Private Credit Is Targeting Fintech Loans - Here's Why It Matters

Forbes

5 days ago

From VC Freeze to Private-Credit Thaw
In 2024, fintech founders were lamenting a venture-capital drought so severe it made the 2008 haze look balmy. Fast-forward 18 months, and the problem is almost the opposite: giant private-credit funds are lining up with term sheets so large they would have broken cap tables a year ago. A joint study from BCG and QED Investors puts the 'white-space' opportunity at US$280 billion over the next five years: capital earmarked for buying or originating fintech loans.
Sizing the War Chest
Private credit has grown nearly ten-fold since 2010 to roughly US$1.5 trillion of assets under management (AUM) in 2024, according to a Paul Weiss market-outlook slide deck. Consultants expect it to hit US$3.5 trillion by 2028, a compound annual growth rate north of 19 percent.
Even fundraising momentum looks resilient. Data-provider With Intelligence logged US $209 billion of final closes in 2024, 5 percent above 2023, with mega-funds swallowing two-thirds of the haul. All that dry powder needs product, and fintech balance sheets: granular, digital, floating-rate, fit the bill perfectly for yield-hungry managers.
Why Banks Are Happy to Step Aside
Basel III 'Endgame' rules, now inching toward finalization in the United States, could raise large-bank risk-weighted assets by 20 percent on average, Federal Reserve Governor Michelle Bowman warned last year, effectively penalizing on-balance-sheet consumer and SME lending.
Rather than ditch those customers, big banks are partnering with private-credit titans to originate and distribute loans off balance sheet:
The model is simple: banks keep the origination and servicing fees, funds take the credit risk, and regulators get comfort that risky assets live outside the deposit-backed system.
Term-Sheet Economics: Spreads Are Compressing
Private-credit exuberance has pushed unitranche pricing down. In May 2024, a Bloomberg scoop on Squarespace's direct-lending package showed pricing sliding from SOFR + 500 bps to about +475 bps as lenders competed for allocations, roughly 75 basis points tighter than January deals.
Even so, funds can lever those assets 1.5-2x and still net solid returns, which makes it an attractive asset class.
Fine Print for Founders
Cheap it is not. Typical clauses include:
Still, many CEOs prefer a 14 percent cost of capital that preserves ownership over a 35 percent down round in an unforgiving venture market.
Does the Credit Actually Perform?
SoFi's own numbers suggest consumer credit can: Q1 2025 filings show 90-day personal-loan delinquencies falling from 0.55% to 0.46% year-on-year.
Yet macro clouds gather. Household credit-card delinquency hit 3.1% in Q1, Fed data shows, and mortgage arrears are edging up. Should consumer stress spike, those shiny forward-flow lines could test their break clauses quickly.
Leverage-on-Leverage: The Regulator's Nightmare
A May 2024 Reuters dispatch from the Milken Institute Global Conference captured Wall Street luminaries warning about 'leverage on leverage' inside the US $1.7 trillion private-credit complex.
The Federal Reserve's FEDS note on Bank Lending to Private Credit echoed the concern, highlighting opaque funding chains and undrawn bank credit lines that could be yanked in a downturn.
Meanwhile, the SEC and CFTC just postponed tougher Form PF reporting for private funds to October 2025, after fierce industry push-back—pushing transparency risk further down the road.
The Venture Capital Power-Law Reset
Historically, VC portfolios rely on one outsized IPO to offset dozens of write-offs. Private-credit recycling threatens that maths. Suppose a fintech can originate, sell, and service loans profitably without hoarding them. In that case, it can turn cash-flow positive earlier—prompting PE buyers or strategic acquirers to pay respectable (if not sky-high) multiples long before IPO scale.
Expect more US$400–600 million exits to asset managers and insurers, fewer zeros, fewer tens, more threes. LPs may accept that trade if it means quicker distributions.
Geography: Why Asia and LatAm Are in Play
Private-credit dry powder is overwhelmingly dollar-denominated, but funds are aggressively scouring growth markets where banking pull-back is most acute:
For cross-border lenders, dollar funding married to local-currency wallets is a tantalizing carry trade, provided FX hedges hold.
What Could Go Wrong (and How to Hedge It)
If U.S. unemployment climbs beyond 6 percent, consumer delinquencies could spike quickly. Lenders are protecting themselves with dynamic advance-rate grids that ratchet down funding as loss rates rise and by inserting turbo-amortisation clauses that force faster pay-downs once portfolios slip.
Forward-flow facilities still rely on committed bank lines and repo markets. Should haircuts widen or banks reduce commitments, like they did during regional-bank scare in March 2023, funds could find themselves scrambling for cash. The more innovative structures include evergreen SPVs with multiple lenders and 'material adverse change' carve-outs that limit a bank's ability to walk away overnight.
The SEC's postponed Form PF overhaul now lands in October 2025, and the Fed continues to signal tougher capital treatment for undrawn credit lines. A sudden leap in disclosure or capital costs could stall dry-powder deployment. Diversifying lender pools and adding trigger-based step-ups that compensate funds for extra compliance work can keep the taps open.
Private-credit deals in India, Southeast Asia, and Latin America pair dollar funding with local-currency wallets. If the Fed tightens while local currencies slide, unhedged positions will hurt. Basis swaps remain the first line of defence, but many agreements now incorporate automatic FX-pass-through clauses that allow originators to re-price loans if exchange rates move beyond a preset band.
In short, cheap money can vanish fast. The facilities that endure are the ones that price in volatility from day one—and give both fintechs and their lenders room to breathe when the cycle turns.
The Road Ahead—Signals to Watch
Bottom Line
Private credit was born in the wreckage of the Global Financial Crisis. Fifteen years on, it has become a parallel banking system which is armed with US $280 billion of dry powder laser-focused on fintech. Deploy that capital responsibly, and the industry could unlock cheaper credit for consumers and SMBs while giving investors a stable, floating-rate asset class. Mis-price it, and we will have merely swapped 'move fast and break things' equity for 'lend fast and break later' debt.
Either way, Sand Hill won't finance the next chapter of fintech roadshows; rather it will be syndicated in the marble-lined offices of Park Avenue, and the maturity transformation will be very, very private indeed.