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

The sudden collapse last fall of a number of American companies backed by private credit has thrust a fast-growing and opaque segment of Wall Street lending into the spotlight.

Private lending, also known as direct lending, is a general term for loans made by non-bank institutions. The practice has been around for decades but grew in popularity after post-2008 financial crisis regulations discouraged banks from servicing risky borrowers.

That growth, from $3.4 trillion in 2025 to an estimated $4.9 trillion by 2029, and the September bankruptcies of auto industry firms Tricolor and First Brands have emboldened some prominent Wall Street figures to sound the alarm about the asset class.

JPMorgan Chase CEO Jamie Dimon warned in October that credit problems are rarely isolated: “When you see one cockroach, there are probably more.” Billionaire bond investor Jeffrey Gundlach a month later called private lenders “garbage loans” he predicted that the next financial crisis would come from private loans.

While fears about private loans have eased in recent weeks due to the absence of banks announcing more high-profile bankruptcies or losses, they have not completely disappeared.

Companies most linked to the asset class, e.g. Blue Owl Capitaland alternative asset giants Karataş And KKRis still trading well below its recent highs.

The chief economist at Moody’s Analytics said private credit “is lightly regulated, less transparent and opaque, and it’s growing really fast, which doesn’t necessarily mean there’s a problem with the financial system, but it’s a necessary condition.” Mark Zandi said in an interview.

Promoters of private credit, e.g. Apollo Co-founder Marc Rowan said the rise of private lending has accelerated American economic growth by filling the gap left by banks, providing good returns to investors and making the financial system more expansive. more durable.

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

But concerns about private loans from the sector’s rivals in public debt are understandable, given their nature.

After all, it is the asset managers who make private credit loans that value them, and they may be motivated to delay recognition of potential borrower problems.

“The double-edged sword of private lending is that lenders “have really strong incentives to monitor for problems,” the Duke Law professor said. Elisabeth de Fontenay.

“But equally, if they think or hope there might be a way out down the road, they actually have incentives to try to hide the risk,” he said.

DeFontenay, studied the effect Bay, who specializes in private equity and loans in corporate America, said his biggest concern is that it’s hard to know whether private lenders are flagging their loans correctly.

“This is an extraordinarily large market that is reaching more and more businesses, but it is still not a public market,” he said. “We’re not entirely sure whether the valuations are accurate or not.”

For example, in the November collapse of home improvement company Renovo, Black Rock and other private lenders thought the debt was valuable 100 cents per dollar until shortly before it drops to zero.

Defaults on private loans are expected to rise this year as signs of stress emerge, especially among borrowers with bad credit, according to the Kroll Bond Rating Agency. report.

Private loan borrowers are increasingly relying on in-kind payment options to avoid defaulting on their loans, according to Bloomberg. cited valuation firm Lincoln International and its own data analysis.

Ironically, despite being competitors, some of the private credit boom is being financed by the banks themselves.

After investment bank jefferiesJPMorgan and Fifth Third Investors learned the extent of such lending when losses due to auto industry bankruptcies were announced in the fall. Bank loans to non-depository financial institutions, or NDFIs, reached $1.14 trillion last year. Federal Reserve Bank of St. Louis.

JPMorgan on January 13 announced made loans to nonbank financial firms for the first time as part of its fourth-quarter earnings presentation. The category’s loans have tripled from about $50 billion in 2018 to about $160 billion in 2025.

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

“You see a lot of competition now for the same types of loans,” Zandi said. “If history is any guide, this is a cause for concern… because it likely points to a weakening of underwriting and ultimately greater credit problems.”

While neither Zandi nor Fontenay say they see an imminent collapse in the sector, it will grow in importance to the U.S. financial system as private credit continues to grow.

There is an established regulatory playbook when banks run into turbulence over their lending, but future problems in the private sphere may be harder to resolve, according to De Fontenay.

“This raises broader questions in terms of the security and robustness of the overall system,” De Fontenay said. “Will we know enough to know signs of trouble before they appear?”