Last fall, the sudden collapse of a series of American companies backed by private credit thrust a fast-growing but murky corner of Wall Street lending into the spotlight.
Private credit, also known as direct lending, is an umbrella term for loans made by non-bank institutions. The practice has been around for decades, but its popularity soared after regulations after the 2008 financial crisis prevented banks from servicing high-risk borrowers.
Its growth (from $3.4 trillion in 2025 to an estimated $4.9 trillion by 2029) and the September bankruptcies of auto industry companies Tricolor and First Brands have some prominent Wall Street figures sounding the alarm about the asset class.
JPMorgan Chase & Co. CEO Jamie Dimon warned in October that credit problems rarely occur in isolation: “If you see one cockroach, there’s probably more.” A month later, billionaire bond investor Jeffrey Gundlach accused private lenders of making “garbage loans” and predicted that the next financial crisis would stem from private credit.
Concerns about private credit have subsided in recent weeks as there has been no increase in high-profile bankruptcies and disclosures of losses by banks, but they have not completely disappeared.
The companies most associated with the asset class, including Blue Owl Capital and alternative asset giants Blackstone and KKR, are still trading well below their recent highs.
The rise of private credit
Mark Zandi, chief economist at Moody’s Analytics, said in an interview that private credit is “less regulated, less transparent and opaque, and growing rapidly. That doesn’t necessarily mean there’s a problem with the financial system, but it’s a necessary condition for the financial system.”
Proponents of private credit, such as Apollo co-founder Mark Rowan, say the rise of private credit has boosted U.S. economic growth by filling the void left by banks, delivering higher returns to investors and making the broader financial system more resilient.
Private lenders told CNBC that large investors such as pension and insurance companies with long-term debt are considered better sources of funding for multi-year corporate loans than banks that raise money with short-term deposits, which can be more liquid.
However, concerns about private credit tend to arise from the sector’s competitors in public debt, which is understandable given its nature.
After all, it is the asset managers offering private credit loans who are evaluating them, and they may have an incentive to delay recognition of potential borrower problems.
“The double-edged sword of private credit,” said Elizabeth de Fontenay, a professor at Duke Law School, is that lenders have “a very strong incentive to monitor issues.”
“But by the same token…they really have an incentive to try to hide the risk if they think or hope that they might somehow be able to avoid the risk in the future,” she said.
De Fontenay, who studies the impact of private equity and debt on American businesses, said his biggest concern is that it’s difficult to know whether private lenders are accurately valuing loans.
“This is a very large market and more and more companies are coming into it, but it’s not a public market,” she said. “I’m not entirely sure if the assessment is correct.”
For example, when home improvement company Lenovo collapsed in November, BlackRock and other private lenders valued the company’s debt at 100 cents on the dollar, right up to the point of reducing the debt to zero.
Defaults on private loans are expected to rise this year, especially as borrowers with poor credit quality show signs of stress, according to a report from Kroll Bond Ratings.
Private credit borrowers are also increasingly relying on in-kind payment options to prevent loan defaults, according to Bloomberg, which cited ratings firm Lincoln International and independent data analysis.
Ironically, although the two companies are competitors, part of the private credit boom has been financed by the banks themselves.
financial enemy
Investors learned the scale of this form of financing after investment banks Jefferies, JPMorgan and Fifth Third disclosed losses from auto industry bankruptcies in the fall. Bank lending to non-depository financial institutions (NDFIs) reached $1.14 trillion last year, according to the St. Louis Fed.
On January 13, JPMorgan disclosed for the first time its loans to non-bank financial companies as part of its fourth-quarter earnings release. The amount of loans in this category tripled from about $50 billion in 2018 to about $160 billion in 2025.
Moody’s Zandi said banks are now “back in the game” as deregulation under the Trump administration frees up capital for banks to expand lending. This, coupled with new entry into private credit, could lead to lower loan underwriting standards, he said.
“There’s a lot of competition for the same types of loans right now,” Zandi says. “If history is any guide, that’s a concern…because it probably speaks to weakening underwriting and ultimately bigger credit issues down the road.”
Although neither Mr. Zandi nor Mr. de Fontenay said they believe the collapse of the private credit sector is imminent, as private credit continues to expand, its importance to the U.S. financial system will grow.
De Fontenay said there are well-established regulatory strategies if banks are hit by disruptions due to lending, but future problems could be more difficult to resolve in the private sphere.
“It raises broader questions in terms of the safety and soundness of the entire system,” Fontenay said. “Can we have enough information to know if there are signs of a problem before it actually occurs?”
