The global drivers of private credit

Private credit has grown rapidly over the past two decades and expanded into more and more industries. Cross-country evidence shows that the footprint of private credit is larger in countries with lower policy rates, more stringent banking regulation and a less efficient banking sector. Examining the cost of capital of business development companies (BDCs), an important private credit investment vehicle, reveals that banks' initial funding advantage has substantially narrowed since 2010. The convergence in the cost of capital reflects a fall in BDCs' cost of equity relative to that of banks and a rise in BDCs' leverage. Private credit's growth has therefore been bolstered, at least in part, by a relative improvement in its funding cost.