Private credit is an aspect of the shadow banking system involving assets defined by non-bank lending where the debt is not issued or traded on the public markets. "Private credit" can also be referred to as "direct lending" or "private lending". It is a subset of "alternative credit". Estimations of the global private credit industry's size vary; as of April 2024, the International Monetary Fund claims it is just over $2 trillion, while JPMorgan claims it to be $3.14 trillion. In 2025, Bloomberg noted it was $1.8 trillion.

Private credit has long existed (as long as businesspersons have been lending money to one another) but has not always been as voluminous as it is today. The private credit market has shifted away from banks in recent decades. In 1994, U.S. bank underwriting covered over 70 percent of middle market loans. By 2020, U.S. banks issued/held around 10 percent of middle market loans. The direct lending market expanded rapidly after the 2008 financial crisis, when the SEC tightened restrictions and capital requirements on public banks. As banks decreased their lending activity, nonbank lenders took their place to address the continued demand for debt financing from corporate borrowers.

Private credit has been one of the fastest-growing asset classes. By 2017, private debt fundraising exceeded $100B. In 2024, private debt funds provided 77% of leveraged buyout debt financing globally, representing the highest share since 2015. Banks provided the remaining 23%, notably representing the lowest share for banks over the same period.

One factor for the rapid growth has been investor demand. As of 2018, returns were averaging 8.1% IRR across all private credit strategies with some strategies yielding as high as 14% IRR. Returns since 2000 are higher than those of the S&P 500 index. At the same time, supply increased as companies turned to non-bank lenders after the 2008 financial crisis due to stricter lending requirements. Private credit investment rose in emerging and developing markets by 89% to US$10.8 billion in 2022.

One recent trend has been the rise of covenant-lite loans (which is also an issue for publicly traded investment grade and high yield debt). This has been driven by investor demand for the relatively high yield compared to alternatives and a willingness to accept less protections. This has resulted in fewer company restrictions and fewer investors' rights if the company struggles. That being said, for the investment firms, covenant-lite loans can also be helpful because of the negative optics if a portfolio company goes into default, and fewer restrictions means fewer ways a company can go into default.

Role of BDCs

In addition to private funds, much of the capital for private debt comes from business development companies (BDCs). BDCs were created by Congress in 1980 as closed-end funds regulated under the Investment Company Act of 1940 to provide small and growing companies access to capital and to enable private equity funds to access public capital markets. Under the legislation, a BDC must invest at least 70% of its assets in nonpublic US companies with market value less than $250M. Moreover, like REITs, as long as 90% or more of the BDC's income was distributed to investors, the BDC would not be taxed at the corporate level. While BDCs are allowed to invest anywhere in the capital structure, the vast majority of the investment has been debt because BDCs typically lever their equity with debt (up to 2X their equity), and fixed income investing supports their debt obligations. With regards to size of the market, as of June 2021, BDC assets totaled $156 billion from 79 funds.

Public equity investing in private credit

Institutional investors make up approximately 76% of private credit investment with retail investment filling the remaining 24%.

For non-institutional investors looking to invest in private credit, the primary method is through the publicly traded BDC market. As of April 2026, however, over 60% of BDCs are private from the average investor.

Liquidity and redemption

Private credit suffers from illiquidity as a secondary market for this asset doesn't exist. Compounding on this, private credit funds often hold illiquid assets. The International Monetary Fund notes that firms account for this through long-term lockup periods and redemption limits. Redemption refers to the investor's ability in certain funds to cash in for capital. In 2026, concerns about withdraws rose after some private credit funds began to place restrictions on redemption and hit redemption caps.

Direct lending

Direct lending is a form of corporate debt provision in which lenders other than banks make loans to companies without intermediaries such as an investment bank, a broker or a private equity firm. In direct lending, the borrowers are usually smaller or mid-sized companies, also called mid-market or small and medium enterprises, rather than large, publicly listed companies. Lenders are generally asset management or private debt fund manager firms. Direct lending funds use leverage, but generally less than banks or collateralized debt obligation funds (CDO/CLO).

Private Debt primarily focuses on investing at the top of the capital structure, primarily in senior, secured first lien debt. Investing at or near the top of the capital structure reduces risk relative to equity. Direct Lending includes Senior Debt and Unitranche Debt. Quarterly interest payments drives a constant cash flow stream throughout the deal life. Because the total AUM of both Private Equity and Private Credit exhibited strong growth from 2013-2023, the proportion of Private Credit has remained relatively steady for the past decade. The assets under management (AUM) in Private Credit has grown by almost 4 times over the past decade. Private Credit metrics are proxied by Direct Lending which has exhibited strong performance through economic cycles. CalPERS references a Direct Lending benchmark as represented by the Cliffwater Direct Lending Index having market size of $263 billion as of December 2022.

The market has grown in importance since around 2009 in response to banks reducing their lending activities after the 2008 financial crisis. The need for direct lending has been put at €100 billion in Europe alone between 2013 and 2015. However, other sources report that in 2014 asset managers are struggling to find enough direct lending opportunities to invest in.

Asset managers cite the higher returns available from direct lending strategies as a main reason that people should invest in direct lending. US pension funds are among the investors who are reported to have made allocations to direct lending strategies, especially in Europe. Several European governments have taken initiatives to boost direct lending to smaller companies since the 2008 financial crisis. For example, in 2012, the UK government introduced a scheme to lend £700 million of public money to smaller companies in partnership with asset managers.

2018 U.S. data shows performance returns for private credit funds equal or better than leveraged-loan, high-yield and BDC indexes. Direct lending funds have relatively low beta with positive alpha when benchmarked to leveraged loan/high yield indices. Low correlation is observed between direct lending funds with leveraged loan/high yield indices.

A large number of asset management firms have started funds to invest in direct lending, and several US firms have targeted European direct lending since around the start of 2013.

Concerns

In a December 2024 letter, Senators Sherrod Brown and Jack Reed raised concerns over a lack of oversight and transparency in the industry.

The private credit industry faced intense scrutiny in 2025 with the collapse of the car parts supplier First Brands Group and subprime auto lender Tricolor Holdings in September 2025.

The collapses and subsequent news coverage of private credit exposure led to major players in the industry facing an uptick of redemption requests (investors asking for their money back) in the final months of 2025. Some private credit executives criticized the association between the collapse of First Brands with private credit, arguing that only 2 percent of First Brands 12 billion dollar balance sheet was associated with private credit.

In November 2025, the chair of UBS warned that the trend of insurers shopping for better credit ratings on private credit assets was creating a "looming systemic risk" akin to the conditions that led to the 2008 financial crisis.

The growth of the European private credit market has faced scrutiny, which has intensified in the wake of the 2026 collapse of London-based lender Market Financial Solutions, which left institutional creditors facing substantial exposures.

Regulation and oversight

Private credit has sparked growing regulatory attention in response to its rapid expansion and relatively scarce oversight in comparison to other traditional banking institutions, with some organizations including the International Monetary Fund (IMF) emphasizing a need for greater government supervision and public transparency. Specific stress is put on the quality of loans and credit provided, with private credit firms rarely publishing valuations. In addition, research from the Federal Reserve Bank of Boston brings up how the move from bank lending to private credit could affect financial stability as private credit has the ability to accept riskier loans. As of March 30th, the Federal Reserve under Jerome Powell maintains observation over the practice, stating that the possibility of largescale financial impact is still relatively minor.

US congressional research particularly has identified illiquidity and redemption caps as particular points of concern.

See also