Private credit is rapidly evolving from a niche asset class to the dominant force of the global lending ecosystem, which currently represents an estimated $2.5 trillion in industry.[1] It rivals traditional bank lending and public debt markets. For institutional investors navigating a shifting macroeconomic and regulatory landscape, asset classes present both attractive opportunities and growing concern.
Private credit promises a bespoke trading structure from traditional bonds, excellent yields, and diversification, but its accelerated growth has boosted bank cuts and investors’ appetites, raising important questions about liquidity, transparency, and systematic risk.
This transformation is driven by structural changes in the financial system. The main ones are: banking regulations since 2008, increased demand from private equity for more flexible and non-traditional sources, banking regulations since 2008, permanent search for yields in low interest rate environments.
Driver of private credit growth
Several important factors have contributed to the rise in private credit.
- Banking regulations and reductions: Since 2008, financial reforms such as Basel III and Dodd Frank impose stricter capital requirements on banks and limit their ability to lend to middle market companies[2]. Private credit funds intervened to fill this gap.
- Demand for yield investors: In a low-interest environment, institutional investors, including pension funds and insurance companies, have sought higher returns through private credit investments.[3]
- Expanding Private Equity: The growth of private equity has driven the demand for direct lending because it prefers customized financing solutions over traditional syndicated loans.[4]
- Flexibility and Speed: Private credits offer customized loan structure, faster execution, and reduced regulatory oversight, making them attractive to borrowers.[5]
Financial stability and systematic risk impact
Despite its benefits, private credit introduces new vulnerabilities in the financial system.
- Liquidity risk: Unlike banks, private credit funds lack access to central bank liquidity. While many funds limit investor withdrawals to quarterly or annual redemption windows, during economic recessions where borrowers default and secondary market liquidity is dry, investors’ demands for redemption can cause fire sales and market instability.
- Leverage and concentration: Many private credit funds operate with high leverage, amplifying returns as well as increasing vulnerability. For example, the Business Development Company (BDCS) was allowed to increase the leverage cap to 2:1 in 2018[6]raises concerns about systemic risks.
- Opaque valuations: Private credit assets are not publicly disclosed, and valuations are less transparent and potentially outdated, potentially hiding underlying risks.[7]
- Linking with Banks: Private credit is run in the traditional banking industry, but increasing relationships with bank funding can cause contagion risks in the recession.[8]
Regulation outlook
Regulators, including the Federal Reserve, International Monetary Fund (IMF), and International Village Banks (BIS), are increasingly scrutinizing the role of private credit in financial markets. The IMF warns that expanding private credit could amplify economic shocks, especially if underwriting standards deteriorate. The BIS highlights the need for improved transparency and risk monitoring, particularly as retail investors are exposed to asset classes.
Think more
For allocators and asset owners, private credit represents a strategic lever in pursuing yields and portfolio diversification. However, as capital continues to be poured into space and often outweighs risk infrastructure, investment papers must be continually reexamined through a risk-adjusted lens. With global regulatory scrutiny and increasing complexity in credit markets, due diligence and scenario planning are essential to avoid hidden vulnerabilities and ensuring resilience in the next stage of the credit cycle.
At the same time, policymakers are increasingly wary of the broader financial impact of rising private credit. Global regulators, including the Federal Reserve, IMF and BIS, have warned that unidentified growth in the opaque and illiquid credit market segment will amplify the shock and create a feedback loop across the agency. In particular, increasing accessibility of private credit products to retail investors, often through interval funds and public BDCs, raises further concerns about liquidity inconsistencies and valuation transparency. These dynamics could raise regulatory attention as retail participation grows.
The right balance between market innovation and systematic surveillance is important not only for regulators but also for institutional investors who must navigate these cross-currents with discipline and foresight.
[1] Overview of the International Banking Village (BIS) Private Credit Market, 2025.
[2] Federal Reserve Report on Private Credit Characteristics and Risks, 2024.
[3] IMF Global Financial Stability Report, April 2024.
[4] IMF Blog on Private Credit Growth, 2024.
[5] Private credit is Brookings, 2024.
[6] HR4267 – Small Business Credit Availability Act, 2018
[7] Federal Reserve Report on Private Credit Characteristics and Risks, 2024.
[8] Bank lending to private equity and private credit funds: Insights from regulatory data, Boston 2025
