The Rise of Private Credit and the Growing Risks

Since 2015, private credit has experienced an explosive rise, fundamentally altering capital flows through the U.S. economy. Sparked by a search for higher returns, private equity firms began channeling hundreds of billions of dollars from institutional investors (such as pension funds and endowments) into corporate lending. The result: a private credit market now estimated in the $2-3 trillion range, comparable to leveraged loan and high-yield bond markets. (Morgan Stanley)

Unlike conventional bank loans or public bond offerings, private credit refers to direct loans made by private equity firms and investment managers. These transactions typically occur outside the purview of traditional banking regulation, making the system less transparent but often more flexible for borrowers. In many cases, private credit allows companies deemed too risky by banks to access capital more quickly. (Duke Law, “Promise and Perils of Private Credit”)

The rapid expansion of private credit has been especially pronounced among midsize U.S. businesses. Many of these companies, unable to meet increasingly strict bank underwriting standards, turn to private lenders as their only path forward. As one JPMorgan commentary notes: “private credit solutions can be tailored to meet borrowers’ needs in terms of size, timing, or structure.” (JPMorgan, “Private Credit: Promising or Problematic?”)

Because traditional financing has become more exclusive, requiring large deposits, banking relationships, or equity minimums, many firms fall into a “middle” zone where neither large institutional capital nor community banking is available. These firms are increasingly reliant on private credit to fuel operations and growth.

This reliance, however, introduces new risks. If liquidity in private credit dries up, broader knock-on effects can ripple across the economy. A contraction in availability could lead to lower payrolls, spikes in unemployment, and slower growth, a potential “credit crunch.” The systemic threat emerges from how deeply private credit is already embedded in the real economy. Research from the Boston Fed warns that private credit lenders’ dependence on bank credit lines for liquidity could cause stress in banking systems if many draw simultaneously in adverse times. (Boston Fed, “Could the Growth of Private Credit Pose a Risk …”)

For borrowers today, the window still offers opportunity. Many advisors recommend refinancing debt while markets remain accessible and rates are relatively stable. Strengthening cash flow, cutting discretionary outlays, and lining up backup credit facilities can help firms weather potential tightening in private lending.

As private credit continues to grow, its role in shaping business finance and its associated risks will be more difficult to ignore. Regulators, lenders, and borrowers must all watch carefully.

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