- within Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-Structuring and Employment and HR topic(s)
- in United States
Private credit, also referred to as non-bank lending, and most visibly “direct lending”, to private-equity-backed companies, has grown from roughly USD 150 billion in assets under management two decades ago to nearly USD 2 trillion today. This explosive expansion is now drawing scrutiny from Wall Street, regulators, and ordinary investors alike.
How we got here
The asset class flourished after the 2008 financial crisis, when tightened bank regulation left a financing void for small and mid-sized businesses. Direct lenders stepped in with flexible, customised loans at attractive yields. Ultra-low interest rates through 2021 amplified returns, and capital poured in from institutions, insurance companies, and eventually retail investors through business development companies (BDCs).
What's straining the market
Several pressures are converging. Higher interest rates since 2022 have stressed borrowers carrying heavy debt loads, particularly software companies acquired at steep valuations during the boom years. When powerful new AI coding tools emerged in late 2025, investors began questioning whether AI disruption might impair the cash flows underpinning those loans. Redemption requests at non-traded BDCs accelerated, and several funds moved to gate withdrawals. Two high-profile bankruptcies, First Brands and Tricolor, raised concerns about fraud and lax underwriting. As Howard Marks of Oaktree put it: “Too much capital chased too few opportunities, standards slipped, and the tide is going out.”
How serious is the risk?
Opinions diverge. Jamie Dimon called private credit unlikely to present systemic risk, and the International Monetary Fund (IMF) characterised current turmoil as potentially “contained”. Goldman Sachs notes that fundamentals through year-end 2025 remain resilient, with realised losses of 64 basis points, which is below the long-term average of 100 basis points. The bears counter that private loans are marked by fund managers rather than markets, making true valuations opaque.
The road ahead
Banks smell opportunity, with their share of large buyout financings recovering from 39% in 2023 to just over 50% in 2025, aided by easing capital rules. Private credit retains structural advantages, such as speed, certainty, and flexibility, but the era of easy capital and loose underwriting appears over. The long-term rationale for the asset class remains intact; it will likely just need to work through a credit cycle first.
In summary, private credit remains a durable and important part of the financing landscape, but it is entering a more challenging phase. After years of rapid growth and easy capital, the market is now facing a tougher credit environment. The long-term case for private credit remains intact, but the next cycle will likely reward stronger managers, better underwriting, and greater transparency.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]