Capital solutions take centre stage in maturing private credit

Over the past several years, private credit has evolved from a niche segment into a major force in alternative asset management, commanding more than $3tn in assets under management, but much of this is dominated by vanilla direct lending strategies. As this segment matures, investors begin looking for higher returns, which has taken them to capital solutions strategies in recent years. 

Goldman Sachs, for example, announced in January 2025 the creation of its Capital Solutions Group within its global banking & markets business, combining its financing group, financial sponsors coverage, and elements of its alternative investments business. The firm said the new team would coordinate origination, structuring, and investing to better serve clients seeking private credit, private equity, and hybrid capital solutions, reflecting what it described as a “structural trend” in global financing markets.

Similarly, DWS Group launched a capital solutions unit in April 2024, emphasizing the provision of “sophisticated and flexible solutions in the special situations lending space,” aiming to address an underserved part of the private credit market between senior debt and equity. 

It’s not just established businesses that are turning to capital solutions as a strategy, but there are emerging managers entering the space as well. Jacob Ucar, who left Park Square Capital last year set up Kinnerton Hill Capital in London to run a flexible capital solutions strategy targeting businesses in Western Europe. 

And it’s not just GPs that are taking advantage of the increased interest. Law firm Akin Gump launched a capital solutions team at the end of last year to help investors seeking opportunities across the capital structure. 

Arcmont is one group that got into the space five years ago, launching Arcmont Capital Solutions and raising €800m for its debut strategy. 

“We saw so many deals from our sponsor community that were not fitting the vanilla direct lending mandate. We wanted a strategy equipped to do more complex deals, but using the same sourcing team,” said David Brooks, co-head of capital solutions at the firm. 

Alice Cavalier, the other co-head, explained that “a really big chunk of the industry is left a bit orphaned because the direct lenders don’t want to touch it and the banks are not very proactive in any case, in most European countries”. 

But what is capital solutions and why is it attractive now? 

One issue is that capital solutions can mean different things for different firms. For Arcmont, it’s financing that sits between traditional direct lending and distressed, or special situations. Barings defines it as “flexible, often credit-focused strategies that provide investors access to unique or bespoke deal flow and sponsors and borrowers access to customized financing packages”. 

For Goldman Sachs it is the combination of the firm’s corporate finance, leverage finance and equity capital markets teams.

Whatever the definition, capital solutions teams are in demand and are nowadays found within asset manager and banks, and some believe it can offer gross returns of around 15-16%, 

One of the reasons for their current popularity seems to be that as private credit has matured, direct lending funds have become more risk averse and have concentrated on businesses in what they view as resilient sectors, such as business services, healthcare, software and education. That’s left companies that are in more cyclical or less mainstream sectors underserved, even if they have strong fundamentals. Meanwhile, due to regulatory or balance-sheet constraints, banks are not providing financing to such businesses either, leaving a larger number of companies reliant on capital solutions providers who are equipped to handle more complexity. 

In addition, market dislocations, whether from interest-rate shifts, refinancing waves, supply chain disruptions, or macroeconomic volatility, have created opportunities for creative capital structures. 

But creative capital structures can come with structural risks, particularly in arrangements such as hold-co payment-in-kind notes or subordinated tranches that may be difficult to unwind under stress. Competition and margin compression have also been highlighted as ongoing concerns as more capital flows into this space, and liquidity can be limited in nontraditional structures with fewer natural buyers. Regulatory scrutiny may increase as the market for hybrid and flexible credit solutions grows, and macroeconomic headwinds such as high interest rates or slowing growth can magnify the risk for borrowers relying on these structures.

While there can be additional risks to stepping outside of the more mature parts of the market, there are ways to mitigate these, insiders say. 

“We try to mitigate the complexity with higher pricing, an interesting risk-return balance and by backing only the leaders in sectors that have high margins, but also very importantly at low leverage,” Arcmont’s Brooks explained. 

The other driver of the current popularity of capital solutions is the increased sophistication of sponsors, Arcmont’s Cavalier said, adding that they have become more interested in such products because it’s a step further than unitranche. 

“It’s the same with HoldCo PIKs,” she said. “Two years ago I think many sponsors wouldn’t have touched HoldCo PIKs but now it’s become a more vanilla product. For a long time it was frowned upon whereas now lots of new LBOs that are highly performing are putting in HoldCo PIKs as a way to get more leverage,” she said. 

Looking ahead, it doesn’t look like the appetite for capital solutions will die down. In fact, many expect firms to continue expanding their mandates beyond senior direct lending to offer more creative and hybrid solutions to sponsors and other borrowers. Therefore competition for skilled professionals in this space is set to increase.