Private Credit: Stability or Systemic Risk in a $2.5 Trillion Market
by Paul Brook
Executive Summary
$2.5 trillion AUM: Private credit has grown eightfold since 2010, rivalling U.S. leveraged loans and high-yield bonds.
Growth vs systemic risk: Flexible, high-yield lending fills gaps left by banks, but hidden leverage and liquidity mismatches may magnify financial shocks.
Regulatory cross-currents: Basel III Endgame, SEC fund rules, and EU/UK reforms aim to contain risk without choking off a critical funding channel.
Investor trade-offs: Attractive floating-rate returns and diversification are balanced by illiquidity, valuation opacity, and increasing retail exposure.
Why Private Credit Matters Now
Private credit has evolved from a niche strategy into a global force. Once dominated by pensions and insurance companies, it now competes directly with traditional bank lending. A confluence of structural shifts — rising interest rates, post-crisis banking reform, and retreat from risk by traditional lenders — has turbocharged the sector’s growth.
After the 2008 global financial crisis, regulations such as Basel III and Dodd-Frank forced banks to deleverage and curtail lending to mid-market and leveraged borrowers. Into that vacuum stepped private credit funds — nimble, bespoke, and willing to lend where banks could not. By 2023–2024, amid banking turmoil and tighter credit, private credit emerged as a go-to funding source.
Today, private credit isn’t just filling gaps — it is reshaping the structure of corporate finance. But its rapid expansion also means growing systemic exposure. With minimal regulation, private credit introduces new fragilities — from leverage and liquidity mismatches to opacity and bank interlinkages.
What’s Driving the Growth?
Private credit assets under management (AUM) surged from ~$310 billion in 2010 to an estimated $2.5 trillion by 2024 — a near 16% compound annual growth rate. Key structural drivers include:
Bank retrenchment: Basel III and post-GFC reforms forced banks to reduce risk-weighted lending.
Yield hunger: Persistent low interest rates pushed institutional investors toward higher-return alternatives.
Private equity demand: Buyouts fuel demand for tailored debt deals.
Speed and flexibility: Direct lenders offer faster execution, no syndication risk, and looser covenants.
What Makes It Attractive?
Proponents point to robust returns, floating-rate income (especially valuable in a high-rate world), and historically low default rates. During the COVID downturn and 2022–2023 rate shocks, direct lending funds outperformed public bond markets. Capital lock-ups reduce run risk, and long-term structures appeal to institutional capital.
What Makes It Risky?
Despite its success, private credit remains largely untested at scale during a full credit cycle. Key systemic vulnerabilities include:
Liquidity mismatch: “Semi-liquid” funds offer quarterly redemptions but hold illiquid assets.
Retail exposure: Wealth managers and HNW channels are increasing redemption sensitivity.
Opaque valuations: Mark-to-model pricing may delay loss recognition and mislead investors.
Fund-level leverage: Subscription lines and warehousing can amplify losses in a downturn.
Bank entanglement: Private funds rely on bank financing, creating feedback risk during stress.
Regulatory Cross-Currents: Striking the Balance
Regulators are attempting to walk a fine line — tightening oversight without cutting off credit to the real economy. This balancing act is clearest in recent developments under the Basel III Endgame.
Basel III and Gold: An Overlooked Adjustment with Strategic Implications
One underappreciated feature of the Basel III framework is the reclassification of physical gold from a Tier 3 to a Tier 1 capital asset — provided it is allocated, unencumbered, and readily available. Gold now carries a 0% risk weight, qualifying it for inclusion in Common Equity Tier 1 (CET1) buffers.
This shift acknowledges gold’s liquidity and counter-cyclicality — particularly relevant amid ongoing geopolitical risk and de-dollarization narratives. For banks with meaningful gold reserves, this offers real capital relief at a time when lending capacity is being squeezed elsewhere.
While unlikely to reverse the trend of bank retrenchment from high-yield corporate lending, it creates some room for balance sheet flexibility — including the ability to maintain select credit lines to private funds. As such, gold’s regulatory upgrade is both symbolic and operational: a nod to monetary realism, and a small tool for preserving credit liquidity in a capital-constrained system.
Global Regulatory Snapshots:
United States: The SEC’s 2023 reforms target transparency and investor protection for private fund advisers. Quarterly statements, annual audits, and fee restrictions are part of the effort — though implementation is now delayed due to industry legal challenges.
Europe: Under AIFMD II, loan-originating funds must improve liquidity governance and increase reporting transparency.
UK: The FCA focuses on stress testing and valuation accuracy, including emphasis on conflict-free appraisal mechanisms.
Despite differing tactics, regulators across jurisdictions are converging around a shared concern: avoiding another “shadow banking” crisis while preserving a vital credit artery.
Investor Implications
Private credit offers yields of 8–10%, floating-rate protection, and low correlation to public markets. But it comes with structural complexity: long lock-ups, lagging valuations, fund-level gearing, and rising exposure to unsophisticated capital.
Key diligence points in 2025:
Stress-test performance assumptions.
Scrutinise redemption terms.
Verify independent valuation practices.
Monitor sector, sponsor, and leverage concentration.
Closing
Private credit has become indispensable to modern capital markets. Its rise reflects deep structural reconfigurations: the retreat of banks, the hunger for yield, and the evolution of risk-taking institutions. But scale brings scrutiny. The $2.5 trillion market, once opaque and peripheral, is now central — and its health has systemic relevance.
The years ahead will determine whether private credit remains a stabiliser or becomes a shock amplifier. With regulators tightening the net, and investors demanding more transparency, the test is not whether private credit survives, but how sustainably it evolves.
Sources
Bank for International Settlements (2023) – Quarterly Review
BlackRock (2024) – Private Credit Quarterly
Boston Fed (2023) – Interlinkages Between Nonbanks and Banks
Deloitte (2024) – Basel III Endgame
Financial Times (2024) – The Rise of Private Credit
IMF (2024) – Global Financial Stability Report
PitchBook (2024) – Global Private Credit Report
SEC (2023) – Private Fund Advisers Rules
UK FCA (2024) – FCA Valuation Guidance
S&P Global (2025) – Private Markets Monthly
NASCUS (2025) – Bank Lending to the Private Credit Sector
CFA Institute (2025) – Private Credit’s Surge: Hype or Hazard?
Insurance Journal (2025) – Insurers Warned About Rising Private Credit Risk
Federal Reserve (2025) – Lending to Private Credit: Systemic Implications
