Is Private Credit Eating Private Equity’s Lunch? The Fight for Dry Powder

In private markets today, capital is abundant—but not uncommitted. With macro conditions evolving and allocators under pressure, a quiet competition is heating up: private equity (PE) and private credit (PC) are both vying for the same resource—dry powder.

While these asset classes were once seen as complementary, they now increasingly compete for attention, especially as limited partners (LPs) reassess allocations amid higher rates, liquidity concerns, and shifting return expectations. In this new cycle, every capital commitment counts.

What Is Dry Powder—And Why It Matters

Dry powder refers to committed capital that has not yet been deployed. It’s the ammunition LPs entrust to fund managers, waiting to be invested in the right deals. As of 2024, global dry powder in private equity stands at over $1.1 trillion, while private credit is not far behind, with estimates pushing toward $500 billion.

Source: Preqin

But this isn’t just about size. It’s about speed, certainty, and return profile—and which strategy can deliver more value to investors in today’s environment.

The Strategic Split: Growth vs. Income

Private Equity bets on long-term capital appreciation through equity ownership and operational value creation. It’s about buying control, improving companies, and exiting profitably—often years later.

Private Credit, by contrast, focuses on yield. Managers originate loans to private companies—often in place of traditional bank financing—and deliver steady income through interest payments. The trade-off? More predictable returns, but less upside.

In a low-rate world, equity reigned. But with higher rates and tighter liquidity, private credit’s appeal is growing fast.

LP Priorities Are Shifting

What are LPs signaling with their capital?

Yield and downside protection have become top priorities, especially for institutions managing fixed income-like mandates.

Liquidity and faster deployment are key. Private credit offers shorter timeframes to put capital to work—an increasingly important feature.

PE fundraising fatigue is real. The denominator effect may have faded, but allocators remain cautious amid prolonged holding periods and valuation opacity.

This doesn’t mean private equity is out of favor—it means LPs are getting more selective. Many are concentrating allocations with a smaller number of trusted managers or leaning toward hybrid strategies.

It’s Not a Zero-Sum Game—But It Feels Like One

The competition isn’t always direct, but the overlap is growing. LPs with constrained budgets are making hard choices between commitments to PE or PC.

Yet the lines are blurring:

PE firms are launching private credit arms to keep LP capital in-house.

Private credit managers are exploring equity co-investments or equity kickers to boost upside.

Hybrid funds are emerging as allocators look to balance risk and return within single vehicles.

Both strategies are adapting. But the message is clear: to win dry powder, firms need to be more flexible, transparent, and attuned to evolving investor needs.

What the Fundraising Data Tells Us

In 2024, global private equity (PE) fundraising declined to $680 billion, marking a 30% decrease from the previous year and the lowest level since 2015. The number of funds closed also saw a significant drop, with 1,783 funds closing—a 40% year-over-year decrease.

The fundraising environment has become increasingly challenging, with fund closings taking longer. The average time to close a fund extended to 19 months in 2024, up from 15 months in 2023, as GPs kept their funds open longer, hoping to wait out LPs facing liquidity issues.

Private credit, while not immune to headwinds, showed more resilience. Fundraising in 2024 declined to $196 billion, down from $250 billion in 2023. However, direct lending was a bright spot, raising $119.4 billion—a 41% year-over-year increase—signaling strong appetite for floating-rate, income-generating strategies.

Fundraising trends reflect a reprioritization among LPs. Faced with tighter liquidity and shifting market conditions, allocators are slowing private equity commitments and leaning into private credit strategies that offer faster deployment, steady income, and downside protection. Capital scarcity is forcing GPs across asset classes to adapt – whether by launching new products, offering more flexible terms, or finding new distribution channels.

Conclusion: A Portfolio Perspective

The competition between private equity and private credit reflects broader trends: rising investor scrutiny, a tougher fundraising environment, and the need for more flexible capital solutions.

Rather than viewing the two as adversaries, savvy LPs are building integrated private markets portfolios that leverage the strengths of each—long-term upside from equity, steady cash flows from credit. To navigate this shifting landscape, allocators are weighing a clear set of trade-offs, from liquidity and deployment speed to return profile and mandate fit.

The table below summarizes how private equity and private credit compare across the dimensions that matter most to investors today:

In this environment, it’s not just about choosing between growth and income—it’s about assembling the right mix. The firms that can offer both—and do so with clarity, speed, and discipline—will be best positioned to capture the next wave of dry powder.