Remember when private credit felt like the cool, exclusive club of finance? The place where mid-sized companies went when banks got stingy, and investors earned juicy illiquidity premiums for locking money away? Yeah, those days are basically over.
I’ve been watching this space for years, and the transformation happening right now is nothing short of breathtaking – and more than a little scary. What used to be a niche corner of the market has ballooned into a $3 trillion beast that increasingly looks, walks, and quacks like the public bond market. And if history has taught us anything, when private markets start copying public ones, trouble often follows.
The Blurring Line Nobody Saw Coming
Let me paint the picture. Five years ago, private credit was mostly about direct lending to companies too small or too complex for the syndicated loan or high-yield bond market. Average deal size? Maybe $50-100 million. Borrowers were solidly middle-market. Covenants were tight. Everyone knew the rules.
Fast forward to 2025 and the industry is projected to hit $5 trillion by the end of the decade. We’re now regularly seeing single private credit deals north of a billion dollars. Some funds are even co-underwriting alongside banks in club deals that look indistinguishable from broadly syndicated loans.
The product menu has exploded too. Want investment-grade style private debt? It exists. Asset-backed facilities? Check. Infrastructure financing? Real estate bridge loans? Specialty finance? You name it, someone in private credit is offering a version of it.
The lines between public and private markets are blurring faster than most people realize.
Credit portfolio manager at a $1T+ asset manager
What’s Driving This Convergence?
Several forces are colliding at once – and they’re all accelerating the trend.
- Banks retreated from large stretches of leveraged finance after the Volcker Rule and Basel III made it expensive to hold risky loans.
- Borrowers discovered they could get certainty of execution and lighter covenants from private lenders – especially during the 2022-2023 rate tantrum when public markets froze.
- Investors poured hundreds of billions into private credit funds chasing yield when rates were near zero, giving managers dry powder they now feel pressure to deploy.
- The biggest driver? Simple economics. When you raise a $20 billion fund, you can’t make your return lending $75 million at a time anymore.
So funds went up-market. Ticket sizes grew. Leverage multiples crept higher. Covenant packages started looking suspiciously “cov-lite.” Sound familiar? It should – it’s exactly what happened in the syndicated loan market before 2020.
The Underwriting Standards Problem Nobody Wants to Talk About
Here’s where my stomach starts to knot.
When you have hundreds of private credit funds chasing the same large, sponsor-backed deals, competition gets fierce. And the easiest way to win a mandate? Offer better terms. Higher leverage. Looser covenants. Add-on capacity for future acquisitions. EBITDA adjustments that would make a 2007 CLO manager blush.
I’ve seen term sheets recently that allow 8-9x leverage through the incurrence test for add-on acquisitions – on top of already elevated 6-7x base-case leverage. That’s nosebleed territory even by pre-GFC standards.
Increased competition can impact credit profiles by increasing the risk of aggressive underwriting and weaker covenant protections.
Senior credit strategist
The First Brands default last year should have been a wake-up call. Over $1.5 billion in private loans, highly leveraged auto-parts platform, sudden liquidity crunch, almost no warning. Lenders were stunned at how fast fundamentals deteriorated and how little visibility they had. That’s not supposed to happen in private credit – the whole pitch was better monitoring and control.
The Hidden Concentration Risk
Another issue that keeps me up at night: accidental concentration.
Because there are only so many $1 billion-plus private equity sponsors doing large deals, the same names keep popping up across funds. An investor allocating to five different “diversified” private credit managers might unknowingly end up with triple exposure to the same portfolio companies of a single mega-sponsor.
Diversification? More like di-worse-ification in a downturn.
Liquidity Illusion of Liquidity
Private credit still loves to advertise itself as “buy and hold” with patient capital. Lovely in theory. But reality is catching up.
Open-end private credit funds and interval funds have exploded in popularity because they offer quarterly or monthly liquidity to investors. Except when everyone wants out at once – good luck. Gates, side pockets, and suspended redemptions are already part of the conversation.
Even in the closed-end world, secondary trading platforms are trying to create liquidity. But volume remains tiny, pricing is opaque, and bid-ask spreads can be 5-10 points in stressed scenarios. That’s not liquidity – that’s the illusion of liquidity.
Are We Building the Next Systemic Risk?
Perhaps the scariest part is how interconnected everything has become.
Insurance companies are now among the largest investors in private credit. Pension funds have massive allocations. If we get a wave of defaults and loss-given-default turns out higher than modeled (because recovery rates on cov-lite loans are terrible), the pain spreads far beyond a few hedge funds.
Regulators are already nervous. Multiple central bank reports have flagged highly leveraged non-bank financial institutions as a potential amplification channel in the next downturn. When your lending book looks more like 2006 vintage CLOs than traditional private debt, that concern feels justified.
Where Do We Go From Here?
Look, I’m not saying private credit is about to blow up tomorrow. There are still plenty of disciplined managers doing sensible mid-market lending with strong covenants and reasonable leverage.
But the market has clearly bifurcated. On one side you have the original recipe – smaller, covenant-heavy, truly private deals. On the other side you have “private in name only” large-cap loans that are basically public market equivalents with worse transparency and liquidity.
Investors need to be brutally selective. Manager dispersion in private credit has always been huge, but it’s about to get massive. The winners will be those who stick to discipline when others chase yield and size. The losers will be those who followed the herd up-market and now sit on over-leveraged, poorly protected credits.
In my experience, the most dangerous words in finance are “this time is different” and “it’s private so it’s safer.” We’re hearing both right now.
Private credit isn’t going away. It’s a permanent and important part of the capital structure. But its adolescence is over. The training wheels are off, the industry has grown up – and with adulthood comes adult-sized risks.
The red flags are there. Whether we heed them or ignore them will determine whether this story ends with a correction… or a crisis.
