Private Credit’s $2 Trillion Surge Pushes Banks to Seek Alternatives
Photo by Mohammed Abubakr
What is Private Credit?
Private credit is lending that bypasses banks and public bond markets. Instead of issuing debt through banks, companies strike direct deals with private funds such as Apollo or Blackstone. Companies borrow directly from funds like Apollo or Blackstone, often paying double-digit rates for flexibility banks won’t offer. Investors accept the risk in exchange for steady, high-yield income.
The Shift from Wall Street to Private Lenders
A decade ago, raising debt meant calling Goldman Sachs or JPMorgan. Wall Street banks set the terms: they underwrote loans, sold them to investors for a 1–3% fee, and everyone played through public markets.
Today, companies can bypass the Wall Street banks and borrow directly from private lenders, such as Apollo or Blackstone. The shift has fueled a $2 trillion private credit market, more than ten times its size a decade ago, reshaping how businesses borrow and how investors chase returns.
The returns are high, but so are the risks. To reassure investors, funds stress diversification and safeguards. Blackstone’s portfolio, for example, spans more than 300 companies. Most of its loans are written so that if a borrower fails to pay, the private lender has the legal right to sell the company’s assets, such as buildings, equipment, or inventory, and use that money to recover what it is owed. The loans are also sized with a margin of safety. In practice, that means a company’s overall value would have to fall by about half before a private funder's money is truly at risk.
For example, if a company is valued at 100 million dollars, a private lender will typically lend only about 50 million. That built-in gap acts as a safety buffer. Even if the company’s value falls, there is room before the lender’s money is at risk of not being repaid.
Before 2008, banks acted as arrangers. Companies came to them for loans, and the banks packaged that debt and sold it to investors, collecting a fee along the way. Ideally, the banks would quickly find buyers for the debt. If not, they would be forced to keep the loans on their own balance sheets, exposing them to additional risk and potentially large losses if the value of the debt declined. That guarantee was a money-maker in good times: deals sold quickly, fees piled up, and banks rarely carried much risk. But in the 2008 crash, it turned toxic. Investors stopped buying, and banks were stuck holding billions in loans that plunged in value.
After the crisis, new rules tied their hands. Regulators forced banks to hold more capital against risky lending, which made them scale back. Private lenders, operating with fewer restrictions, stepped in to fill the gap.
The New Battle
Now, the big banks want back in. For years, private credit funds have encroached on their territory, cutting them out of corporate lending and eroding the fees once tied to underwriting and syndicating loans. That erosion of influence is prompting banks to push back.
J.P. Morgan Chase is leading the charge, committing 50 billion dollars of its own balance sheet to direct lending, alongside another 15 billion from partners. The move marks a decisive shift: America’s biggest bank is no longer content to just arrange loans for others; it wants to compete head-on with Apollo and Blackstone.
Citigroup has taken a different path. Rather than building a direct lending arm, Citigroup struck a deal with Apollo Global Management to steer potential loans to the private credit giant in return for fees, a structure that recalls the banks’ traditional syndication role. Several other investment banks are joining Citigroup and J.P. Morgan Chase in their parallel efforts to tap the market.
The Potential Bubble
While private credit may look like the future of debt financing, it carries significant risks. Because these loans are not traded on public markets, investors who want to exit are often locked in until maturity. In a downturn, when defaults climb, that illiquidity can be especially punishing.
Transparency is another challenge. Public market loans are priced daily, giving investors a clear picture of value. In private credit, valuations are far less visible, allowing losses to build quietly until they surface all at once. That opacity raises concerns that risks are being underestimated.
The rapidly growing market also requires caution, as spreads have compressed and returns have declined. This creates pressure on funds to compete by offering riskier loans to deliver the same returns. A large share of private credit is extended to sponsor-backed companies, which are typically highly leveraged. If many of these borrowers default simultaneously, the impact could spread quickly across the system.
The Federal Reserve has noted that private credit firms often depend on commercial bank credit lines for funding. That leaves lenders exposed even when they are not directly making the loans. A wave of defaults could strain both the private funds and the banks behind them.
The bigger concern is systemic: if the market expands too quickly and stretches too far into risky territory, today’s boom could set the stage for tomorrow’s bubble.
