After the banking system nearly collapsed during the 2008 financial crisis, Congress in 2010 passed the Dodd-Frank legislation, forcing banks to hold more capital against risky commercial loans. It also pushed corporate lending into the hands of private equity firms like Apollo Global Management, Blackstone Group, Ares Management, and KKR.
The upshot was a $1.7 trillion private credit industry that investors loved.
But now, as the world financial system teeters under the draconian — and uncertain — tariff and fiscal policies of the second Trump administration, this once-hot market faces a reckoning.
“It’s the canary in the coal mine,” says Dan Rasmussen, a partner at Verdad Advisers, explaining that “private credit is the riskiest type of corporate lending being done right now. The companies it finances are the most susceptible to almost any risk because they’re so overleveraged, and they are small, fragile companies in a space that massively expanded in the past few years.”
But the asset class may have peaked. Last year, direct lending hit a record-high issuance of $145 billion, up 79 percent from 2023, according to Fitch Ratings, which anticipates a deterioration of credit this year “amid tariffs and policy volatility.” Rasmussen warns: “We haven’t seen a default cycle since 2008. This is an untested asset class.”
It is also a largely opaque one. In a 2024 paper titled “The Credit Markets Go Dark,” professors Jared Ellias of Harvard University and Elisabeth de Fontenay of Duke University write that private credit’s “defining feature is its near-total absence of truly reliable and comprehensive data, both for the market in aggregate and for the individual loans made by private credit funds.”
They note that “the consequences of this are significant and potentially troubling: A segment of the U.S. economy may simply go dark.” The professors anticipate “more examples of wildly mistaken or misleading valuations of private companies,” as well as “a greater incidence of corporate fraud, given that private companies that go dark are by definition subject to less scrutiny, oversight, and enforcement.”
“We don’t know yet . . . whether, going forward, we should expect our economy to be more susceptible to large market distortions and the painful market corrections that eventually follow,” the professors add.
You can read the full story here: https://www.institutionalinvestor.com/article/trillion-dollar-private-credit-market-faces-its-first-big-test
Michelle Celarier 