Last fall, a wave of bankruptcies among U.S. companies funded by private credit brought this rapidly growing yet opaque sector of Wall Street lending into the spotlight.

Private credit, also known as direct lending, refers to a collection of lending services provided by non-bank institutions. This business model has existed for decades, but after the 2008 financial crisis, regulatory policies limiting banks' ability to lend to high-risk borrowers propelled private credit into a period of rapid growth and widespread adoption.

The significant growth in private credit – from $3.4 trillion in 2025 to an estimated $4.9 trillion in 2029 – coupled with the bankruptcies of automotive companies Tricolor and First Brands in September, prompted several prominent Wall Street figures to issue warnings about the risks associated with this asset class.

JPMorgan Chase CEO Jamie Dimon warned in October that problems in the credit sector 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 issuing "junk loans" and predicted that the next financial crisis would originate in the private credit sector.

Although there have been no further high-profile corporate bankruptcies in recent weeks, and banks have not disclosed related losses, market concerns about private credit have eased somewhat, but the worries have not completely disappeared.

Companies most closely associated with the private credit sector, such as Blue Owl Capital, and alternative asset giants Blackstone and KKR, still have share prices significantly below their recent highs. 

The Rise and Controversy of Private Credit

Mark Zandi, chief economist at Moody's Analytics, stated in an interview: "Private credit is less regulated, less transparent, and growing very rapidly. This doesn't necessarily mean there's a problem in the financial system, but it is a necessary condition for problems to arise."

Proponents of private credit, such as Apollo Global Management co-founder Marc Rowan, argue that the rise of private credit fills the market gap left by banks, driving U.S. economic growth, generating substantial returns for investors, and strengthening the overall resilience of the financial system.

Private credit operators have told the media that large investors with long-term liabilities (including pension funds and insurance companies) are considered a superior source of multi-year corporate loan funding compared to banks that rely on short-term (and potentially unstable) deposit financing.

However, given the inherent characteristics of private credit, market concerns—often voiced by competitors in the public debt market—are understandable. After all, the asset management companies that issue private credit are the ones assessing the value of these loans, and they may have an incentive to delay identifying potential problems with borrowers.

Elizabeth de Fontenay, a law professor at Duke University, points out that the "double-edged sword of private credit" is that lenders "have a strong incentive to monitor problems."

"But equally... if they think or hope that there might be a way out of the situation in the future, then they actually have an incentive to conceal the risks," she added.

De Fontenay, who has long studied the impact of private equity and debt on U.S. companies, said her biggest concern is the difficulty in determining whether private lenders are accurately valuing their loans.

"This is an incredibly large market, and it's attracting more and more companies, but it's not a public market," she said. "We don't have complete certainty that the valuations are correct."

The collapse of home improvement company Renovo in November, which also implicated BlackRock, serves as an example. Other private lenders had previously valued their debt to the company at 100% of face value until shortly before writing it down to zero.

According to a report by Kroll Bond Rating Agency, private loan default rates are expected to rise this year, especially as borrowers with weaker credit profiles are already showing signs of stress. According to Bloomberg, valuation firm Lincoln International and its own data analysis show that private credit borrowers are increasingly relying on in-kind payments to avoid loan defaults.

The Financial World's "Frenemies": The Intertwined Relationship Between Banks and Private Credit

Ironically, despite the competitive relationship between banks and private credit institutions, the boom in private credit is partly due to the financial support provided by the banks themselves.

Following investment bank Jefferies, JPMorgan Chase and Fifth Third Bank disclosed losses related to bankruptcies in the automotive industry last fall, giving investors a glimpse into the actual scale of these lending operations. Data from the Federal Reserve Bank of St. Louis shows that banks provided a total of $1.14 trillion in loans to non-deposit financial institutions (NDFIs) last year.

On January 13, JPMorgan Chase disclosed details of its loans to non-deposit financial institutions for the first time during its fourth-quarter earnings call. The size of these loans is expected to triple, from approximately $50 billion in 2018 to $160 billion in 2025.

Moody's analyst Zandi said that thanks to deregulation policies under the Trump administration, banks have freed up capital, allowing them to expand lending and are now "back in the market." He noted that this, coupled with the continuous influx of new entrants into the private credit sector, could lead to a relaxation of industry lending standards.

"There's a lot of competition for the same type of loans right now," Zandi said. "If history is any guide, that's concerning... because it could signal a lowering of lending standards, ultimately leading to bigger credit problems down the road."

While neither Zandi nor de Fontenay suggested that the industry is on the verge of collapse, as the size of private credit continues to expand, its influence on the U.S. financial system will also increase.

De Fontenay said that regulators have well-established procedures for dealing with problems when banks run into trouble with lending, but resolving issues in the private credit sector in the future may be more challenging. 

De Fontenay said, "From the perspective of the overall system's security and robustness, this raises broader questions. Do we have enough information to detect the signs of problems before they actually occur?"