The abrupt failures last fall of several American companies financed by private credit have shone a spotlight on this rapidly expanding, yet largely unseen, corner of Wall Street lending.
Private credit, also known as direct lending, refers to loans made by non-bank financial institutions. While it’s been around for decades, it gained significant traction after post-2008 financial crisis regulations discouraged traditional banks from lending to riskier borrowers.
That growth—from $3.4 trillion in 2025 to a projected $4.9 trillion by 2029—and the September bankruptcies of auto-industry firms Tricolor and First Brands have prompted prominent figures on Wall Street to voice concerns about this asset class.
JPMorgan Chase CEO Jamie Dimon warned in October that credit problems rarely occur in isolation: “When you see one cockroach, there are probably more.” A month later, billionaire bond investor Jeffrey Gundlach accused private lenders of making “garbage loans” and predicted that the next financial crisis would originate in the private credit market.
While anxieties surrounding private credit have eased in recent weeks due to the absence of further high-profile bankruptcies or disclosed bank losses, they haven’t entirely dissipated.
Companies closely tied to the asset class, such as Blue Owl Capital, along with alternative asset giants Blackstone and KKR, continue to trade below their recent peaks.
The Rise of Private Credit
Private credit is “lightly regulated, less transparent, opaque, and it’s growing really fast, which doesn’t necessarily mean there’s a problem in the financial system, but it is a necessary condition for one,” Moody’s Analytics chief economist Mark Zandi said in an interview.
Proponents of private credit, such as Apollo co-founder Marc Rowan, argue that it has fueled American economic growth by filling the void left by banks, provided investors with solid returns, and made the broader financial system more resilient.
Pension funds and insurance companies—investors with long-term obligations—are seen as more stable sources of capital for multiyear corporate loans than banks, which rely on short-term deposits, according to private credit operators.
However, concerns about private credit—often voiced by competitors in the public debt market—are understandable given its characteristics.
Ultimately, the asset managers providing these loans are responsible for valuing them, which creates a potential incentive to delay recognizing borrower problems.
“The double-edged sword of private credit” is that lenders have “really strong incentives to monitor for problems,” said Duke Law professor Elisabeth de Fontenay.
“But by the same token … they do in fact have incentives to try to disguise risk, if they think or hope that there might be some way out of it down the road,” she said.
De Fontenay, who has studied the impact of private equity and debt on corporate America, expressed her biggest concern is the difficulty in determining if private lenders are accurately valuing their loans.
“This is a market that is extraordinarily large and that is reaching more and more businesses, and yet it’s not a public market,” she said. “We’re not entirely sure if the valuations are correct.”
In the November collapse of home improvement firm Renovo, for example, BlackRock and other private lenders initially valued its debt at 100 cents on the dollar before marking it down to zero.
Defaults on private loans are expected to increase this year, particularly among less creditworthy borrowers, according to a Kroll Bond Rating Agency report.
And private credit borrowers are increasingly relying on payment-in-kind options to avoid defaulting on loans, according to Bloomberg, which cited valuation firm Lincoln International and its own data analysis.
Ironically, banks themselves are contributing to the private credit boom.
Finance Frenemies
Following disclosures of losses tied to auto industry bankruptcies by investment bank Jefferies, JPMorgan and Fifth Third, investors learned the extent of bank involvement. Bank loans to non-depository financial institutions, or NDFIs, reached $1.14 trillion last year, according to the Federal Reserve Bank of St. Louis.
On January 13, JPMorgan disclosed for the first time its lending to nonbank financial firms as part of its fourth-quarter earnings presentation. This category tripled to approximately $160 billion in loans in 2025, up from about $50 billion in 2018.
Banks are “back in the game” because deregulation under the Trump administration is freeing up capital for expanded lending, Moody’s Zandi said. Combined with new entrants in private credit, this could lead to lower loan underwriting standards, he added.
“You’re seeing a lot of competition now for the same type of lending,” Zandi said. “If history is any guide, that’s a concern … because it probably argues for a weakening in underwriting and ultimately bigger credit problems down the road.”
Neither Zandi nor de Fontenay predicted an immediate collapse in the sector, but as private credit continues to grow, its importance to the U.S. financial system will also increase.
When banks face turbulence due to their loans, a well-established regulatory framework exists. However, resolving future problems in the private credit realm may prove more challenging, according to de Fontenay.
“It raises broader questions from the perspective of the safety and soundness of the overall system,” de Fontenay said. “Are we going to know enough to know when there are signs of problems before they actually occur?”
