Wall Street braced for a collapse in private credit. The risk is rising

The sudden collapse last fall of a string of US companies backed by private credit brought into focus a fast-growing and murky lending corner on Wall Street.

Private credit, also known as direct lending, is an umbrella term for lending done by non-bank institutions. The practice has been around for decades, but rose in popularity after post-2008 financial crisis regulations discouraged banks from serving riskier borrowers.

That growth — from $3.4 trillion in 2025 to an estimated $4.9 trillion by 2029 — and the bankruptcies of automakers Tricolor and First Brands in September have encouraged some prominent Wall Street figures to sound alarms about the asset class.

JPMorgan Chase Jamie Dimon, the company’s chief executive, warned in October that credit problems are rarely isolated: “When you see one cockroach, there are likely to be more.” A month later, billionaire bond investor Jeffrey Gundlach accused private lenders of making “garbage loans” and predicted that the next financial crisis would come from private credit.

While concerns about private credit have eased in recent weeks in the absence of more bankruptcies or high-profile bank losses, they have not dissipated entirely.

Companies most closely associated with the asset class, e.g Capital of the blue owlin addition to alternative asset giants Blackstone and KKRis still trading well below its recent highs.

Private credit “is lightly regulated, less transparent, opaque, and growing very quickly, which does not necessarily mean there is a problem in the financial system, but it is a necessary condition for it to happen,” Mark Zandi, chief economist at Moody’s Analytics, said in an interview.

Private credit boosters, e.g Apollo The rise of private credit has fueled U.S. economic growth by filling the gap left by banks, serving investors with healthy returns and making the broader financial system more resilient, said co-founder Mark Rowan.

Large investors, including pension and insurance companies with long-term liabilities, are seen as better sources of capital for multi-year corporate loans than banks funded with short-term deposits, which can be volatile, private credit operators told CNBC.

But concerns about private credit – which typically comes from the sector’s competitors in public debt – are understandable given its characteristics.

After all, it is the asset managers who make private credit loans that evaluate them, and they may be incentivized to delay recognizing potential problems to borrowers.

The “double-edged sword of private credit” is that lenders have “really strong incentives to monitor for problems,” said Elizabeth de Fontenay, a law professor at Duke University.

“But by the same token…they actually have incentives to try to hide the risks, if they believe or hope that there might be some way out of it in the future,” she added.

De Fontenay, who has studied the impact of private equity and debt on U.S. companies, said her biggest concern is that it is difficult to know whether private lenders are accurately evaluating their loans.

“This is a very large market that is reaching more and more companies, yet it is not a mass market,” she said. “We’re not entirely sure if the assessments are correct.”

In the collapse of home improvement company Renovo in November, for example, Black Rock Other private lenders considered its debt worth 100 cents on the dollar until shortly before reducing it to zero.

Defaults among private loans are expected to rise this year, especially as signs of stress appear among less creditworthy borrowers, according to the Kroll Bond Rating Agency report.

Private borrowers are increasingly relying on in-kind payment options to prevent loan defaults, according to Bloomberg, which cited valuation firm Lincoln International and its data analysis.

Ironically, although these banks were competitors, part of the private credit boom was financed by the banks themselves.

After the investment bank JefferiesJ.P. Morgan and Third Fifth After the losses associated with the bankruptcy of automakers were revealed in the fall, investors learned the extent of this form of lending. Bank loans to non-deposit financial institutions, or NDFIs, reached $1.14 trillion last year, according to the Federal Reserve Bank of St. Louis.

On January 13, JPMorgan revealed for the first time its lending to non-banking financial companies as part of its fourth-quarter earnings presentation. This category has tripled to about $160 billion in loans in 2025 from about $50 billion in 2018.

Moody’s Zandi said banks are now “back in the game” because deregulation under the Trump administration will free up capital for them to expand lending. That, coupled with new entrants into private credit, could lead to lower loan underwriting standards, he said.

“You’re seeing a lot of competition now for the same type of lending,” Zandi said. “If history is any guide, it is a concern…because it may invite poor underwriting and ultimately greater credit problems in the future.”

While neither Zandi nor de Fontenay said they expect an imminent collapse in the sector, as private credit continues to grow, its importance to the US financial system will increase as well.

When banks are troubled by their loans, there are well-established regulations, but future problems in the private sphere may be more difficult to solve, according to de Fontenay.

“It raises broader questions from the perspective of the safety and integrity of the system as a whole,” De Fontenay said. “Will we know enough to know when signs of trouble appear before they actually happen?”