Private credit has exploded into a $2 trillion market, quietly becoming one of the largest sources of corporate financing—yet it has never faced a true economic downturn.

On the surface, the system looks stable, backed by banks, insurers, and private equity firms—but beneath it lies a complex web of risk that regulators struggle to track.

The market's rapid growth is fueled by its ability to provide tailored financing to companies with higher credit risks or limited collateral, according to the Financial Stability Board. That flexibility has powered the boom—but it's also raising alarms.

Investors are increasingly requesting redemptions from private credit funds, a dynamic the FSB warns could trigger a downward spiral: forced asset sales depress valuations, amplify losses, and erode confidence, especially if managers impose gates or suspend withdrawals.

And while pressure is building within these funds, their connections to the broader financial system remain murky. The report added that, "credit-related vulnerabilities warrant ongoing monitoring."

So the real question here is if a recession hits, could this market trigger a stress event that echoes the early, overlooked cracks of the 2008 financial crisis?  Industry leaders have mixed feelings regarding the sector’s months-long downturn.

Experts Weigh In On Private Credit Risks

Michael Lebowitz, a portfolio manager at RIA Advisors, believes that the “chaos and bad press” surrounding private credit has dragged down both strong and weak players in the sector. 

While Apollo Global CEO Marc Rowan defended the sector during the company's Q1 earnings call.

“The obsession with this very narrow corner of the market, this $2 trillion slice, levered lending, is frankly a failure of imagination. Credit in any economy only comes from one of two places. It comes from the banking system or the investment marketplace. There is no third choice. If levered lending is risky, do we want it as a policy matter inside the banking system, or do we want it in the investment marketplace? I think the market has spoken. I think regulators have spoken,” Rowan said.

“Big Short” investor Steve Eisman said that private credit turmoil has already "obliterated" software-related exposure, though its effects on the broader economy remain unclear.

“If you’re a private equity firm and you have overexposure to software, your company is worth less than half. Period. There’s no argument about it,” Eisman said.

Overall, the FSB report noted that the sector is difficult to monitor due to "limited data, opaque valuations, and varied funding structures.”

Rising leverage, increasing links to the broader financial system, and newer fund models that allow investor withdrawals could heighten risks—especially during an economic downturn—potentially amplifying stress across markets.

Regulators remain focused on better understanding these risks, improving oversight, and closing data gaps to strengthen financial stability, the report concluded.

Photo: AI image created using ChatGPT