Introduction to Private Credit
The sudden collapse of several American companies backed by private credit last fall has brought attention to a rapidly growing and relatively opaque corner of Wall Street lending. Private credit, also known as direct lending, refers to lending done by nonbank institutions. This practice has been around for decades but gained popularity after the 2008 financial crisis, when regulations discouraged banks from serving riskier borrowers.
Private credit has seen significant growth, from $3.4 trillion in 2025 to an estimated $4.9 trillion by 2029. The September bankruptcies of auto-industry firms Tricolor and First Brands have led prominent Wall Street figures to raise alarms about the asset class.
JPMorgan Chase CEO Jamie Dimon warned in October that problems in credit are rarely isolated: “When you see one cockroach, there are probably more.” Billionaire bond investor Jeffrey Gundlach accused private lenders of making “garbage loans” and predicted that the next financial crisis will come from private credit. While fears about private credit have subsided in recent weeks, they haven’t lifted completely.
The Rise of Private Credit
Companies linked to the asset class, such as Blue Owl Capital, as well as alternative asset giants Blackstone and KKR, still trade well below their recent highs. Private credit’s boosters argue that it has fueled American economic growth by filling the gap left by banks and served investors with good returns.
Big investors, including pensions and insurance companies with long-term liabilities, are seen as better sources of capital for multiyear corporate loans than banks funded by short-term deposits. However, concerns about private credit are understandable given its attributes, such as the potential for lenders to delay the recognition of potential borrower problems.
Concerns and Risks
Moody’s Analytics chief economist Mark Zandi said that private credit is “lightly regulated, less transparent, opaque, and it’s growing really fast, which doesn’t necessarily mean there’s a problem in the financial system, but it is a necessary condition for one.” Defaults among private loans are expected to rise this year, especially as signs of stress among less creditworthy borrowers emerge, according to a Kroll Bond Rating Agency report.
Private credit borrowers are increasingly relying on payment-in-kind options to forestall defaulting on loans, according to Bloomberg. Irony lies in the fact that part of the private credit boom has been funded by banks themselves, with bank loans to non-depository financial institutions reaching $1.14 trillion last year, per the Federal Reserve Bank of St. Louis.
Finance Frenemies
After investment bank Jefferies, JPMorgan, and Fifth Third disclosed losses tied to the auto industry bankruptcies in the fall, investors learned the extent of this form of lending. JPMorgan disclosed for the first time its lending to nonbank financial firms as part of its fourth-quarter earnings presentation, showing a tripling to about $160 billion in loans in 2025 from about $50 billion in 2018.
Banks are now “back in the game” due to deregulation under the Trump administration, which will free up capital for them to expand lending, according to Moody’s Zandi. This, combined with newer entrants in private credit, might lead to lower loan underwriting standards.
Conclusion and Future Outlook
While neither Zandi nor Duke Law professor Elisabeth de Fontenay sees an imminent collapse in the sector, as private credit continues to grow, so will its importance to the U.S. financial system. When banks hit turbulence because of the loans they made, there is an established regulatory playbook, but future problems in the private realm might be harder to resolve.
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Smart Tip for Readers
When evaluating investment opportunities in private credit, it’s essential to conduct thorough research and due diligence, considering factors such as the lender’s underwriting standards, the borrower’s creditworthiness, and the overall market conditions to make informed decisions.
