Private credit, once a niche corner of finance focused on middle-market borrowers, has rapidly expanded into a $1.7 trillion industry. The sector’s rise has been nothing short of remarkable, reshaping how companies access capital and how investors seek yield. As private credit’s influence grows, so do questions about the risks that come with its newfound prominence.
Not long ago, private credit was the domain of specialist lenders serving companies that couldn’t easily tap public markets or traditional banks. Today, it is a central pillar of corporate finance, fueling private equity transactions, asset-based lending, and even retail investment products. The appeal is clear: private credit offers higher yields than many public bonds and a chance to diversify away from the daily swings of public markets.
Several factors have contributed to this surge. Banks have pulled back from lending to riskier or unrated companies, especially after the 2023 regional banking crisis. Private lenders stepped in to fill that gap, offering more flexible terms and faster decision-making. Institutional investors, including pension funds and insurers, have embraced private credit as a core strategy, not just an alternative. Even individual investors are getting in on the action through new investment vehicles.
Private credit is driving growth due to its attractive yields, as private loans typically offer higher interest rates than comparable public bonds, which is particularly appealing in an environment where fixed income returns have been low. Additionally, private lenders provide flexibility by customizing loan structures to meet the unique needs of borrowers, making them preferred partners for companies pursuing growth or acquisitions. Furthermore, private credit offers diversification benefits because it tends to be less correlated with public markets, helping investors reduce portfolio volatility.
Analysts expect the market to keep growing. Some forecasts see private credit assets under management reaching $2.8 trillion by 2028, with momentum driven by demand from both borrowers and investors.
With rapid growth comes heightened scrutiny. Some experts warn that if the private credit boom continues unchecked, it could become a new source of systemic risk in the financial system. The concern is not just about the size of the market, but also its increasing interconnectedness with other financial institutions.
Private credit funds often rely on secured credit lines from banks, and many are managed alongside private equity portfolios. This web of connections means that trouble in one part of the system could quickly spread to others. For example, if defaults rise among highly leveraged borrowers, losses could ripple through private credit funds and back to the banks that support them.
Another worry is transparency. Unlike public markets, private credit deals are less visible, making it harder for regulators and investors to spot emerging problems. If investors suddenly rush to redeem their money, the illiquid nature of private credit could force funds to sell assets at fire-sale prices, amplifying market stress.
One trend drawing particular attention is the growing use of paid-in-kind (PIK) loans. These loans allow borrowers to pay interest by adding it to the loan principal instead of making cash payments. While this can help companies conserve cash in tough times, it also means that debt levels can quietly swell in the background.
PIK loans are especially common in venture debt and among companies looking to extend their financial runway. The share of private credit and broadly syndicated loans making PIK payments has risen, with more than 11% of such loans in business development company portfolios now using this structure, up from about 10% a year ago. While this flexibility can be a lifeline for borrowers, it can also mask underlying financial stress and create bigger problems down the road if companies are unable to repay the growing balances.
Private credit’s transformation from niche to mainstream is one of the most significant shifts in modern finance. The sector is now a vital source of funding for companies and a key opportunity for investors seeking yield. But with size and influence come new responsibilities and risks.
Regulators and market participants are watching closely, especially as the sector’s interconnectedness and reliance on less transparent structures increase. The rise of paid-in-kind loans is just one example of how innovation in private credit can bring both benefits and hidden dangers.
For now, private credit remains a powerful force in the financial landscape. Whether it continues to deliver on its promise or becomes a source of broader instability will depend on how carefully risks are managed as the market matures.
