Private credit

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. == 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 ==