The unexpected failure last autumn of several American firms financed by private credit has spotlighted a rapidly expanding and opaque area of Wall Street lending.
Private credit, referred to as direct lending, encompasses loans provided by nonbank institutions. This approach has existed for many years but gained traction following the post-2008 financial crisis regulations that dissuaded banks from catering to high-risk borrowers.
This expansion — escalating from $3.4 trillion in 2025 to a projected $4.9 trillion by 2029 — alongside the September bankruptcies of the auto sector companies Tricolor and First Brands has prompted several notable Wall Street figures to voice concerns regarding the asset class.
JPMorgan Chase CEO Jamie Dimon cautioned in October that issues in credit are seldom singular: “When you notice one cockroach, there are likely more.” Billionaire bond strategist Jeffrey Gundlach shortly after accused private lenders of doling out “inferior loans” and forecast that the next financial crisis will stem from private credit.
Although anxieties regarding private credit have diminished in recent weeks due to the lack of further high-profile bankruptcies or losses revealed by banks, they have not completely vanished.
Firms most associated with the asset class, like Blue Owl Capital, along with alternative asset powerhouses Blackstone and KKR, continue to trade significantly below their recent peak values.
The emergence of private credit
Private credit is characterized by being “loosely regulated, less transparent, and opaque, and it’s expanding rapidly, which doesn’t inherently indicate a problem within the financial system, but creates conditions for potential issues,” stated Moody’s Analytics chief economist Mark Zandi in an interview.
Proponents of private credit, such as Apollo co-founder Marc Rowan, assert that the advent of private credit has spurred American economic development by bridging the void left by banks, delivering favorable returns to investors, and enhancing the overall financial system’s resilience.
Major investors like pension funds and insurance entities with long-term liabilities are perceived as superior sources of capital for multiyear corporate loans compared to banks that rely on volatile short-term deposits, according to private credit operators speaking to CNBC.
However, the worries surrounding private credit — often stemming from rivals in the public debt sector — are reasonable given its characteristics.
After all, it’s the asset managers issuing private credit loans who assess their worth, and they might be inclined to postpone acknowledging potential borrower issues.
“The double-edged sword of private credit” is that the lenders are strongly incentivized to monitor for problems, remarked Duke Law professor Elisabeth de Fontenay.
“Yet simultaneously, … they indeed have incentives to mask risk if they believe or anticipate some avenue of escape down the line,” she noted.
De Fontenay, who has investigated the effects of private equity and debt on corporate America, expressed her primary concern lies in the uncertainty of whether private lenders are accurately assessing their loans.
“This is a remarkably extensive market that is increasingly impacting a wide range of businesses, yet lacks the transparency of a public market,” she remarked. “We can’t be entirely confident that the valuations are accurate.”
In the November failure of home improvement company Renovo, for example, BlackRock and other private lenders considered its debt to be valued at 100 cents on the dollar until just prior to adjusting it to zero.
Defaults among private loans are anticipated to increase this year, particularly as distress signals from lower creditworthy borrowers become apparent, according to a Kroll Bond Rating Agency report.
Moreover, private credit borrowers are more frequently depending on payment-in-kind methods to delay defaults on loans, as indicated by Bloomberg, which referenced valuation firm Lincoln International and its own data analysis.
Paradoxically, while these entities are competitors, part of the private credit surge has been financed by banks themselves.
Financial frenemies
In the aftermath of investment bank Jefferies, JPMorgan and Fifth Third revealed losses associated with the auto sector bankruptcies in the autumn, investors recognized the scale of this lending form. Bank loans extended to non-depository financial institutions, or NDFIs, amounted to $1.14 trillion last year, according to the Federal Reserve Bank of St. Louis.
On January 13, JPMorgan revealed for the first time its lending to nonbank financial entities as a component of its fourth-quarter earnings report. This category grew threefold to approximately $160 billion in loans in 2025 from around $50 billion in 2018.
Banks are now “reactivated” because deregulation under the Trump administration will enable them to allocate more capital to increase lending, noted Moody’s Zandi. This, combined with new entrants in private credit, could result in decreased loan underwriting standards, he added.
“There’s considerable competition for the same type of lending now,” Zandi commented. “If historical trends hold, that’s a worrying sign… as it suggests a decline in underwriting quality and ultimately greater credit challenges in the future.”
While neither Zandi nor de Fontenay foresaw an imminent failure in the sector, as private credit expands, so will its significance to the U.S. financial landscape.
When banks face turmoil due to the loans they’ve issued, there exists an established regulatory framework, but upcoming challenges in the private sector might be more difficult to navigate, according to de Fontenay.
“It raises broader issues regarding the stability of the entire system,” de Fontenay stated. “Will we possess sufficient information to identify signs of difficulties before they actually arise?”
