Private credit, once a niche financial instrument reserved for the upper echelons of Wall Street, has rapidly evolved into a force that touches the savings and livelihoods of everyday people around the globe. In recent months, this $2 trillion market—sometimes dubbed the “shadow banking” sector—has come under intense scrutiny from regulators, economists, and industry insiders, who warn that its opacity, high debt levels, and growing ties to mainstream finance could pose systemic risks to the global economy.
According to Penn Today, the private credit market has quietly ballooned to more than $1.8 trillion since the 2008 financial crisis. This explosive growth was fueled by a fundamental shift in how credit is supplied. After the crisis, traditional banks, facing stricter regulations and higher capital requirements, pulled back from lending. But the demand for credit didn’t simply vanish. As Itay Goldstein, a financial crises expert at the Wharton School, explains, “When banks are forced to be more stringent in providing credit, that need for credit doesn’t just disappear — it goes private.”
Private credit refers to loans negotiated directly between companies and non-bank lenders—such as private equity firms, hedge funds, and asset managers. These deals often happen behind closed doors, with far less oversight and transparency than traditional bank lending. The market’s rapid ascent has been driven in part by its appeal to borrowers: loans are arranged faster, terms are more flexible, and lenders are often willing to take on higher levels of risk, especially in the mid-market sector where banks have retreated.
But the very characteristics that make private credit attractive also make it risky. As reported by Financial Times, the Financial Stability Board (FSB)—a global watchdog made up of central bankers, finance ministers, and regulators—recently warned that private credit’s opacity, high levels of debt, and rising default rates are creating vulnerabilities that could amplify financial stress in a crisis. “There are some preliminary signs of rising defaults in private credit,” the FSB said in its latest report, noting that debt levels for borrowers have reached 5 to 6 times earnings before interest, tax, depreciation, and amortisation (EBITDA), and may be closer to 7 times after certain adjustments.
These risks are not limited to Wall Street titans. Over the past decade, major investment firms like Apollo, Blackstone, and KKR have acquired life insurance companies, using annuity deposits from ordinary savers as a stable pool of capital to fund private loans. The FSB highlighted that the share of assets under management accounted for by retail investors climbed from virtually zero to around 13 percent in the past decade. This means that the permanent capital meant to make the system resilient is increasingly the savings of American households. If defaults spike, it’s not just wealthy investors or bankers who stand to lose, but also pensioners and policyholders whose retirement security is tied up in these opaque funds.
Liquidity is another looming concern. Private credit funds typically lend money over several years but often allow investors to withdraw their capital with much shorter notice. This mismatch can work—until it doesn’t. If too many investors try to pull out at once, funds may be forced to sell illiquid assets at steep discounts, potentially setting off a cascade of losses. As Goldstein warns, “You can’t just sell these assets quickly without taking a hit.” This scenario played out recently when Blackstone saw billions withdrawn from its flagship private credit funds, raising concerns about liquidity and valuation in a market that has grown largely out of public sight.
Transparency remains a major sticking point. Unlike public markets, where prices update constantly and disclosures are standardized, private credit operates in the shadows. Valuations are often model-based, relying on assumptions about a company’s future performance rather than open-market trades. Regulators, including the U.S. Securities and Exchange Commission, have limited data to assess how much risk is building in the system. As Goldstein puts it, “This lack of transparency means that if something starts to break, we might not know until it’s too late.”
The FSB’s secretary-general, John Schindler, acknowledged the data gaps, stating that the watchdog could not even put a precise figure on the size of the private credit market, though estimates range from $1.5 trillion to $2 trillion by the end of 2024. In a high-profile example of the risks, HSBC recently disclosed a $400 million loss from lending to a private credit fund, reportedly Apollo’s asset-backed lending unit, Atlas SP. This incident underlined investor jitters about whether the influx of private credit lenders has eroded underwriting standards and whether defaults could ripple across the broader financial sector.
Andrew Bailey, governor of the Bank of England and FSB chair, has called for deeper scrutiny of the “significant interlinkages” between private credit and banks, asset managers, insurers, and private equity. He emphasized that these “multiple layers of leverage” require “deeper scrutiny.” The FSB is now calling for enhanced reporting requirements and stress tests for private credit funds, similar to those performed on major banks, in an effort to bring this shadow industry into the light before it becomes too big to fail—or too big to save.
Notably, the trend is not confined to the United States and Europe. As reported by Business Daily Africa, Kenyan businesses have increasingly turned to private debt funds and fintech lenders as commercial banks tighten credit. These private loans often come with interest rates exceeding 18-22%, much higher than standard commercial rates. For growing businesses, especially in places like Nairobi, Nakuru, or Kisumu, this high-cost debt can quickly become a "debt trap" if revenue growth slows down. Here, the Central Bank of Kenya and other regulators face a tough choice: over-regulate and risk stifling much-needed economic growth, or under-regulate and leave the economy exposed to a sudden collapse of unregulated entities.
Industry voices are also weighing in. Daniela Gabor, a prominent commentator on financial stability, has drawn parallels between current concerns about shadow banking and debates dating back to 2005. She argues that the risks of instability and systemic interconnectedness in private credit are not new, and calls for increased transparency and more robust oversight. Gabor and other analysts are also raising alarms about policy changes—such as pension privatization—that could further entangle ordinary savers with risky financial products.
For individuals, the risks may be hidden in plain sight. Private credit exposure can lurk in retirement accounts, pension funds, and life insurance policies, often under broad categories like "alternative assets" or "multi-strategy income funds." Goldstein recommends that investors review fund disclosures and consult financial advisors to understand where their savings are allocated and whether the level of risk matches their personal tolerance and time horizon. "In murky markets like private credit, the danger lies in what people don’t know they own," he cautions.
As the world faces an era of sustained high interest rates, the resilience of the private credit market is being put to the test. Regulators, investors, and ordinary savers alike are watching closely, hoping that this $2 trillion boom is built on solid fundamentals—and not on a foundation of hidden losses and unchecked risks.