The term "private credit" is a recent rebranding of what was called "shadow banking" after the 2008 crisis. This shift in terminology has helped the asset class grow enormously by making a historically risky sector sound less alarming and more legitimate to a wider range of investors.
The private credit market is exhibiting behaviors reminiscent of the 2007-2008 subprime crisis. These include major funds blocking investor withdrawals ("gating") and large banks proactively disclosing their exposure, suggesting growing internal anxiety and a desire to manage public perception before a potential downturn.
Despite the highest benchmark interest rates in years, the U.S. economy avoided a major wave of corporate bankruptcies. This resilience can be attributed to the explosive growth of private credit, which provided an alternative financing channel for companies when traditional bank lending became more restrictive.
Post-2008 regulations were meant to de-risk banks by pushing risky lending outside the system. However, banks have developed a "frenemy" relationship with private credit funds, both competing and partnering, leading to a massive $1.4 trillion in bank exposure to the sector and reintroducing systemic risk.
A large concentration of private credit lending is in the software sector, particularly SaaS businesses. The rise of powerful AI tools that can replicate software services cheaply poses a direct threat to the viability of these companies, creating a hidden risk concentration within private credit portfolios where there are few hard assets to recover.
Private credit assets lack the price discovery of public markets. Their value is typically assessed quarterly by third-party services, meaning the "marks" on a fund's books can lag significantly behind reality. This creates a hidden risk: in a downturn, the actual sale price could be far below the stated value.
A proposed rule change allowing alternative assets like private credit in 401(k)s raises concerns. Critics suggest this move could be driven by institutional investors seeking "exit liquidity"—a way to sell their illiquid and hard-to-value assets to a new, less sophisticated class of retail buyers.