Evolving Private Credit - by Thomas Hoenig - FinRegRag

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Evolving Private Credit<br>Rapid growth, expanding leverage, and deeper financial linkages are changing the industry's risk profile<br>Thomas Hoenig<br>Jun 23, 2026

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Pieter Bruegel the Elder - Landscape with the Fall of Icarus<br>In recent months much has been written regarding the rapid growth of private credit (PC) and related risks incubating within the financial system. This concern has been intensified by the surprise failures of private credit borrowers and subsequent investor runs on private credit firms.<br>While the industry does not appear to pose an immediate systemic risk to the financial system, its rapid growth, expanding leverage, and complex ties within the financial industry deserve attention before private credit becomes the unexpected force that undermines the financial system.<br>Private credit

In its simplest form, private credit is direct lending by nonbank institutions, business development companies (BDCs), or other asset managers to highly leveraged companies. The loans are not publicly issued bonds and are usually not traded in liquid public markets. They are privately negotiated, often senior secured, floating-rate, and commonly held until maturity or refinancing.<br>The private credit borrower is typically a middle-market company: too large or complex for ordinary small-business lending, but too leveraged or too opaque for traditional bank lending or the public bond market. Some are backed by private equity sponsors.<br>Private credit funds are ready lenders because they can offer borrowers greater speed, flexibility, certainty of execution, and confidentiality. Given these advantages, it isn’t surprising that private credit funds have experienced extraordinary growth in recent years.<br>The Federal Reserve estimated in 2024 that the U.S. total private credit market had reached nearly $1.7 trillion, making it comparable in size to the leveraged loan and high-yield bond markets. Using slightly different definitions and a broader global perspective, the Bank for International Settlements (BIS) and the Financial Stability Board (FSB) estimate that private credit fund assets under management have grown from about $2 billion in the early 2000s to between $2.0 and $2.5 trillion today.<br>While estimates vary, the conclusion is the same: Private credit has evolved from a niche financing source into an increasingly important component of corporate credit markets.

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Factors behind private credit’s growth

Several factors have contributed to this growth. First, as the banking industry argues, the post-Great Financial Crisis capital and liquidity requirements made some forms of leveraged corporate lending less attractive for commercial banks. Second, the prolonged low-interest-rate period after 2008 encouraged qualified investors to seek higher-yielding alternatives to public bonds, and private credit helped meet that demand. Finally, borrowers value the private credit model. Companies can obtain tailored financing packages more quickly from a small group of direct lenders than through a public syndication or a more cautious commercial bank.<br>How are private credit firms funded?

On the supply side, private credit firms are funded with long-term investor capital. Sources include, for example, pension funds, insurers, sovereign wealth funds, endowments, private funds, family offices, and high-net-worth individuals. These sources — the limited partners — commit capital to a fund for multiple years, and managers draw on that capital as loans are originated, thus protecting the fund from unexpected short-term liquidity events.[1] Thus, the growth in the supply of capital through private credit and the explosive demand for leveraged capital among mid-tier firms to fund acquisitions, refinancings, and balance sheet growth has made this market a mainstay in corporate finance.<br>Unlike banks, however, private credit funds have no access to insured deposits or to central bank liquidity facilities. Consequently, to maintain investor confidence, they historically have operated with far less leverage than do commercial banks. The IMF reports that the typical private credit fund has maintained debt-to-equity ratios ranging from roughly 0 to 1.3 times, while BDCs often operate around 0.8 to 1.2 times. In contrast, the commercial banking industry, which benefits from both deposit insurance and central bank liquidity, operates with total debt-to-equity ratios averaging 10 to 1.<br>Thus, while both commercial banks and private credit funds are corporate lenders, they cover their risks in very different ways.<br>Also, while private credit may compete with banks in the direct lending arena, it is at times an attractive loan market for banks. When banks lend to private credit, they may mitigate risks that come when lending directly to the private credit borrower. Banks commonly lend to private credit using secured credit or senior tranches, which enables...