If you run a mid-sized company and borrowed money in the past five years, there is a decent chance your lender was not a bank. It was a fund managed by Apollo, Ares, Blackstone, Blue Owl, HPS or one of hundreds of smaller firms that have built a parallel lending system outside the regulated banking sector. Private credit has become one of the most important sources of finance for the middle of the economy, and one of the most debated.
Its supporters describe a market that has filled a gap left by retreating banks, matched long-term investor money with long-term loans, and given borrowers speed and certainty. Its critics see a lightly supervised system that has grown huge during a benign period and never been tested by a real recession. In 2026, with default measures rising and the Financial Stability Board, the IMF and central banks all publishing warnings, both views are being put to the test.
How a Niche Became a Pillar
Private credit is simple in concept. Instead of borrowing from a bank, a company borrows directly from an investment fund, usually through a loan negotiated privately with one lender or a small group. The fund raises its money from pension schemes, insurers, sovereign wealth funds, endowments and, increasingly, wealthy individuals.
The market existed before 2008, but the global financial crisis changed its trajectory. New capital rules made it more expensive for banks to hold risky loans to mid-sized, often private-equity-owned companies. Asset managers stepped in. When interest rates rose sharply from 2022 and regional bank failures in the US in 2023 tightened bank lending again, private lenders took another large slice of the market. Estimates of the asset class now range from about $1.5 trillion to more than $2 trillion depending on what is counted, several times its size a decade ago.
The growth has been tightly linked to private equity, which we examined in our piece on the mid-market. Buyout firms like private credit because it is fast, confidential and flexible. A private lender can agree terms in weeks, hold the loan to maturity, and renegotiate quietly if things go wrong, without the public scrutiny of a syndicated loan or bond.
Why Borrowers and Investors Love It
For borrowers, the attractions go beyond convenience. Private loans can be tailored to unusual situations, from a carve-out of a division to a business with lumpy cash flows that a bank’s credit committee would reject. Companies pay for that flexibility, typically several percentage points above the rate on a comparable syndicated loan, but many decide the certainty is worth it.
For investors, the appeal has been yield. Most private loans are floating rate, so when central banks raised rates, returns rose with them. Senior secured direct lending has delivered high single digit or low double digit returns in recent years with relatively low reported volatility. For a pension fund trying to meet long-term liabilities, that combination is hard to ignore.
Insurers have become especially important. Life insurers owned by or tied to large alternative asset managers, including Athene at Apollo and Global Atlantic at KKR, invest policyholder money heavily in private credit. This gives the managers a stable, permanent pool of capital and gives the insurers higher yields than public bonds. It also links the stability of the insurance system more closely to the performance of private loans.
| Feature | Traditional bank or syndicated loan | Private credit loan |
|---|---|---|
| Who holds the loan | Bank balance sheet or many institutional investors | One fund or a small club of lenders |
| Speed to close | Often several months | Often a few weeks |
| Pricing | Lower spread over benchmark rates | Typically higher spread, plus fees |
| Flexibility | Standardised terms | Tailored covenants, PIK options, bespoke structures |
| Transparency | Public pricing, ratings, regulatory reporting | Private marks, limited disclosure |
| Regulation | Bank capital and supervision rules | Fund and asset manager rules, far lighter |
| Funding source | Deposits and wholesale markets | Pensions, insurers, sovereign funds, wealthy individuals |
The Cracks Starting to Show
Every lending boom eventually meets a downturn, and private credit’s first serious examination is under way. The evidence is contested, partly because there is no agreed definition of a default in a market where loans are renegotiated privately.
On the narrow measures the industry prefers, things look manageable. Proskauer’s private credit default index, which tracks senior secured and unitranche loans, stood at about 2.5% in the second quarter of 2026 across more than 700 loans. The IMF’s Global Financial Stability Report in April described default rates in the 2% to 3% range as manageable.
Broader measures tell a darker story. Fitch’s US private credit default rate reached 6.3% for the twelve months to August 2026, a record for its series. Crucially, almost half of the default events Fitch counted were interest deferrals or the introduction of payment-in-kind interest, and another 41% were stressed maturity extensions. In other words, much of the distress is being handled quietly, by letting borrowers pay later rather than forcing them into bankruptcy.
Payment-in-kind, or PIK, is the detail worth understanding. Instead of paying interest in cash, a borrower adds it to the loan balance. Sometimes that is planned from the start for a growing company. Increasingly, it is agreed after the fact because the borrower cannot afford its interest bill. A loan that is accruing PIK may still be counted as performing, and its value marked close to par, even as the debt grows and the underlying business weakens.
The collapse of auto parts supplier First Brands and subprime car lender Tricolor in the autumn of 2025 were reminders of what can lurk in opaque lending. Neither was a classic direct lending deal, but both exposed weak due diligence and complex financing structures that surprised even sophisticated lenders. JPMorgan’s Jamie Dimon warned at the time that when you see one cockroach, there are probably more.
What Regulators Are Worried About
The Financial Stability Board’s report on private credit vulnerabilities in May 2026 set out the official concerns clearly. It flagged valuation opacity, inconsistent definitions of default, the growing reliance on PIK, and liquidity mismatches in semi-liquid funds that promise investors periodic redemptions while holding loans that cannot be sold quickly. Above all, it noted that a market of this size has never been through a prolonged downturn.
Three issues stand out. The first is valuations. Private loans are marked by the fund managers themselves, often quarterly, using models rather than market prices. When conditions worsen, those marks can lag reality by months, flattering returns and delaying the recognition of losses.
The second is interconnection. Banks have pulled back from making these loans directly but have become major lenders to the private credit funds themselves, through credit lines and other structures. Insurers own large chunks of the loans. The Bank of England and the US Federal Reserve have both been working to map these links, because a problem that starts in private credit may not stay there.
The third is the arrival of retail money. Managers have launched a wave of evergreen and semi-liquid funds aimed at wealthy individuals and, in some markets, ordinary savers. These products promise regular liquidity from assets that are fundamentally illiquid. In a calm market, inflows cover redemptions. In a stressed one, managers may have to limit withdrawals, just as several open-ended property funds were forced to do when rates rose, a pressure we examined in our coverage of real estate in a high-rate world.
Systemic Risk or Growing Pains?
It would be easy to cast private credit as the next subprime, but the comparison has limits. Most private credit funds borrow far less against their assets than banks do. Investors commit money for years and cannot run overnight the way depositors can. Losses, when they come, fall largely on pension funds and insurers that signed up for risk, rather than on taxpayers through a bank bailout.
The more likely outcome is not a sudden crash but a slow grind. Some funds will report disappointing returns as PIK balances turn into write-downs. Weaker managers that grew too fast will struggle to raise new money and may be absorbed by larger rivals. Borrowers that relied on endlessly flexible lenders will find the terms tighter. The asset class will survive, but the golden age of easy returns with little visible volatility is probably ending.
The tail risk sits in the places where private credit touches the rest of the system: insurers with concentrated holdings, banks with large exposure through fund finance, and retail products with liquidity promises they cannot keep. That is where regulators are rightly focusing.
What This Means for Mid-Market Companies
For chief executives and finance directors, private credit remains a valuable option, but the rules of engagement are changing. Lenders are becoming more selective, asking for tighter covenants and paying closer attention to cash flow rather than adjusted earnings. Companies that were able to refinance easily in 2021 may find the next round more demanding.
A few practical points follow. Know your lender. The quality, size and staying power of the fund behind your loan matter more than the headline rate, because a lender under pressure from its own investors behaves differently in a renegotiation. Treat PIK as a warning light, not a free option. Deferring interest buys time but increases the debt, and it can make a later refinancing much harder. Finally, build relationships with more than one source of capital, including banks that are returning to the market, so that you are not dependent on a single lender if conditions turn.
What Investors and Boards Should Ask
For institutional investors and trustees, the questions are about transparency. How are loans valued, and by whom? What share of income is being paid in kind rather than cash? How concentrated is the portfolio by sector and sponsor? What happens to redemptions if many investors ask for their money back at once?
For boards of insurers and banks, the priority is understanding indirect exposure. A balance sheet can look free of private credit risk while holding loans to the funds, structured notes backed by them, or derivatives linked to their performance. The past few years have shown that risk tends to migrate to wherever it is least visible.
A Market Growing Up
Private credit is not going away. The structural reasons for its rise, bank capital rules, demand from long-term investors and the needs of mid-sized companies, are still in place. If anything, the market is likely to keep growing into new areas such as infrastructure, asset-backed lending and financing for AI data centres.
What is changing is the assumption that it can grow without friction. The next few years will separate lenders who underwrote carefully from those who simply rode a wave of cheap capital and rising rates. For borrowers and investors alike, the lesson is the oldest one in finance: the returns that look effortless in good times are usually the ones that need the closest scrutiny.
