What Changed?
Private credit — once a niche alternative to traditional lending — has grown into a $1.5 to $2.1 trillion market, according to Russell Investments. It thrived in an era of easy money, offering borrowers quick capital with fewer strings attached. But that era is ending.
As interest rates remain elevated and growth slows, cracks are beginning to appear. Borrowers are finding refinancing more difficult. Defaults are ticking higher. And the very features that fueled private credit’s rise — flexible structures and limited regulation — are now testing its stability.
The question for investors isn’t whether private credit will keep growing, but how it behaves under real stress for the first time since the 2008 crisis.
The Numbers
$1.5 – $2.1 trillion — Estimated size of the global private credit market in 2025 (Russell Investments).
5.5% — U.S. private-credit default rate in Q2 2025, up from 4.5% in Q1 (Fitch Ratings).
$250 billion — Estimated refinancing volume for middle-market loans over the next 12 months (Preqin data).
5% limit — Typical quarterly redemption cap for open-ended private-credit funds, creating a potential liquidity bottleneck when withdrawals surge.
30% increase — Growth in secondary-market trading of private-credit assets this year as investors seek liquidity.
Why It Matters
Private credit’s appeal lies in its promise of yield and flexibility — but those same traits can magnify risk. Unlike bonds or syndicated loans, private loans trade infrequently. Their valuations are marked infrequently and often lag real-time conditions. When investors request withdrawals, funds may need to sell assets quickly or restrict redemptions — turning illiquidity into a shock absorber that fails under stress.
For now, large institutional investors remain committed, and most managers appear well-capitalized. But stress is building at the edges: smaller borrowers exposed to floating-rate debt are feeling the squeeze, and refinancing risks are piling up as maturities approach.
Moody’s warns that while overall credit quality remains stable among large issuers, “defaults are rising among private middle-market borrowers where disclosure is limited.” That opacity makes it difficult for investors to gauge how deep the cracks run — or how long liquidity will hold up if redemptions spike.
Takeaway
The private-credit boom that promised steady, uncorrelated returns is entering its first true cycle of volatility. Higher rates, tighter liquidity, and rising defaults will separate disciplined lenders from those who mistook leverage for resilience.
For investors, this isn’t the end of private credit — but it is a reminder that even “private” markets can feel very public when the tide goes out.
— Lauren
Editor, American Ledger