MW Private credit not only won't spark a financial crisis - it may be more stable than your bank
By Tomasz Piskorski
With 65% equity cushions and 10-year lockups, Wall Street's 'anti-banks' won't face a 'Lehman moment'
Private credit is better prepared than traditional banks to withstand shocks.
Rising redemption pressures in parts of the private-credit market - and growing concern among regulators and commentators - have sharpened the debate over financial stability. As private credit has expanded rapidly over the past decade, so has a familiar question: Is this simply banking risk in another form? And could stress in private-credit funds spill over into the broader financial system?
The concern is understandable. Financial crises are rarely caused by asset losses alone. Trouble begins when losses collide with fragile funding structures. Traditional banks, for instance, fund long-term, illiquid assets with short-term, runnable liabilities. When confidence falters, that mismatch can turn manageable losses into systemic crises. The key question, then, is whether private credit reproduces the balance-sheet features that make banks fragile.
Looking closely at the data, the answer appears to be no.
Private credit - an emerging financial sector led by Blue Owl Capital $(OWL)$, Ares Management $(ARES)$, HPS, Blackstone (BX) and Cliffwater - is part of "shadow banking" because the asset managers doing the lending face fewer regulations than traditional banks. In the aftermath of the 2008-09 global financial crisis, asset managers moved boldly into corporate lending as traditional banks opted to take fewer balance-sheet risks. The number of private-credit debt funds has increased sharply - from fewer than 30 in the early 2000s to close to 1,000 by 2023. Over the same period, aggregate assets under management expanded from under $10 billion to more than $1 trillion.
Middle-market companies turn to private-credit funds because they're able to access capital on faster and more flexible terms than they might get from a traditional bank - for example, having the option to skip interest payments and add them onto the total balance (known as payment-in-kind). Loans through private credit are popular for an array of needs, including hard assets such as data centers, green energy and aircraft leasing, and commercial finance such as equipment leases and supply-chain costs.
For decades, these funds were the purview of large investors and institutions, including pension funds, university endowments, family offices and sovereign-wealth funds. In the past few years, asset managers started chasing retail funding - with some funds becoming reliant on individual investors, who are more susceptible to panic. Last year, Moody's warned of the dangers of inviting retail investors into the funds: "If growth outpaces the industry's ability to manage such complexities, such challenges could have systemic consequences." With investors fleeing over the "SaaSpocalypse," many of the managers are closing off redemption requests from their funds.
Equity in private-capital funds typically accounts for 65% to 80% of fund assets - more than six times the level at traditional U.S. banks.
But even in these rocky times, private credit is simply better prepared to withstand shocks than traditional banks - particularly compared with the collapse of Silicon Valley Bank and Signature Bank three years ago. To better understand these funds, Northwestern-Kellogg School of Management Professor Gregor Matvos, Stanford Graduate School of Business Professor Amit Seru, and I analyzed an MSCI data set of more than 1,200 private-equity debt funds - capturing more than 60% of outstanding private-equity credit funds by assets.
Across these funds, a few significant conclusions emerge. First, the funds are structured very differently from banks. Most striking is their capitalization.
Equity typically accounts for 65% to 80% of fund assets - more than six times that of traditional U.S. banks. That means losses are absorbed primarily by long-term equity investors rather than short-term creditors. Where borrowing exists, it tends to take the form of bank credit lines used for liquidity management - bridging capital calls or facilitating transactions - rather than supporting sustained leverage.
Second, private-credit funds do little of the maturity transformation that lies at the heart of banking instability. Funds typically last 10 to 12 years, while the loans they hold mature sooner. Cash flows generally arrive before obligations come due, leaving little scope for the refinancing pressure that can trigger runs.
Third, investments are diversified across industries, geographies and credit strategies, which limits exposure to idiosyncratic shocks. Performance data reinforce this picture. Returns for fully realized funds have averaged around 10% annually, with losses largely contained within the equity layer. Because that equity is not runnable, losses do not force fire sales or spread through funding markets in the way bank losses can.
Taken together, these features point to a different form of financial intermediation - one in which risk is borne primarily by equity investors - namely, limited partners, who are structured to absorb it - rather than by creditors who can withdraw funding at the first sign of trouble.
None of this means private credit is without risk, or that recent redemption pressures should be ignored. Private-credit funds rely on limited partners (LPs) as first-loss investors. Their high equity capitalization implies that LP capital absorbs most losses before creditors become exposed. Banks may be indirectly exposed to private-credit losses through their relationships with LPs.
Many institutional investors finance portions of their portfolios with leverage or liquidity facilities provided by banks. If LPs experience substantial losses in private-credit investments, they may draw on these facilities or adjust portfolios in ways that affect their bank counterparties. Competitive pressures could also push funds toward higher leverage or riskier lending. Bank linkages could deepen. The expansion of semiliquid or retail-oriented vehicles could introduce new vulnerabilities as investor behavior becomes more important.
A related set of questions concerns governance, control rights and monitoring in private credit. Particular concerns center on the reliability of valuation practices and the quality of disclosure, especially as funds scale and performance becomes harder to independently verify. The experience of the nonagency mortgage-backed securities market before the 2008 financial crisis shows how opacity can enable misrepresentations of asset quality, erode investor confidence and contribute to market unraveling.
In this sense, stressed conditions could give rise to what we term "valuation contagion," wherein uncertainty about asset values spills over into fundraising, secondary markets or affiliated vehicles that have potential real economic consequences due to contraction of credit to affected firms.
But the core point remains: Financial stability depends less on who provides credit than on how that credit is funded. By that standard, private credit today does not look like a replay of traditional banking fragility.
Tomasz Piskorski is the Edward S. Gordon Professor of Real Estate at Columbia Business School.
More: Blue Owl stokes more private-credit worries, as it paid out less than a quarter of requests
Also read: The 'smart money' fled software stocks after Citrini's viral AI doomsday report. Here's where it's going.
-Tomasz Piskorski
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April 14, 2026 11:02 ET (15:02 GMT)
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