Private Credit: A Looming Crisis?

As the globe watched the coordinated US-Israeli offensive against Iran, a Goldman Sachs executive remarked that their clients were “just glad there’s something to talk about that isn’t software exposures and private credit” (Tett, 2026). Private credit is a rapidly expanding subset of Non-Bank Financial Intermediation (NBFI) where credit is extended to businesses by private firms rather than through traditional bank intermediation (Cai and Haque, 2024). While attention is fixed on Hormuz, the private credit market is undergoing what experts describe as a “slow moving cancer” (Tett, 2026). Driven by regulatory arbitrage, specialisation, and incentive distortions within private lending structures, credit has been redistributed across a more opaque system which remains interconnected with the banking sector. Thus, risk is rendered less observable, allowing its impact to be deferred until financial conditions tighten.

To understand how risk is accumulated and obscured, it is necessary to situate private credit within the broader architecture of NBFIs (International Monetary Fund, 2024). At the top sit investors who seek long-duration credit assets. This capital is channeled through a set of intermediaries. At the base of the system are corporate borrowers, often small to medium sized enterprises operating outside public debt markets. This system is dependent on the banking industry, which often provides leverage to non-bank lenders. Risk is distributed across multiple layers of the financial system, partially anchored in the traditional banking sector.

Rapid expansion in private credit represents a structural shift in credit intermediation away from traditional bank balance sheets toward non-bank lenders. Global NBFI assets under management reached $256.8 trillion at the end of 2024 (Financial Stability Board, 2025), up from $95.2 trillion in 2008, now accounting for over half of global financial assets, with growth outpacing the banking sector (Financial Stability Board, 2025). In the United States NBFI assets have more than doubled from $30 trillion in 2009 to $72 trillion in 2022, compared to a more modest increase in bank assets over the same period (Kroszner, 2024). Private credit has emerged as one of the fastest growing segments, rising from $380 billion in 2010 to an estimated $2.28 trillion in 2025, an increase of roughly 500% since 2009 (Guevarra and Bhuracha, 2025).

This transformation is partially attributable to external forces. Post crisis regulatory reforms, particularly under Basel III, increased capital and liquidity requirements for banks, reducing their willingness to lend to riskier and more opaque borrowers and encouraging a migration of credit toward less regulated intermediaries (Alacos, Doerr and Pinter, 2025; Financial Stability Board, 2023). Concurrently, a prolonged period of low interest rates alongside quantitative easing intensified the search for yield among institutional investors, directing capital toward private credit funds offering a persistent spread premium over comparable public debt (Alacos, Doerr and Pinter, 2025). Private credit has also expanded by meeting structural gaps in credit demand, particularly from smaller and highly leveraged firms that remain underserved by banks (International Monetary Fund, 2024).

Private credit funds often coordinate financing across lenders, specialising in screening opaque firms, developing informational advantages that allow lending where banks are less willing or able to do so (Aldasoro and Doerr, 2025). This is particularly evident in sectors such as technology (International Monetary Fund, 2024), where firms are asset-light, highly leveraged, and difficult to value. Thus, they are less suited to bank credit, and financial risk shifts into a less regulated and more opaque part of the system, while remaining linked to the banking sector.

Reconfigured credit provision structures create familiar incentive problems in an opaque setting with weaker regulatory and market constraints. Private credit funds delegate decision making by situating investors to allocate capital to fund managers who originate and monitor loans, making assessing risk dependent on managerial interpretation of borrower fundamentals (International Monetary Fund, 2024). This separation between those who bear risk and those who make lending decisions, misaligns incentives (International Monetary Fund, 2024). In banking, similar delegation problems exist, they are more tightly constrained by regulation that imposes discipline on risk assessment. In private credit, lending takes place in largely privately negotiated environments with limited external benchmarking (International Monetary Fund, 2024).

Compensation models reinforce these conditions. Fund manager remuneration is weighted on capital deployment (International Monetary Fund, 2024). The absence of continuous market pricing means that valuations are predominantly model-based (International Monetary Fund, 2024), granting managers discretion over both underwriting and ongoing pricing. This reduces the pressure to recognise losses early. As a result, risk can build within portfolios without being adequately reported, particularly in segments with high informational asymmetry (Alvos, Doerr and Pinter, 2025): the system realises losses late as they are not absorbing them through continuous price adjustment.

The consequences of these dynamics become visible as financial conditions tighten and previously deferred risks begin to surface. At the borrower level, rising interest rates and tighter financing conditions place increasing pressure on highly leveraged firms (Cohen et. al., 2024) which often depend on floating-rate debt and continued access to refinancing (Karri, 2025). This has begun to manifest in weaker performance, particularly in opaque and asset light sectors such as technology (Tett, 2026). In response, lenders have increasingly relied on contractual adjustments (International Monetary Fund, 2025), that defer cash obligations, avoiding underlying solvency pressures.

These mechanisms interact with valuation practices to produce a widening gap between reported valuations and underlying credit quality. Market indicators, such as discounts of listed private credit vehicles to their reported net asset values, suggest that losses are being priced ahead of reported marks, which are now adjusting under pressure as previously deferred losses begin to surface (Reuters, 2026).

The vulnerabilities emerging in private credit markets are unfolding within an increasingly different macroeconomic environment from the one in which the sector expanded. The prolonged period of low interest rates and abundant liquidity supported rapid credit growth (Schlaffer, 2019). Now, inflationary pressures and tighter monetary policy have increased the cost of capital across the system, while the scale of global indebtedness has heightened sensitivity to interest rate movements (Adrian, 2023). Therefore, private credit markets are exposed to developments in broader financial conditions. Because lending is typically structured on a floating rate basis, increases in benchmark rates feed through into borrower financing costs, tightening debt servicing constraints, increasing reliance on refinancing. While Goldman Sachs executives may have enjoyed a brief period of calm, as the war in the Middle East takes centre stage, attention is returning to private credit, and the risk this conflict poses to the sector. Volatile energy markets have the potential to sustain inflationary pressures and delay monetary easing (Sadh and Gupta, 2026). In such scenarios, higher-for-longer interest rates interact with an already leveraged system, reinforcing refinancing constraints and limiting the capacity of both borrowers and lenders to defer adjustment. What emerges is a convergence between a system structured to delay loss recognition and macroeconomic conditions that accelerate it.