Welcome correction, or a bubble bursting? Private-credit stress draws D.C.’s attention

The private credit market is showing signs of strain, and U.S. policymakers are starting to take notice – whether they wish to or not.

Private credit – corporate loans arranged with one or a small group of non-bank counterparties rather than a bank – has grown dramatically in the U.S. in recent years for several reasons. First, the Global Financial Crisis (GFC) of 2007-08 led to tighter capital and liquidity requirements for regulated banks and brokers, providing an opening for asset managers and other non-bank entities to step in and generate somewhat higher returns for the added risk of illiquidity. Second, low interest rates, initially engineered by policymakers to spur a global economy reeling in the wake of the GFC and then to counteract the economic effects of the pandemic, created demand for higher returns by yield-starved credit investors. Finally, private credit markets offer issuers lighter disclosure requirements and greater flexibility than their public equivalents, appealing in a world in which more companies prefer to remain privately owned for longer rather than go public.

The result is an asset class that has expanded to rival its bank-mediated peers in size. According to the Financial Stability Oversight Council (FSOC) – a coordinating body for U.S. financial services regulators chaired by the Treasury Department – North American private credit fund assets under management (AUM) nearly doubled in just five years from $565 billion in 2019 to $1.1 trillion at year-end 2024 (see below), approaching the $1.2 trillion in high-yield bonds and $1.4 trillion in leveraged loans, both bank-mediated products (some experts estimate the U.S. private credit market to be even larger.)

Private Credit Fund Assets Under Management (North America)

Source: U.S. Financial Stability Oversight Council using Preqin data (https://home.treasury.gov/system/files/261/FSOC2025AnnualReport.pdf)

However, as with fast-growing financial assets since time immemorial, any boom contains the seeds of its own bust: more competition, lower returns and fewer restrictions imposed on issuers. Defaults have risen – Fitch pegged default rates at 9.2% last year, more than double the 4.5% of the overall U.S. credit universe. In response, buyers are getting jittery and several funds have imposed limits on redemptions to avoid asset fire sales. On April 2^nd, shares of Blue Owl Capital (ticker: OWL), a private credit-focused asset manager, saw its shares fall to new lows, down more than 50% from highs reached just last year after it limited redemption requests from investors who sought to withdraw 22% of its flagship private credit fund and 41% of a smaller tech-focused fund.

What does all this mean for U.S.-focused companies and investors? We offer three observations:

1. Despite the worries, a private-credit retrenchment appears manageable for the financial system. 

Sky-is-falling panic about private credit is driving the day. But even if a skeptic doubles the $1.1 trillion in reported private credit assets and assumes the 15% loss rate used recently by some analysts, $330 billion in losses appear manageable in the $30 trillion U.S. economy, particularly as markdowns would occur over several years. For context, the U.S. investment-grade credit market totals $8 trillion and the mortgage market $13 trillion. Investors also worry about the banking industry’s lending to the industry. Treasury estimated last year that U.S. banks’ total loan commitments to private credit were $445 billion. Another big number, but consider that total commitments by these banks totaled more than $10.6 trillion, according to the Fed.

2. U.S. policymaker scrutiny of private credit is likely to rise. 

As financial markets and media have focused more on private credit, U.S. policymakers have joined in. Several weeks ago, Treasury Secretary Scott Bessent said: “if there is something rotten [in private credit], it is not going to be handed to the individual investors.” Last month media outlets reported that concerns raised by Treasury officials were key to the delay of an expected Department of Labor proposed rule to expand individual investor access to private credit funds in retirement funds. Industry should expect the spotlight to get brighter, and will need to be proactive in anticipating concerns of both policymakers and markets. Senator Elizabeth Warren (D-MA), a frequent Wall Street critic, called in February for stress tests and increased disclosure requirements for private credit funds. One could imagine Warren (who is in line to chair the powerful Senate Banking Committee should Democrats win the Senate in November) or even a Republican congressional committee chair convening hearings criticizing Wall Street for taking advantage of mom-and-pop investors through lightly regulated private credit funds. Some in the industry have made themselves easy targets.

3. Financing will become part of the U.S. data-center narrative. 

In recent months, opposition has risen to data centers under construction in a number of American communities to support the fast-growing AI industry. To date, public dissatisfaction has been centered on issues around use of local resources like electricity and water as well as quality-of-life issues. Financial issues will likely be added to this mix given the role private credit has played in backing the data-center buildout. What if a private credit sponsor drops out of a data-center development project to meet investor redemption requests or sells a position at a sharp discount to par? In a more selective AI infrastructure development market, project sponsors will want to promote their more stable financial backers – or know early if one is in trouble.

In conclusion, following years of strong growth, the private credit industry is facing its first serious test – in the policy realm as well as in financial markets. Issuers and investors that can weather the tough times and get ahead of demands from policymakers as well as Wall Street will be poised to emerge stronger from the shakeout.