital but also offered assets with attractive yields for institutional investors, especially during the decade after the GFC, when traditional fixed income assets offered meagre returns. It was a very convenient marriage of interests. It did not suit everyone, however.
These changes saw many insurers move to private debt. So, will there be a shift back?
With house price inflation far outstripping wage growth, the mortgage market got tougher for borrowers. The relaxation of loan-to-value (LTV) criteria has begun to stimulate the mortgage market, a key pillar in the government’s drive to see 1.5 million new houses built by the end of this current Parliament, due in mid-2029. A major overhaul of planning rules is the headline-grabbing policy in that drive, but without an expansion of the mortgage market, the number of potential buyers of those new houses would fall short.
“The Chancellor’s move to relax bank lending rules may provide some
short-term easing, but we don’t see this as a structural shift."
The banks are stepping up on this front, but it is not seen as a game-changer for those who need to access the private debt market, said Louise Klouda, CEO and Founder of Fenchurch Legal, a specialist in litigation finance.
“The Chancellor’s move to relax bank lending rules may provide some short-term easing, particularly for areas like first-time buyer mortgages, but we don’t see this as a structural shift. Non-bank lenders still have a critical role to play, particularly when it comes to plugging the gaps in business financing.”
Banks have been very cautious about lending to businesses, especially small to medium-sized enterprises (SMEs). According to the Department for Business and Trade, banks approved just over half of applications for business loans last year, up from 33% in 2019, before Covid-19 disrupted the market with its government-subsidised loans to many companies.
As well as the relaxation in LTV rules, the Bank of England has signalled its willingness to provide banks with greater flexibility in other areas. It has eased the timelines for implementation of parts of the Basel 3.1 regime and proposed fresh consultation on market-risk rules, marginally reducing near-term capital pressure on banks.
Few in the market think that it is, seeing a continuing major role for private debt, says an experienced US-based institutional investment manager, who asked not to be named.
“I have been in this industry for more than 20 years, and this is a cycle that I have witnessed before, where banks loosen and tighten and the private lenders adjust, not go away,” they said.
“The UK bank regulations could be getting more relaxed today, but that certainly does not imply that the private debt is becoming less dynamic. They said that while institutional prudence has not disappeared and banks may be open again, they are “cautious with regard to complex or unconventional deals”. That is where the private capital still dominates.
“The bottom line is, as long as there is a need among borrowers to have quick, tailor-made solutions, there will be demand, and this demand is not going away anytime in the future,” they said.
SMEs, in particular, still find it harder to access bank loans, especially for major expansion, mergers and acquisitions. For them, the private debt market remains a vital source of finance. It also continues to provide higher yields for lenders.
One company specialising in this area, Muzinich & Co, recently reported consistently achieving yields of 7% plus on lending packages for SMEs, although mainstream private debt spreads across European markets have been running at 5.25-5.6% for most of 2025.
Of course, to sustain higher returns and a sufficiently large pool of potential investments for institutional money, the demand must be sustained as well. There is no sign of this abating, says Klouda, as the potentially higher-risk niches that mainstream banks have never been keen on remain plentiful, and they are looking for more than just capital, with flexibility and speed also major considerations.
"We’re in conversations with institutional investors, particularly
private credit funds, as we raise capital.”
“The easing of mortgage rules may free up some bank balance sheet capacity, particularly for first-time buyer lending, but it doesn’t replace the need for non-bank credit in specialist areas,” she said. “Private lenders still have the edge in speed, structuring, and addressing financing gaps where banks remain limited.”
“A good example is the recent attention on motor finance mis-selling, which has created a surge in demand for secured, short-duration funding, something that sits outside banks’ lending scope. It’s a case of banks stepping back into the mainstream while non-bank lenders focus on more niche opportunities.”
“We’re currently in conversations with institutional investors, particularly private credit funds, as we raise capital for our latest secured revolving credit facility.”
This doesn’t mean throwing caution to the wind to jump into the gaps left by the banks, she says:
“These investors see strong potential in niche strategies, but they also want to understand the underlying business models before deploying capital. The managers who will do well in this environment are those who can demonstrate robust underwriting, clear risk controls, and a track record of good governance.”
In the UK government’s wider plans for stimulating economic growth, especially through investment in major infrastructure projects, renewable energy and house building, some see the opportunity to open this market to private investors.
Hargreaves Lansdown, one of the UK’s largest investment platforms for private investors, has teamed up with Schroders Capital to offer its Long Term Asset Funds (LTAF) through self-invested personal pensions, currently highly tax-efficient. Reeves has already flagged, as part of the so-called Leeds Reforms, that LTAFs will be open to investment from stocks-and-shares Individual Savings Accounts (ISAs) from April 2026.
James Lowe, Director of Private Markets at Schroders Capital, said this linking of LTAFs with retail savings products gives investors “a new access point to invest into high-growth private businesses and essential global energy infrastructure, benefitting from the diversification and return potential that is unique to private markets”.
This is part of a wider trend identified by Chambers & Partners in its recent Private Credit 2025 report.
"The UK’s focus on sustainable finance and ESG considerations
is also shaping the private credit landscape."
“Asset managers have expanded their fundraising efforts by opening fund investment opportunities to high-net-worth individuals and family offices,” it said. “This has permitted certain private credit funds to offer businesses a lower cost of capital, increasing the fund’s assets under management and maximising the deployment opportunity. Private credit providers are also seizing new opportunities to fill the financing gap left by traditional banks.
“Additionally, the UK’s focus on sustainable finance and ESG considerations is also shaping the private credit landscape, with an increasing number of private credit funds incorporating ESG criteria into their investment strategies.”
Similar moves to attract retail investors into what has traditionally been an asset class dominated by institutional investors are also taking place in the US, although they are not purely market led. During the summer, President Donald Trump issued an executive order – Democratizing Access to Alternative Assets for 401(k) Investors – to expand access to a range of alternative assets in 401(k) pension plans by directing the Department of Labor to review regulations restricting these investments. As well as private debt, President Trump wants retail investors to be able to invest in private equity, real estate and digital assets
While promising stronger returns, LTAFs and many other private debt instruments also exhibit some of the downside that makes institutional investors cautious about over-committing to private debt. Liquidity. Typically, they require retail investors to give notice of 90 days for withdrawals.
This problem is never far from the minds of institutional investors, said Jonathan Ayala, a US-based specialist in data-driven market research, who has been monitoring developments in the UK.
“For insurance companies, private debt is a plausible substitute for conventional fixed income, offering better yields while eschewing substantial leverage risk build-up,” he said. “All exposures to illiquids, however, call for strong due diligence. Banks' withdrawal from lending has opened opportunities for private debt providers, but interconnectedness may escalate systemic risk unless carefully controlled.”
Ayala said that private debt’s allure remains strong for institutional investors seeking yield and diversification. “However, long-term sustainability will depend on navigating regulatory changes, liquidity risks, and economic headwinds,” he said. “The Chancellor’s relaxed rules may stimulate short-term growth, but greater transparency and stronger risk management will be key to lasting success.”
"In litigation finance, we’re seeing AI tools that can analyse loans and flag
borrower issues more efficiently than relying solely on analysts."
The market should welcome greater transparency, something that will be inevitable as artificial intelligence (AI) becomes embedded in portfolio construction and analysis, said Klouda.
“AI is already being used to speed up underwriting and portfolio monitoring,” she said. “For example, in litigation finance, we’re seeing AI tools that can analyse thousands of loans and flag borrower issues more efficiently than relying solely on analysts.
“On the regulatory side, while there’s no immediate move toward direct regulation of private credit, the sector’s rapid growth has understandably attracted attention from bodies like the Bank of England and the Financial Conduct Authority (FCA). Rather than full-scale regulation, the more likely outcome is increased transparency, stronger reporting standards, and perhaps some frameworks around risk oversight. That’s not necessarily a bad thing, as more transparency can help mature the asset class.”
Another feature of this growing maturity is a blending of bank and private debt to provide a greater range of options for borrowers, said the report from Chambers & Partners. It is no longer a simple ‘either/or’ choice. This trend started in the US but is now a regular feature of the UK market.
“Strategic partnerships between banks and private credit funds are becoming increasingly common, allowing both parties to leverage their respective strengths," it said. "Citigroup’s $25 billion partnership with Apollo and Wells Fargo’s $5 billion collaboration with Centerbridge Partners exemplify this "co-opetition” model, which enables banks to offload risk while maintaining client relationships and provides private credit funds with access to a broader range of investment opportunities.”
This will pose institutional investors a fresh challenge as they will have to pick their way through new, potentially more complex, financing packages to find the value.
