Insights
Uncovering Growth Credit: An Emerging Opportunity in Private Credit
|
|
Insight Article
|
• |
November 19, 2025
|
Uncovering Growth Credit: An Emerging Opportunity in Private Credit
|
November 19, 2025
|
Uncovering Growth Credit: An Emerging Opportunity in Private Credit
Uncovering Growth Credit: An Emerging Opportunity in Private Credit |
|
Key Takeaways
- Growth credit is a distinct and fast-evolving segment of private credit, markedly smaller than direct lending but offering differentiated opportunities.
- Growth credit targets smaller, faster-growing companies—often venture-backed—where capital scarcity increases lender negotiating power and enhances return potential.
- Asset-level returns in growth credit often are enhanced by additional upside from warrants that may benefit from favorable tax treatment.
- Structural features such as prime-rate indexing with rate floors can insulate growth credit returns from declining interest rates, in contrast to most SOFR-indexed loan products.
Private credit has enjoyed widespread adoption by institutional and individual investors in recent years, with direct lending franchises leading the charge. Yet, within the broader private credit space lies an underexplored but increasingly relevant strategy: growth credit.
Growth credit represents debt financing provided to high-growth private companies, often backed by minority venture capital or growth equity sponsors. Growth credit is sometimes viewed as an extension of direct lending. However, it is distinct not only in scale but also in structure, borrower profile and return potential. Whereas direct lending is dominated by large, well-capitalized platforms focused on private equity-owned companies, growth credit deals tend to be smaller, with positions in the publicly traded venture debt BDCs averaging around $14 million, and often include equity kickers in the form of warrants.
This paper breaks down the strategic rationale for growth credit, its market dynamics, and its role within a well-diversified portfolio that includes a robust allocation to private credit. It also highlights key differentiators to direct lending given the latter’s status as a well-understood and bellwether strategy within private credit.
|
Managing Director
Morgan Stanley Expansion Capital
|
Definitions:
(SOFR) Secured Overnight Financing Rate is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.
(BDC) Business Development Company is a type of investment vehicle that provides capital (primarily debt and equity financing) to small- and mid-sized U.S. companies that often cannot access traditional bank loans or public capital markets.
IMPORTANT INFORMATION:
The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.
This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.
This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.
Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.
For the complete content and important disclosures, refer to the full article.