The risky lending market known as “private credit” is causing visible strain for banks and investors, with potential consequences beyond Wall Street.
Private credit refers to loans made by private-equity firms and other nonbank entities to businesses — from software companies to auto lenders. Banks often avoid direct lending to these firms because they view them as higher risk, but banks are still exposed because they lend to private credit managers and finance related vehicles.
The sector has expanded rapidly and is estimated at roughly $3 trillion, according to Morgan Stanley. But mounting problems have become harder to ignore after two companies backed by private-credit firms declared bankruptcy in September, raising questions about underwriting standards and how lenders and their financiers will recover losses. JPMorgan Chase CEO Jamie Dimon warned that one failure could indicate others: “When you see one cockroach, there’s probably more,” he said, noting his bank had financed one of the failed companies.
More signs of stress emerged in recent weeks. Blue Owl, one of the largest private-credit lenders, announced in February it would sell about $1.4 billion of assets to return cash to some investors. The move, intended to calm markets, instead triggered broad investor panic about asset values. Other investors have attempted to redeem funds from several private-credit firms, and the trouble has spilled into public markets: Blue Owl’s shares fell roughly 40% year to date, and shares of major private-credit players such as KKR, Apollo and Blackstone are down more than 20%.
“When everyone is rushing to the door at the same time, there’s an inherent panic that occurs that also affects sentiment,” says Olaolu Aganga, head of portfolio construction for Citigroup’s wealth-management division.
Private-credit worries intersect with broader market anxieties, including the swings tied to the artificial intelligence boom. Tech companies and AI-related investments have lifted markets for years, but investors increasingly question which firms will thrive and which will be made obsolete by AI. Because private-credit funds are substantial lenders to many software companies, there is fear they may have financed a disproportionate share of the losers.
“Everyone’s terrified. They don’t know who the winners are. They don’t know who the losers are,” says Jared Ellias, a Harvard law professor and coauthor of an academic paper on private credit. “The great fear is that private credit is going to turn out to have financed a lot of the losers, and then those private credit funds are going to be left with huge losses.”
The immediate impact hits individual investors who have exposure through mutual funds, retirement plans, or 401(k) allocations that include private-credit companies. More broadly, regulators and market watchers worry about contagion because private-credit firms operate with far less transparency and regulatory oversight than banks. They are not subject to the same disclosure rules and capital requirements, so it’s harder to see where risks concentrate.
“We simply don’t know where that money is going (who it is being lent to) and the full extent of the risks being taken,” says Brad Lipton, director of corporate power and financial regulation at the Roosevelt Institute and a former senior advisor at the Consumer Financial Protection Bureau. If investors panic and pull money out en masse, there could be a run on lending firms that would cascade through markets, he warns.
Banks are already tied in: U.S. banks have extended about $300 billion of credit to private-credit managers, according to Moody’s. As more troubles surfaced, bank stocks have been hit; the KBW Nasdaq Bank Index has fallen more than 11% since the start of the year, while the broader S&P 500 is down only about 3%.
Ellias says the situation today is unlikely to mirror 2008-era catastrophes like AIG or Lehman Brothers. “This isn’t AIG, this isn’t Lehman Brothers — this is a bunch of investors who may turn out to have made a bad bet,” he says. Still, he cautions that if private credit collapses into a prolonged downturn, the consequences could ripple into the real economy: companies that rely on private credit for growth or working capital may struggle to find alternative financing, potentially slowing economic activity.
“Financial stability is always about confidence,” Ellias adds. “If private credit turns out to be this place that we lose confidence in, and then we lose confidence in everything else by association — that could be a way that there’s contagion out of this.”
