Private credit has developed from a specialist source of financing for medium-sized companies into a major global asset class. Its growth can provide borrowers with flexible capital and investors with additional income, but it also introduces questions about leverage, valuation, liquidity and financial-system interconnectedness.
Private credit generally refers to loans negotiated directly between non-bank lenders and companies rather than issued through public bond markets or broadly syndicated bank-loan markets.
The Financial Stability Board estimated that the global private credit market had reached between $1.5 trillion and $2 trillion by the end of 2024. [1]
The United States represented approximately $1 trillion of the total. The euro area and United Kingdom also had sizeable markets, while activity was expanding from smaller bases in Canada, Switzerland, South Africa and parts of Asia.
Private credit can broaden access to capital and reduce dependence on traditional banks. However, the market at its current size, structure and concentration has not yet experienced a prolonged and severe economic downturn.
How the Private Credit Ecosystem Works
A private credit transaction can involve more institutions than the borrower and the direct lender.
Investment funds may raise capital from pension funds, insurers, sovereign investors, family offices and increasingly individual investors. Banks can provide subscription facilities, revolving credit lines, foreign-exchange services and financing to the funds or their borrowers.
The connections between these participants can improve access to funding and distribute risk across the financial system.
They can also make it difficult to determine which institution ultimately carries the economic risk when the same company, fund or private-equity sponsor has relationships with several lenders and investors.
Banks may finance private credit funds, provide revolving facilities to borrowers, participate in risk-transfer arrangements and form strategic partnerships with private asset managers.
Why the Market Has Grown
Private credit expanded as banks became more selective about leveraged and middle-market corporate lending, while institutional investors searched for assets capable of providing additional income.
The FSB reported average annual private credit growth of approximately 16% in Canada and 17% in the United Kingdom over five years. Euro-area activity grew by an average of approximately 13% annually over a decade, while the United States experienced a threefold increase from 2019. [1]
Borrowers may use private credit because the loans can be negotiated more quickly and structured around the requirements of an acquisition, expansion, refinancing or ownership transition.
Potential Benefits
- Financing for companies not well served by public markets.
- Terms customised around the borrower and transaction.
- Potentially faster execution and greater confidentiality.
- Senior status, collateral and contractual covenants.
- Income and diversification opportunities for investors.
- Additional competition with traditional bank lending.
Potential Vulnerabilities
- Borrowers may have high leverage and weak credit ratings.
- Loans are not continuously traded in transparent markets.
- Valuations may depend on models and manager judgement.
- Payment-in-kind interest can delay recognition of stress.
- Fund liquidity may not match the liquidity of underlying loans.
- Overlapping exposures may create unexpected contagion.
How Private Credit Differs from Public Corporate Bonds
| Feature | Private credit | Public corporate bonds | Why it matters |
|---|---|---|---|
| Negotiation | Usually bilateral or arranged among a small lender group | Issued broadly to market investors | Private terms can be more customised |
| Market pricing | Limited secondary trading and less frequent valuations | Prices can change continuously in public markets | Private assets may appear less volatile |
| Borrower profile | Often smaller, leveraged or unrated companies | Usually larger issuers with public reporting | Credit analysis may require more private information |
| Liquidity | Loans may be difficult to sell quickly | Many bonds have active secondary markets | Exit options can differ substantially |
| Covenants | Can include detailed lender protections | Terms are standardised for a broad investor base | Private lenders may have stronger intervention rights |
| Transparency | Loan-level data may remain confidential | Public disclosures and market data are more available | External monitoring is more difficult in private markets |
Borrower Credit Quality Is a Central Risk
Many private credit borrowers are medium-sized businesses, acquisition vehicles or companies owned by private-equity sponsors.
These borrowers may have higher leverage than companies in broadly syndicated loan markets. They also frequently lack public credit ratings and detailed public financial disclosures.
Where ratings are available, the FSB noted that external research often places private credit borrowers around the single-B-minus area of the rating spectrum. [1]
A borrower with high leverage can remain current while revenue and cash flow are stable. Problems may emerge when interest costs rise, earnings weaken or refinancing becomes more difficult.
Interest Coverage Falls
A larger proportion of operating earnings is required to pay interest, leaving less cash for investment and debt reduction.
Payment-in-Kind Increases
Interest is added to the loan balance rather than paid in cash, potentially delaying recognition of borrower stress.
Covenants Are Amended
Lenders may waive or reset financial requirements to avoid an immediate default or restructuring.
Debt Maturity Is Extended
A longer maturity can provide time, but it may also indicate that the borrower cannot refinance on normal terms.
Valuation Remains Stable
A loan valuation that barely changes despite weaker operating performance may deserve additional examination.
Distressed Exchange Occurs
Debt may be replaced, extended or modified on terms that reduce the economic value received by the lender.
The IMF estimated in April 2026 that current private credit default rates were approximately 2–3%. In adverse scenarios, they could rise to approximately 4–6%, a level the IMF considered potentially manageable in isolation. [2]
The broader risk depends on whether defaults occur alongside fund redemptions, falling valuations, bank losses and stress at insurers or pension funds.
Selective defaults, distressed exchanges, maturity extensions and payment-in-kind arrangements may reveal deteriorating credit conditions before a conventional missed-payment default occurs.
Valuations Can Make Private Assets Appear Stable
Publicly traded bonds and loans are repriced whenever buyers and sellers transact. Private credit loans may instead be valued monthly or quarterly using models, comparable instruments and manager assumptions.
This does not mean the valuation is necessarily inaccurate. It means that price changes can be recognised more slowly and may involve significant judgement.
During a period of market stress, two funds holding similar loans could use different assumptions about recovery values, credit spreads, default probability and expected cash flows.
Reported values may move less frequently because loans are not continuously traded. Lower displayed volatility does not automatically mean lower economic risk.
Seniority and collateral can improve recovery prospects, but losses remain possible when enterprise value falls or several lenders claim the same assets.
Floating rates can protect lender income, but higher payments may weaken the borrower and increase credit risk.
The SEC highlighted private-market valuation as a growing issue in March 2026 as private assets increasingly moved into products accessible to individual investors. [3]
Investors should examine valuation frequency, independent review, model inputs, comparable market data and procedures for handling loans with deteriorating performance.
Liquidity Mismatch and Redemption Risk
Traditional private credit funds are often closed-end structures. Investors commit capital for several years and cannot normally request immediate repayment.
This structure is well matched to loans that may be difficult to sell quickly.
The market is changing as semi-liquid and continuously offered vehicles provide periodic redemption opportunities. According to the IMF, approximately 15% of the $2 trillion direct-lending market, or around $300 billion, was held in semi-liquid structures in April 2026. [2]
Some funds limit withdrawals to a fixed percentage of net asset value. The FSB noted examples in which redemption requests exceeded stated withdrawal limits of around 5% of NAV.
Redemption gates can protect remaining investors from forced loan sales, but they also mean that an investor may not receive the requested amount at the requested time.
A fund offering quarterly withdrawals may still restrict, defer or proportionally reduce redemption requests when they exceed the vehicle’s stated limit.
Technology and AI Exposure Add a New Layer of Risk
Private credit has become an important source of financing for software companies, data centres and other technology infrastructure.
BIS research showed that outstanding private credit loans to software-as-a-service companies increased from almost $8 billion in 2015 to more than $500 billion by the end of 2025. [4]
These loans represented approximately 19% of total direct loans, while about one-third of private credit funds had exposure to the SaaS sector.
AI may support demand for computing infrastructure while simultaneously challenging established subscription-software business models. Software equity prices fell sharply between October 2025 and February 2026, and business development companies with greater SaaS exposure underperformed less-exposed peers.
BIS has also observed that the expected scale of AI infrastructure investment may require companies to shift from financing projects primarily through operating cash flow toward greater use of debt and private credit. [5]
Connections with Banks and Insurers
Private credit can transfer lending activity outside traditional bank balance sheets, but it does not necessarily transfer every associated risk outside the banking system.
The FSB identified approximately $220 billion of drawn and undrawn bank credit facilities to private credit funds in available member data. The actual level remains uncertain because reporting and definitions differ between jurisdictions.
Banks can be exposed through:
- Subscription and capital-call credit facilities
- Loans secured against private fund assets
- Revolving credit lines provided to fund borrowers
- Foreign-exchange and interest-rate derivatives
- Loan origination and distribution partnerships
- Synthetic risk-transfer transactions
- Custody, administration and settlement services
- Direct ownership or financing of asset managers
Insurers and pension funds are important providers of long-term capital to private credit vehicles. Their long-dated liabilities can make illiquid assets suitable in principle, but concentration, valuation and ownership structures still require monitoring.
A Practical Private Credit Stress Test
Areas most likely to reveal pressure
The indicators illustrate relative analytical concerns across the market. They are not ratings for a particular fund, borrower or investment.
Documentation Investors Should Review
Private credit products can use different structures, valuation rules, redemption terms and fee arrangements. Reviewing the supporting documents is therefore important before drawing conclusions from a headline yield or reported net asset value.
- Offering memorandum and fund prospectus
- Audited annual financial statements
- Quarterly portfolio and valuation reports
- Loan-level sector and borrower concentration
- Default and non-accrual definitions
- Payment-in-kind interest disclosures
- Redemption limits, gates and notice periods
- Valuation policy and independent review process
- Fund-level leverage and credit facilities
- Management, performance and incentive fees
- Related-party and affiliated transactions
- Tax statements and distribution records
A higher reported return may reflect illiquidity, borrower leverage, lower credit quality, payment-in-kind income or structural complexity rather than an isolated pricing opportunity.
Three Possible Private Credit Scenarios
Growth Slows Without Severe Stress
Borrower earnings remain sufficient, defaults increase moderately and closed-end fund structures absorb losses without major forced selling.
Valuations and Income Weaken
More loans move to non-accrual status, payment-in-kind income rises and investors demand wider discounts for private credit vehicles.
Defaults and Redemptions Coincide
Borrower failures, redemption pressure and losses at connected banks or insurers amplify stress across several parts of the financial system.
What Market Participants Should Monitor
- Non-accrual and default rates
- Distressed exchanges and maturity extensions
- Payment-in-kind interest as a share of income
- Borrower interest-coverage ratios
- Fund redemption requests and gates
- Discounts to reported net asset value
- Changes in valuation methodology
- Private credit fund leverage
- Bank credit facilities to private funds
- Insurance-company private asset exposure
- Technology and SaaS concentration
- Growth in retail-accessible vehicles
Frequently Asked Questions
What is private credit?
Private credit generally refers to loans negotiated directly by non-bank lenders with companies rather than issued through public bond markets or broadly syndicated bank-loan markets.
How large is the private credit market?
The Financial Stability Board estimated the global market at between $1.5 trillion and $2 trillion at the end of 2024, although definitions and available data vary.
Why can private credit offer higher yields?
Higher yields may compensate investors for illiquidity, borrower leverage, lower credit quality, limited transparency and the complexity of privately negotiated loans.
Is private credit safer because prices are less volatile?
Not necessarily. Private loans are valued less frequently, so their reported prices may appear more stable even when underlying credit conditions are changing.
What is payment-in-kind interest?
Payment-in-kind interest is added to the outstanding loan balance rather than paid in cash. It can preserve borrower liquidity but also increase leverage.
Can investors redeem private credit investments whenever they want?
Usually not. Closed-end funds may lock capital for several years, while semi-liquid products can impose notice periods, limits, deferrals or redemption gates.
Could private credit create systemic financial risk?
Authorities currently describe the aggregate risk as manageable, but leverage, liquidity mismatches and links with banks, insurers and private equity could amplify stress under adverse conditions.
Conclusion
Private credit has become an important part of global corporate finance and can provide useful alternatives when bank lending or public markets do not meet a borrower’s requirements.
Its expansion also means that risks once concentrated in traditional lending markets are increasingly distributed across private funds, banks, insurers, pension funds and retail-accessible investment vehicles.
The central issues are not simply the size of the market or its reported default rate. Valuation methods, payment-in-kind income, borrower leverage, redemption terms and overlapping institutional exposures can all influence how the sector behaves during stress.
Private credit has not yet been tested at its current scale through a prolonged global downturn. The result of that test will depend heavily on loan underwriting, fund structure, investor liquidity expectations and the transparency of financial reporting.
For investors and market observers, careful analysis of the underlying documents remains more informative than relying only on headline yields, reported NAV stability or the broad private credit label.
Sources
- Financial Stability Board — Report on Vulnerabilities in Private Credit, May 2026
- International Monetary Fund — Global Financial Stability Report press briefing, April 2026
- U.S. Securities and Exchange Commission — Private Markets Valuation and Retail Access Roundtable
- Bank for International Settlements — Private Credit’s Software Lending Meets AI Disruption
- Bank for International Settlements — Financing the AI Boom: From Cash Flows to Debt
- International Monetary Fund — Global Financial Stability Report, April 2026
