Fuel the future, not the cycle

Not all credit leads to the creation of value by the borrower. While lending is often seen as an engine of economic activity, the purpose behind a loan matters more than ever. A loan facility used to fund a strategic acquisition, a new product launch, or geographic expansion creates productive capacity and future earnings which in turn create incremental cash flows designed to comfortably cover interest payments. A facility used to refinance an old loan or extend a maturity serves a different end: continuity, not growth. Investors allocating to private credit products are well served understanding exactly what their capital is being used for.

When Credit Fuels Cycles Instead of Growth

Credit (senior and otherwise) represent core capital for most companies and can be useful in lowering the overall cost of capital for operational and investment purposes. However, credit, when untethered from its primary purpose of expanding productive capacity, often becomes cyclical. It sustains valuations, liquidity, or incentives—but not necessarily enterprise value. At scale, this non-purpose lending can lead to debt saturation: where total liabilities rise faster than income, productivity, or profits.

Ray Dalio and others have long warned about the risks of such debt cycles, in which credit creation fuels more borrowing rather than more output. The warning signs are visible across markets. In the U.S., over 65% of sub-investment grade issuance in recent years has gone to refinancing alone. In private markets, sponsor-led PE secondaries have surged, with debt layered on top of second-or third-time ownership of assets, often with limited fresh capital for business improvement.

Growth-Focused Lending Creates Shared Value

By contrast, credit deployed to fund primary transactions (such as M&A financing, product development, or geographic expansion) are intended to create future earnings that can service and repay borrowings. This is what productive credit looks like: enabling businesses to grow into their capital structures, not merely survive them.

These forms of credit don’t just benefit the borrower. They stimulate supplier ecosystems, support job creation, and increase tax revenues. A lender financing a bolt-on acquisition is facilitating strategic expansion. A facility funding a company’s entry into a new market or sector is underwriting growth. These loans are not just financially sound—they are economically valuable.

In an ESG-conscious world, the alignment is even clearer. Lending that supports innovation, sustainability, or scale-up activity delivers not just private returns, but public benefit. It avoids the extractive logic of non-purpose lending and redirects capital toward outcomes that matter.

Beyond Recycling Capital

Recycling capital may deliver short-term yield to its funders, but it rarely delivers long-term impact. The success of credit lies in being selective - not just in pricing or risk metrics, but in purpose. Whilst loan refinancings can be a valuable tool to optimise a capital structure where a borrower can command lower rates due to an improvement in their financial profile, it’s a different story if a borrower is stagnant and kicking the can down the road.

This isn’t about idealism. Lending with purpose produces better fundamentals. Loans backed by M&A, product or geographic expansion tend to benefit from stronger growth profiles, higher returns on capital, and greater resilience through cycles. They are easier to monitor, easier to support, and ultimately, easier to exit.

Private credit markets often describe themselves as engines of the real economy. That promise depends on credit being more than passive capital. Lending with purpose, where the use of funds aligns with future earnings should be the standard, not the exception.