As the US private credit industry's assets soar to $3 trillion, this market is increasingly transforming from a niche financing channel into a massive, structurally complex "high-risk version" of the public debt market.
According to Morgan Stanley data, the private credit sector has grown from $2 trillion in 2020 to approximately $3 trillion in early 2025, with projections reaching $5 trillion by 2029. While still a fraction of the overall bond market, JPMorgan notes its size now rivals the public high-yield bond market. Private credit has expanded beyond mid-sized company loans, with large asset allocators now viewing it as a mainstream investment option comparable to high-yield bonds and leveraged loans, thanks to growing deal sizes and collateral types.
This shift is reshaping corporate financing. The boundaries between direct lending and traditional broadly syndicated loans are rapidly dissolving. Single private market deals now routinely reach billion-dollar levels, enabling large corporations to seamlessly switch between public and private markets for equivalent funding.
However, this rapid expansion comes with significant warning signs. As more capital chases limited opportunities, aggressive underwriting practices are emerging, increasing "winner's curse" risks. Some investors warn that private credit is absorbing public market volatility without offering corresponding liquidity, while relaxed underwriting standards amid massive capital inflows could heighten default risks, potentially creating systemic financial stress during future downturns.
Boundary Blurring: Full Convergence of Public and Private Markets The lines between private credit and its public market counterparts are becoming increasingly indistinct.
Emily Bannister, credit portfolio manager at Wellington Management, observes that the market now displays "private credit equivalents" for every segment of public fixed income. Virtually all debt types found in public markets—from investment-grade loans and high-yield debt to asset-backed financing, infrastructure, and real estate credit—now have private market counterparts.
This convergence is particularly evident in commercial real estate and data centers, where financing solutions often blend bank loans, commercial mortgage-backed securities (CMBS), REITs, and private credit.
Danielle Poli, managing director at Oaktree Capital Management, notes the most visible convergence occurs between direct lending by private firms and traditional bank syndicated loans. As terms and pricing align, this confirms the markets are developing a symbiotic relationship through mutual penetration.
Scale Leap: Yield Hunting and Financing Alternatives Multiple forces drive this convergence: banks retreating from certain loan types, borrowers demanding customized capital, and investors chasing higher yields and diversification.
Christopher Acito, CEO of Gapstow Capital Partners, explains this fusion accelerated when investors sought yields during 2020-2021's near-zero public rates, enabling private credit managers to amass huge capital pools.
When public debt markets froze during the Fed's 2022 aggressive rate hikes, private lenders rapidly filled the gap. Chasing higher returns, these lenders expanded beyond traditional mid-market limits, with average deal sizes ballooning from $75 million to billions, making public and private markets functionally interchangeable for large financings.
Bubble Risks: Aggressive Underwriting and Credit Dangers The market's "publicization" raises credit quality concerns. As private lenders compete for limited large deals, underwriting standards are loosening toward pre-2020 syndicated market norms.
Bannister warns increased competition in some sectors may lead to more aggressive underwriting and weaker covenant protections, particularly threatening highly leveraged mid-sized companies vulnerable to growth slowdowns or rising financing costs.
The recent First Brands default—where the auto parts maker unexpectedly defaulted on $1.5+ billion in private loans—exposed vulnerabilities when aggressive underwriting meets limited visibility into deteriorating fundamentals.
Poli cautions that intensified competition may push managers to accept uncompensated credit risks while chasing deal flow.
Structural Fragility: Liquidity Traps and Concentration Risks Beyond credit risks, structural issues loom large.
Man Group's Putri Pascualy highlights that limited mega-deal targets create unintended double-exposure risks, where investors may concentrate positions in single large borrowers rather than achieving diversification.
Liquidity mismatch remains a core concern. Despite matching public debt markets in size, private credit lacks a true secondary market, making position exits difficult. Though new liquidity tools have emerged, Pascualy doubts their substantive effectiveness.
Regulatory reports have flagged risks that highly leveraged, opaque non-bank lenders could amplify systemic stress during downturns. Experts warn that if capital-driven lending standard erosion continues, this explosive growth may form a new financial bubble.
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