On October 18, 2025, the financial world was rattled by the collapse of two US firms, First Brands and Tricolor, exposing deep-seated risks in the rapidly expanding private credit sector. As losses mounted at traditional banks and investor anxiety swept through global markets, the spotlight turned to a corner of the financial system that, until now, many everyday savers had barely heard of: private credit, a form of lending that has quietly ballooned into a $3 trillion industry and is forecast to reach $4.5 trillion by 2030, according to a 2024 report by the Alternative Credit Council and EY.
Private credit, sometimes called "shadow banking," refers to loans made by firms backed by private investors—think pension funds, insurers, and high-net-worth individuals—instead of the customer deposits that underpin traditional bank lending. The industry took off after the 2008 financial crisis, when regulators forced banks to hold more capital and conduct more rigorous checks on borrowers. These new rules made bank lending slower and pricier, creating an opening for private credit firms to step in and offer faster, more flexible financing. Ultra-low interest rates after the crisis only fueled their rise, as private credit firms could borrow cheaply from banks and lend out at higher rates.
But as private credit grew, so did its connections with the traditional banking system. Banks in the US and Europe have become increasingly exposed to private credit, either by investing directly in these funds or by lending to the firms that run them. The sector is now dominated by heavyweight asset managers like Blackstone, Apollo, Ares, and KKR, though many pension and insurance companies have launched their own private credit arms. In the UK, for example, £50 billion of workplace pension cash is set to be invested in private assets, including private credit, over the next five years—a move championed by Chancellor Rachel Reeves.
Yet the dangers of this opaque industry were laid bare in recent weeks when First Brands, a Cleveland-based car-parts supplier employing 26,000 people, collapsed amid fraud allegations and financial distress. The company admitted that $2 billion was unaccounted for, and its founder, Patrick James, faced scrutiny over his business practices. A spokesperson for James insisted he "always conducted himself ethically" and blamed the collapse on "a perfect storm of tariffs, volatile interest rates and well-known industry headwinds," according to The Times.
The reverberations were immediate. Jefferies, the Wall Street investment bank, revealed a $715 million exposure to First Brands, while JP Morgan disclosed a $170 million loss tied to Tricolor, a sub-prime auto lender that filed for bankruptcy in early September 2025 amid its own fraud allegations. As news of these losses broke, Jefferies shares tumbled by 20% in just two weeks, prompting CEO Rich Handler and President Brian Friedman to write a rare letter to shareholders. They assured investors that the losses were "readily absorbable," but the market was already on edge.
"Back in 2008, it was, where are the time bombs, where are they ticking, what is going to blow?" Neil Birrell, chief investment officer at Premier Miton, told The Times. "That is part [of what is going on]. You don’t actually know [where the risk is]." The uncertainty deepened when two US regional banks, Zions and Western Alliance, reported losses on loans believed to be subject to fraud. The resulting panic wiped out £10 billion from London-listed bank shares, sent Barclays down 6%, and pushed the Vix "fear index" to levels last seen in April, when former President Donald Trump announced sweeping tariffs on Chinese goods.
So why does private credit matter so much right now? Critics argue that the sector’s success rests on "regulatory arbitrage"—essentially, exploiting looser rules to gain a competitive edge. Unlike banks, private credit firms aren’t required to hold capital cushions against potential losses or disclose the full extent of risks on their books. This means they can issue loans more quickly and to a broader range of borrowers, but it also makes it harder for regulators and investors to see what’s really happening under the hood.
"Nobody knows what the true value of assets these guys are holding," warned Raghavendra Rau, a finance professor at the University of Cambridge, in The Guardian. "They’re opaque loans. We have no idea what’s going on in there, but hopefully the private credit fund is able to monitor these loans properly to make sure there are not too many bad loans."
Even the International Monetary Fund has sounded the alarm. Managing director Kristalina Georgieva confessed that the sector was the "question that keeps me awake every so often at night." The IMF cautioned that banks’ growing exposure to non-bank financial intermediaries, which includes private credit, could have ripple effects if things go wrong. "Banks’ growing exposures to NBFIs mean that adverse developments at these institutions – such as downgrades or falling collateral values – could significantly affect banks’ capital ratios," the IMF said in its October 2025 statement.
For their part, private credit advocates argue that the industry brings benefits for both investors and borrowers. Pension funds and insurers can diversify and potentially boost returns, while businesses get access to tailored loans more quickly than through traditional banks. Michael Moore, head of the British Private Equity and Venture Capital Association, told The Guardian: "They are taking on more risk, but they are engaging more closely and more frequently than banks traditionally do. Typically, the private credit provider will be much more engaged, week by week, depending on what business they are working with."
Not everyone is convinced, however, that these benefits outweigh the risks. Steven Chiavarone, deputy chief investment officer at Federated Hermes, pointed out, "A lot of the lower-quality lending has occurred with non-bank lenders … and standards around lending and fraud protection have not been as strong as they should be." Still, he noted that the current problems differ from the 2008 crisis: "This time, the problematic lending is to companies, which is more self-contained than the mortgage market and less likely to hurt consumer sentiment."
As for the average consumer, the risks from private credit are indirect but real. Most of the funding comes from institutional investors, including pension funds managing billions in retirement savings. If defaults mount, the pain could ripple through to traditional banks and, in the worst case, affect the broader financial system. The Bank of England warned last year, "Private credit and leveraged loan markets are interconnected and shocks could be highly correlated, so disruptions in overseas markets could spill over to the UK."
Calls for tighter regulation are growing louder, but prospects for meaningful reform remain slim—especially in the US, where Donald Trump’s administration has been actively rolling back financial regulations. Instead, there are even debates about loosening rules on traditional banks to level the playing field with their less-regulated rivals.
Despite the recent turbulence, some market watchers believe the shakeout may be a "tremor, not an earthquake," as Chiavarone put it. By the end of the week, US markets had bounced back, buoyed by Trump’s partial reversal on tariffs and reassuring updates from other regional banks. Still, as Handler told Jefferies shareholders, "This is personal. We care and we own this company with you. And everything we do is beyond money. It’s personal." Investors and regulators alike will be hoping the worst has passed—but the episode has left no doubt that the shadowy world of private credit is now too big, and too interconnected, to ignore.
