Private credit faces highly public questions

You know your corner of the market has made it to the big leagues when JPMorgan honcho Jamie Dimon cautions that it might bring about the next financial crisis—as he did with private credit earlier this year. Of course, not all the attention private credit has gotten has been negative—or has compared it to a “cockroach,” as Dimon memorably did following the collapse of two private credit-backed firms.

So, what is it? Basically, private credit means loans from investment funds rather than banks. These loans are often riskier than bank loans, so the companies taking them pay more in interest, and the funds typically intend to hold them until maturity.

• Despite its reputation for high risk, the boom in private credit traces back to regulations put in place in the wake of the 2008 financial crisis meant to get banks out of the risky lending game. With banks facing more rules, companies without a big track record or seeking to add on to already large debt needed to turn to someone else.
• Major private equity outfits like KKR, Apollo, and Blackstone turned this lending into a large part of their business.
• The private credit market went from ~$500 billion in the US in 2020 to ~$1.3 trillion as of December 2024, according to Bloomberg. And as the industry grew, private credit firms brought in retail investors.

Private credit, public pain

Private credit works in part because investors are prepared to park their money in these loans for the long haul—but, beginning last year, some investors started to worry and sought to pull their cash.

One fear, besides general macroeconomic concerns, is how tied private credit is to software that AI could make obsolete. Roughly 20% of private credit loans went to software companies, per Axios. But attempts to withdraw funds also created their own doomsday narrative about the private-credit industry, especially as firms like Blue Owl limited withdrawals and sold off assets to pay back investors.

Half full or half empty? Withdrawal requests have since calmed down somewhat, and even Dimon said he doesn’t view the risks as “systemic.” But private credit hasn’t really been tested in a downturn, so some observers view it more optimistically, while others say new risks could still be revealed.—AR