Black box 🕸️

In autumn 2008, credit seized up. Lehman Brothers fell in September. Other banks were rescued, merged or taken into public ownership. What had started in the mortgage market had become a full banking crisis.

Lending between banks became strained. Governments and central banks stepped in, guaranteeing deposits, injecting capital, cutting interest rates, and buying assets. But the rescue came with conditions. Banks were now expected to hold more capital, take less risk and be more cautious about lending. Companies still needed money, of course. And as banks became more constrained, space opened up for other lenders to grow.

Private credit was not born in 2008. But 2008 helped create the conditions for its modern boom.

Side door

Private credit is, essentially, lending outside the traditional banking system, although banks are not entirely absent. 

Instead of borrowing from a bank, or issuing bonds in public markets, a firm borrows directly from a private fund. That fund is usually run by an asset manager and backed by investors such as pension funds, insurers, sovereign wealth funds, endowments, wealthy individuals, or other institutions. 

The loans are usually not traded. They are negotiated, held, and valued privately. Borrowers enjoy speed and flexibility. Lenders get higher yields than they might find in public bond markets. Investors receive an income stream that looks less volatile than publicly traded debt. Everybody’s happy.

Quiet giant

The Financial Stability Board, the global body that monitors risks in the financial system, estimated private credit assets to be around $1.5tn to $2tn at the end of 2024. The Alternative Credit Council pegged the broader market at $3.5tn in assets under management by the end of 2024.

Private credit has grown quickly. It now competes with banks, syndicated loans, and high-yield bonds in parts of the corporate lending market. The IMF says it now rivals other major credit markets in size. Where much lending might once have sat on bank balance sheets, or in more transparent public markets, it now resides in private funds. This, the IMF says, is what creates potential vulnerabilities.

No drama

A private credit deal can involve fewer moving parts and less public disclosure than a bond or syndicated loan. That can be useful in volatile markets or when a company needs a customised package. The lender can also stay close to the company and renegotiate if things go wrong.

For investors, the appeal is yield. Private credit often promises a premium over comparable public debt. That premium is designed to compensate investors for taking on illiquidity, complexity and credit risk. In the ZIRP era, this was catnip for pension funds, insurers and other long-term investors looking for income.

One reason private credit has been such a hit is that its returns can look nice and smooth. Public bonds and listed shares are priced every day, and move with interest rates, credit fears, liquidity, and investor mood. Private loans do not usually trade daily. Their value is estimated by fund managers or third-party valuation firms using models, comparable market data, and good old-fashioned assumptions.

Patient zero

Private credit often sells itself on being patient capital. A fund does not have to dump a loan just because markets are having a bad week. It can avoid the forced selling that turns a temporary problem into a permanent loss.

That can make private credit look less volatile than public credit. But lower reported volatility sometimes just means the price is not being tested in the open market every day. If a loan is worth less than it was last quarter, that loss may appear gradually. In a public market, the adjustment can be brutal and immediate. In a private market, it can arrive in instalments. Without regular public prices, investors can be flying blind.

Risky business

Concentration is a problem. Private credit is dominated by large asset managers and is heavily concentrated in a few jurisdictions, especially the US and Europe. In the event of a meltdown, losses may not be evenly spread.

There is also an issue with the lack of data. Public bond markets leave breadcrumbs: prices, filings, and ratings. With private credit, loan terms, borrower performance, valuations, and leverage can be harder to sift out, making it harder to know where stress is building.

On the other hand, private credit funds generally do not rely on short-term retail deposits. Many have locked-up capital. That reduces the chance of a classic bank run. The bigger concern is a slower chain reaction: defaults rise, valuations fall, investors lose confidence, funds restrict withdrawals, banks cut financing, and lending to companies tightens when the economy is already weak.

There’s also concern around private credit’s role in financing the AI infrastructure boom. AI-related private credit deals have risen sharply, with AI-linked activity making up more than a third of private credit deal activity in 2025, compared with 17% over the previous five years. If too much capacity is built, or power costs rise, or AI revenues disappoint, or valuations fall, some loans may start to look less sound.

Cockroaches

The FSB’s 2026 report said private credit can support economic activity by providing finance to underserved sectors and offering more tailored credit solutions. But it also highlighted vulnerabilities around links with banks, lenders’ credit exposures and data gaps that make the market hard to monitor. Importantly, it noted that private credit remains untested through a prolonged downturn.

Jamie Dimon gave the concern a less technical label in 2025. After a run of credit problems linked to companies including Tricolor and First Brands, the JP Morgan boss warned “when you see one cockroach, there are probably more”. Not every private credit loan is rotten. But in a large, opaque market, one visible failure can make investors wonder how many similar problems are hidden from view. 

Cracked

Today’s higher-for-longer interest rates have made debt more expensive. Some companies that borrowed when money was cheaper are now under the kosh.

Apollo has faced pressure in one of its private, non-traded credit vehicles. Investors in Apollo Debt Solutions requested redemptions equal to roughly 11% of shares in the first quarter of 2026, more than double the fund’s 5% quarterly limit. 

Apollo therefore paid withdrawals on a pro-rated basis rather than meeting every request in full. That is exactly what redemption caps are designed to do. But it is a live example of the liquidity mismatch at the heart of the retail private credit model.

KKR has also faced pressure in a large private credit fund held by individual investors. FS KKR Capital reportedly took a $560mn loss in the first quarter of 2026, equal to roughly 10% of net asset value, as loan defaults rose from 5.5% at the end of 2025 to 8.1%.

Private credit managers would argue isolated losses are normal in lending, especially after a period of higher rates. They would also say that private lenders can manage difficult borrowers more effectively than dispersed bondholders. They’re probably right.

Retailisation

Private credit began mainly as an institutional asset class. But asset managers, such as BlackRock, the world’s largest, increasingly want to sell private market products to wealthy individuals and, in some cases, a wider retail audience. 

Investable wealth is huge, expected to exceed $481tn by 2030. But while institutions may understand private credit is illiquid and complex, retail investors may be more focused on the headline yield. A product that pays regular income can feel safe, especially if its price does not move much. But the underlying assets may still be risky. 

If a fund owns private loans that can’t be sold quickly, but investors ask for their money back regularly, there is a mismatch. Funds manage this with redemption limits or gates. That can also surprise investors who thought they owned something close to cash. A pension fund can take a ten-year view. A retail investor may want their money back next month.

Boom and doom

Imagine a few years from now. Rates have stayed higher than many expected. Growth has slowed. A group of private equity-owned companies that borrowed heavily from private credit funds now needs to refinance. The loans were manageable when earnings were rising and money was cheaper. But now, profits are flat, interest costs are higher, and lenders are cautious.

A few borrowers ask to amend terms. Some payments are delayed. Funds mark down loans. Just credit doing what credit does. Then, semi-liquid funds see more withdrawal requests. Some funds limit redemptions. Listed vehicles trade below the stated value of their assets. Banks that had provided financing to private credit funds reduce exposure. Elsewhere, loans that looked safe in the boom times start to disappoint. Collateral that looked solid becomes harder to sell.

Banks step back from financing lenders. Private credit funds make fewer new loans. Borrowers that need refinancing find they’re no longer pushing against an open door. Companies cut costs, sell assets, or default. Losses rise, valuations catch down and the lending slowdown feeds into the real economy.

This matters because credit is payroll, stock, expansion plans, lease payments, supplier invoices and investment in new equipment. When lending tightens, projects are delayed. Hiring freezes. Firms lay people off. Suppliers wait longer to be paid. Banks and funds become more cautious again. Not quite the apocalypse. But certainly a cause for concern.

Illiquid swords

Private credit diversifies the lending market and reduces reliance on banks. It can also give long-term investors access to income streams they might not find elsewhere.

But its first real test may still be ahead. A long period of cheap money helped private credit expand. It’s now woven into modern finance. Now, higher rates, slower growth, AI uncertainty and rising defaults are starting to test the system.

The post-2008 diversification of risk may have made the system less bank-dependent. It may also have made it harder to see where the next problem is forming. A substantial part of modern lending now sits in a black box. And black boxes are usually only opened after something has gone wrong.