Inside Private Credit: Expert Insights on Risks and Opportunities

Private credit has emerged as a dynamic force in global capital markets, growing rapidly and evolving significantly in recent years. This report summarizes the key insights from the webinar ‘Inside Private Credit: Expert Insights on Risks and Opportunities, where experts Winifred Cisar (CreditSights), Zachary Griffiths (CreditSights) and Meghan Neenan (Fitch Ratings) discussed growth drivers, investor trends, market dynamics, transparency, risk factors, and the future outlook.

You can watch the full webinar here.

Key takeaways

Private credit has experienced rapid growth, with the US direct lending market tripling since 2019, but it remains a smaller segment compared to the overall leveraged finance market.

Alternative investment managers (e.g., Blackstone, Apollo, KKR) are the dominant players, benefiting from regulatory changes that limited bank lending and enabled them to provide more durable capital and innovative product offerings.

Retail investor participation is increasing through vehicles like BDCs and new perpetual private structures and 401(k)s in the US, but these raise questions around liquidity, suitability, and redemption constraints.

Private credit acted as a liquidity buffer during periods of public market volatility (2022–2023), with built-in duration matching between investors and borrowers being a key stabilizing factor.

Competition and interplay with public credit markets is strong, with flows shifting between private credit and broadly syndicated loans (BSLs) depending on pricing and market conditions.

Transparency and data gaps remain a challenge, especially regarding default rates, recoveries, and real-time valuations. Definitions of default and loss can vary significantly between vehicles.

Credit fundamentals are becoming more differentiated among managers and portfolios, with net realized losses and non-accruals rising modestly but remaining generally low.

Private credit is not seen as a systemic risk at this stage, due to well-understood asset classes, permanent capital structures, and limited forced selling. However, growing interconnectedness and product innovation warrant ongoing monitoring.

Regulatory focus is increasing, particularly on bank exposures, insurance company investments, rating practices, and the development of new product types such as ETFs and interval funds.

Illiquidity premiums remain a draw for investors, though spreads have tightened in recent years due to increased competition and market evolution.

Future risks include asset-liability mismatches, further product innovation, and continued growth in scale and complexity, all of which could alter the risk profile of the asset class.

What is private credit?

Private credit typically refers to direct lending, where large asset managers deploy committed capital from institutional investors to make loans—often to private equity portfolio companies. These loans usually exceed the capacity or risk appetite of a single bank and are structured outside the traditional syndication process.

Direct lending can be segmented by borrower size (lower middle market, traditional middle market, and upper-middle market), with larger loans now rivaling those in the broadly syndicated loan (BSL) market. Globally, the private credit market is about $1.6 trillion, (source: Preqin) with direct lending accounting for roughly half globally, thought around 60% in the US.

Growth has been rapid: in the U.S., the direct lending market tripled between 2019 and 2023, far outpacing growth rates in high-yield bonds and syndicated loans which have seen around 3-4% annualized growth. (Report)

The most common fund structure is the closed-end general partner/limited partner model, offering long-term (7-10 year), illiquid capital commitments.

Key players

Alternative investment managers such as Blackstone, Apollo, KKR, and others dominate private credit. Their growth accelerated post-2007 due to banking regulations that constrained traditional lenders, especially after the global financial crisis. Regulatory cycles, bank retrenchment, and low interest rates further enabled alternative managers to expand, offering sponsors and investors greater certainty and privacy. The resilience and durability of their capital have made them attractive partners compared to banks.

Insurance companies have also become important, often partnering with or being acquired by alternative managers to create rated products and optimize capital charges. This is a big driver for capital availability for alt managers which is further fueling growth.

Private credit as a liquidity buffer

The 2022-2023 period illustrated private credit’s role as a market stabilizer. With aggressive rate hikes and public market volatility, private credit offered a liquidity buffer by matching investors and borrowers with aligned investment horizons. Borrowers benefited from certainty on pricing and execution; asset managers could tailor covenants and structures to specific needs, avoiding the complexity of large syndicates.

Analysis shows private credit funds delivered significant illiquidity premiums—historically about 365 basis points over leveraged loans and 230 basis points over high-yield bonds, though this has narrowed considerably as of late. During public market dislocations, private credit absorbed deals that might otherwise have stalled, though this dynamic can shift as public markets recover.

Interplay between private and public credit markets

There is an uneasy but symbiotic relationship between private credit and public markets (high-yield bonds, BSLs). Private credit is seen both as a competitor and a complement, especially as high-yield new issuance has slowed. The BSL market regained competitiveness in 2024 as pricing tightened, leading to more BSL takeouts of private credit deals. Nevertheless, features like delayed-draw structures and PIK (payment-in-kind) options make private credit attractive for certain issuers.

In investment grade, some private placements now resemble club deals more than syndicated offerings, while dual-track processes (exploring both BSL and private options) have become common for mid-sized issuers.

Market transparency and data

Transparency is a significant challenge. While BDCs (regulated by the SEC) provide detailed quarterly disclosures, much of the private credit market remains opaque.

Data gaps persist around real-time pricing, default rates, and recoveries, with varying definitions of default and non-accrual across vehicles. For example, Fitch’s leveraged finance group tracks 300 private ratings and 900 CLO opinions yielding a default index (5.2% 12-month rate as of July 2025).

Recovery measurement is complicated by long bankruptcy processes and subjective assessments.

Overall, while performance has been strong, there is substantial differentiation between managers and vehicles.

Credit fundamentals and outlook

Credit fundamentals have become more differentiated across portfolios. (Report)

Net realized losses for BDCs averaged about 1.2% in 2024, up from 0.5% in 2023, with a wide range of outcomes among managers.

Non-accruals also ranged widely (0%-6.5%). Larger BDCs with strong workout capabilities and deal flow access may be better positioned.

The sector outlook for BDCs in 2025 is negative, amid elevated rates and a challenging macro backdrop.

Defaults are rising across leveraged finance: high-yield bonds saw a recent uptick, BSL defaults are outpacing high-yield, and private credit defaults are also increasing (estimates range from 1% to 10% depending on definitions).

High-yield fundamentals remain relatively strong due to low net new issuance and locked-in lower rates.

The role of retail investors and product innovation

Retail investors have been part of the private credit market via business development companies (BDCs) since the 1980s. The sector saw significant retail inflows following the introduction of perpetual private BDC structures (not publicly listed, distributed via wirehouses, with quarterly redemption caps) by Blackstone in January 2021. While these innovations increase capital for managers, they raise questions about investor suitability and potential liquidity mismatches.

Other recent product developments include interval funds, private credit ETFs, and vehicles offering exposure to real estate, private equity, and infrastructure, each with varying liquidity terms. The structure of these products—especially redemption caps and manager-imposed gates—helps mitigate the risk of forced asset sales, a key lesson from the global financial crisis.

Is private credit a systemic risk?

There is ongoing debate about whether private credit poses a systemic risk. Experts argue that, for now, the asset class is not systemically threatening. The underlying assets are generally well-understood, and structures (such as permanent capital and redemption restrictions) limit forced sales and market contagion.

Systemic risk would require significant interconnectedness and exposure across the financial system—features more characteristic of the banking system during the global financial crisis.

While private credit is growing rapidly, its absolute size remains modest relative to broader credit markets. However, potential risks include asset-liability mismatches (e.g., ETF vehicles for illiquid assets) and increasing interconnectedness as large managers dominate and cross-finance deals.

Regulatory developments

Regulators are increasingly focused on private credit, particularly regarding bank exposures and transparency.

Recent changes require banks to expand call report disclosures on private credit from one to five line items, offering greater granularity, for example.

Initial data suggest bank exposure remains modest, largely tied to warehousing and revolving facilities at the top of capital structures with significant collateral.

Insurance companies affiliated with alternative managers are also under scrutiny, especially given their higher share of illiquid (Level 3) assets.

Regulators are examining rating agency practices and capital treatment for these investments, and the National Association of Insurance Commissioners (NAIC) is reviewing rating challenges and oversight.

Future trends and emerging risks

Several trends and risks merit monitoring. The proliferation of interval funds, ETFs, and new trading venues for private credit assets could introduce new liquidity pressures or asset-liability mismatches, especially if tested in a downturn. The increasing scale and interconnectedness of alternative managers raise questions about concentration risk.

Meanwhile, product innovation continues to blur the boundaries between public and private credit, and between institutional and retail capital. Macroeconomic uncertainty, ongoing regulatory evolution, and potential rating arbitrage for insurance-owned assets are also key areas to watch.

Conclusion

Private credit has become a critical component of the credit market ecosystem, offering flexibility and stability during public market disruptions, but also introducing new complexities and risks. While the sector does not yet pose a systemic threat, its continued evolution demands close scrutiny from investors, regulators, and market participants.