Financing the real world economy - an inside look at a US$7 trillion dollar industry

Where markets are at today was probably not on everyone's bingo card entering 2025. 

Against the backdrop of a volatile past five months, I sat down with Daniel Pietrzak, Global Head of Private Credit at KKR, during his trip to Australia, to talk about how the recent shakeups have affected the outlook of the private credit market.

Pietrzak also shared his expert insights on an industry that's grown to US$2 trillion of assets under management in the last few years.

Please note this interview was filmed on 30 April, 2025.

Private credit - a broader scope and meaning

“When most people talk about private credit, they’re thinking about direct lending,” Pietrzak begins. “But for us, it’s much bigger than that.”

Indeed, KKR’s definition of private credit encompasses not just direct lending but also junior debt, asset-based finance (ABF), and everything in between, touching both corporate and consumer markets.

“We’re financing the real-world economy,” he explained. 

“For us, that business has been a big growth story. That market's got a lot of white space, probably $6-7 trillion of assets there and continually growing, as assets move out of the banking system.”

Despite the political surprises in the early months of 2025, and the tremendous amount of volatility and tariff uncertainty, Pietrzak believes this has been mainly centred in the equity markets, and the fundamentals still support a resilient credit environment.

“We're sitting here today at the end of April, very different from where we thought we were starting the year, right?” Pietrzak laughs. “I think the outlook is hard, but I think it's more of an equity issue than a credit issue…it's all about getting a stable return.”

The role of private credit in an investor’s portfolio

Investor demand, Pietrzak says, is a major driver behind the sector’s growth and expansion, and for good reason, given the asset class has been able to deliver stable NAVs, consistent income, and in many cases, unlevered returns close to 10%.

Pietrzak points out that he believes there is a misnomer out there that the private credit market is new, when in fact, the market has been around for decades - it just may have been called something different.

“If you think about it, in the US there were BDCs (business development companies) prior to the financial crisis; there was a gigantic void that happened as banks took a step back, and more and more capital came in to fill that void.”

While exposure has been quite US-centric in direct lending, Pietrzak sees the next evolution happening in income diversification.

“I think the big conversation today with all of our investors is can they add asset-based finance to their portfolio? Can they add Europe? Can they add Asia credit? So they have global, diversified exposure.

What’s happening with spreads?

Spreads in direct lending have tightened considerably in recent years, but Pietrzak doesn’t see that as a deterrent. ("Spread" refers to the difference between the interest rate charged to a borrower and the benchmark interest rate.)

While acknowledging that spreads have come in - from 650 basis points post-COVID to around 450–475 recently - with rates where they are, Pietrzak says the total return story is still very compelling. Even for levered investors, the impact has been muted. 

“The cost of leverage has come down too, helping maintain returns despite tighter spreads.”

He does expect some spread widening with current market volatility - “maybe 25 basis points or so” - but overall, he describes the market as healthy and well-capitalised, with plenty of “dry powder” ready to deploy.

Recession risk - alert but not alarmed

Recession fears are on Pietrzak’s radar, though he doesn’t foresee anything deep or systemic.

 “A U.S. recession could be a base case,” he said, “but it may also be healthy. A bit of a shakeout could present great investing opportunities.”

The main concern, however, lies in the potential resurgence of inflation and an economic “hard landing” due to impacts of trade policy. Pietrzak describes this as the platform’s “downside underwriting scenario” as it would most likely result in higher defaults, particularly for levered companies where free cash flow is already tight.

That said, Pietrzak is confident in KKR’s portfolio, which is positioned toward non-cyclical industries globally and larger, well-managed businesses with operational levers. In consumer exposures, the firm focuses on prime borrowers, steering clear of the riskier subprime segments. He reiterates: “Again, I think it's more of an equity thing than a credit thing.”

Standing firm on quality

With more capital flowing into the space, competition in direct lending has intensified. However, “There’s a lot of capital, yes, but there’s also a lot of demand. More private equity sponsors and issuers are seeking private deals. More companies are staying private for longer…however, we've never had a view that the syndicated loan or bond market was going to go away, both markets were always going to co-exist together."

Even so, the right structure and documentation remain non-negotiable for the team at KKR. “That’s probably one of the biggest reasons we walk away from a deal,” Pietrzak states.

“As a lender, I want to get paid as much as possible for any individual loan (as would anyone in the market), but that lasts 25 or 50 basis points, ultimately it needs to be a high-quality credit.”

White space in asset-based finance

“When we talk about our asset-based finance business (ABF), we're talking about financing the real world economy,” 

So that’s everything from a car loan or a credit card or consumer loans or mortgages, equipment leasing, to aviation, to leasing.

One area of growth: partnerships with large public companies like PayPal (NASDAQ: PYPL), where KKR has acquired certain consumer loan portfolios. 

“The equity market is rewarding capital-light models, so we are seeing more opportunities to invest in assets that were historically unavailable to private investors." 

He likens it to being like a storage business - “we want exposure to the assets and if we can be that long-term holder, I think there's great partnerships there.”

He also sees growing interest in the upper part of the capital structure - investment-grade ABF, where earning 7%+ with very low default risk has been incredibly attractive for insurance companies and pension funds.

M&A…a bust?

On the flipside, at the start of 2025, many expected a boom in M&A activity. But geopolitical tensions and economic uncertainty have slowed the pace.

“The direct lending market thrives on active M&A,” Pietrzak says. But with everything going on geopolitically and the uncertainty around tariff conversations, it’s going to be slow going. 

“It’s not the gangbuster year people hoped for...yet”

However, with private equity sponsors facing pressure to return capital and plenty of dry powder available to finance deals, he expects activity to pick up - eventually.

Addressing transparency concerns

A final topic that continues to surface: transparency and valuation in private credit. Pietrzak is clear on this.

“Our valuation process is just as robust as what you’d see in the banking world,” he said. 

He goes on to say that employing third-party valuation providers is an industry-wide focus, so there’s real independence and oversight as these valuation providers are doing it for multiple parties across the industry.

And yes, private credit marks don’t move as fast as public markets during volatility. “But spreads haven’t moved dramatically, so why would the marks?”

His advice? “If investors do have concerns about it, they should call their partners and get into the weeds to understand the valuation process and how these assets are being marked.”

Stay informed with more insights from KKR here.