Last fall, a series of bankruptcies among U.S. companies backed by private credit thrust a rapidly growing yet opaque segment of Wall Street's credit market into the spotlight. Private credit, also known as direct lending, is an umbrella term for lending activities conducted by non-bank institutions. While this business model has existed for decades, its popularity surged following the 2008 financial crisis as regulatory policies restricted banks from lending to high-risk borrowers. The industry continues to expand, with projections indicating growth from $3.4 trillion in 2025 to $4.9 trillion by 2029. This expansion, coupled with the successive bankruptcies of automotive industry firms Color Brands and Premier Label in September, has prompted warnings from several prominent Wall Street figures about this asset class. In October, JPMorgan Chase CEO Jamie Dimon issued a caution, stating that problems in the credit sector are rarely isolated: "When you find one cockroach, you are likely to find more." Billionaire bond investor Jeffrey Gundlach accused private lenders of issuing "junk loans" a month later, predicting the next financial crisis would originate in the private credit sector. In recent weeks, the panic surrounding private credit has eased somewhat due to the absence of further large-scale corporate bankruptcies and no major related losses disclosed by banks, but concerns have not entirely dissipated. Shares of firms closely linked to private credit, such as Blue Owl Capital, as well as alternative asset management giants like Blackstone and Carlyle Group, remain significantly below their recent highs. The rise of private credit Moody's Analytics Chief Economist Mark Zandi remarked in an interview, "Private credit is lightly regulated, lacks transparency, and is growing rapidly. This doesn't necessarily mean the financial system has a problem, but it is a necessary condition for a crisis to occur." Proponents of private credit, such as Apollo Global Management co-founder Marc Rowan, argue that its rise has filled a market void left by banks, fueling U.S. economic growth, delivering strong returns for investors, and enhancing the resilience of the overall financial system. Practitioners told CNBC that large investors with long-term liabilities, such as pension funds and insurance companies, are more suitable sources for providing multi-year loans to companies compared to banks, which rely on less stable short-term deposit funding. However, given the inherent characteristics of private credit, concerns from competitors in the public debt space are not without merit. After all, the asset management firms issuing private credit are also the ones valuing these loan assets, creating an incentive to delay disclosing potential problems with borrowers. Duke University School of Law Professor Elisabeth de Fontenay pointed out, "Private credit is a double-edged sword; lenders have a strong incentive to monitor risk." "But on the other hand, if they believe or hope there are ways to resolve the risk in the future, they may actually be inclined to conceal it." de Fontenay, who has long studied the impact of private equity and debt on U.S. corporations, stated her greatest concern is the difficulty for outsiders to judge whether private lenders are accurately assessing the value of their loan assets. She said, "This is an extremely large market that is penetrating more and more companies, but it is not a public market. We cannot be entirely sure if its valuations are accurate." For instance, prior to the collapse of home improvement firm RenoWorks last November, private lenders like BlackRock had valued the company's debt at 100% of its face value, only writing it down to zero shortly before the bankruptcy. A report from credit rating agency KBRA indicates that as borrowers with weaker credit profiles show increasing signs of stress, default rates on private loans are expected to rise this year. Bloomberg, citing data from valuation firm Lincoln International and its own analysis, reported that a growing number of private credit borrowers are resorting to Payment-in-Kind (PIK) repayment methods to avoid loan defaults. Ironically, although banks are competitors to the private credit industry, the sector's robust growth is partly funded by the banks themselves. Frenemies in the financial world It was only after investment bank Jefferies, JPMorgan Chase, and Fifth Third Bank disclosed losses related to automotive industry bankruptcies last autumn that investors gained insight into the scale of such lending activities. According to Federal Reserve Bank of St. Louis data, bank loans to non-depository financial institutions reached $1.14 trillion last year. On January 13th, JPMorgan Chase disclosed its lending to non-bank financial institutions for the first time during its fourth-quarter earnings call, revealing that such loans had tripled from approximately $50 billion in 2018 to around $160 billion in 2025. Moody's Analytics' Zandi noted that deregulatory policies from the Trump administration would free up bank capital, aiding their efforts to expand lending, and banks are now "returning to this market." He pointed out that this, combined with the influx of new participants into private credit, could lead to a decline in loan underwriting standards. Zandi stated, "Competition for the same type of lending is intensifying now. Looking at historical experience, this is a cause for concern because increased competition often leads to lower underwriting standards and, ultimately, more severe credit crises." Although both Zandi and de Fontenay stated that a sudden collapse of the private credit industry is not imminent, its growing size means its importance to the U.S. financial system will continue to increase. de Fontenay pointed out that while regulators have established playbooks for dealing with banks in trouble due to their own lending issues, resolving problems originating in the private credit sector in the future could prove more challenging. She said, "From the perspective of the safety and soundness of the entire financial system, this raises broader questions. Can we recognize the risk through the signs before problems actually materialize?"
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