In the autumn of 2025, two mid-sized American companies most people had never heard of — an auto-parts maker called First Brands and a subprime car lender called Tricolor — collapsed within weeks of each other. Banks and investment funds that had lent to them suddenly disclosed hundreds of millions of dollars in exposure, some of it tied to invoices that may have been pledged more than once [source: Banking Dive, 2025]. Within days, the failures became a proxy for a much bigger argument: is the fast-growing world of private credit a healthy new pillar of finance, or an under-regulated build-up of risk that regulators have been warning about all year?
That argument is why private credit — lending to companies by investment funds rather than banks — has moved from an obscure corner of Wall Street to the front of financial-stability agendas at the International Monetary Fund (IMF), the Bank for International Settlements (BIS), the U.S. Federal Reserve, and the Financial Stability Board (FSB). In 2025 and 2026 all four issued cautionary assessments [source: IMF, 2025; FSB, 2026]. This article walks through what private credit actually is, how big it really is (the honest answer: nobody knows precisely), why it boomed, what the warnings say, and how much the 2025 blow-ups really tell us.
- What "private credit" actually means
- How big is it, really?
- Why it boomed
- What the regulators are warning about
- The 2025 test: First Brands and Tricolor
- The case for calm
- What to watch
What "private credit" actually means
Private credit is, at its simplest, lending that happens outside the banking system. Instead of a bank taking deposits and making a loan, an investment fund raises money from institutional investors — pension funds, insurers, sovereign wealth funds, and increasingly wealthy individuals — and lends it directly to companies. The largest segment, direct lending, funds mid-sized firms and the buyouts of private-equity sponsors; it accounts for roughly two-thirds of the market [source: FSB, 2026].
It is one branch of what economists call non-bank financial intermediation, sometimes loosely called "shadow banking" — credit that flows through institutions that are not deposit-taking banks. The appeal to borrowers is speed, flexibility, and certainty: a private-credit fund can write a single large loan quickly and hold it to maturity, without syndicating it to dozens of lenders. The appeal to investors is yield — private loans typically pay more than comparable public bonds, partly as compensation for being harder to sell.
How big is it, really?
Here the honesty has to start. Estimates of the market's size differ by roughly a factor of two, and the gap is not a rounding error — it reflects genuine disagreement about what to count.
The IMF and the FSB put private-credit assets at roughly $1.5–2.0 trillion at the end of 2024 [source: FSB, 2026]. The BIS, using a broader lens, estimated the market had grown from about $0.2 billion in the early 2000s to over $2.5 trillion by early 2025 [source: BIS, 2025]. Morgan Stanley pegged it near $3 trillion at the start of 2025 and projects it could approach $5 trillion by 2029 [source: Morgan Stanley, 2025]. Independent market-research forecasts scatter across a similar range.
Why the dispersion? There is no harmonized definition. Some counts include only direct lending; others fold in asset-based finance, mezzanine debt, distressed lending, and infrastructure credit. Cross-border activity is hard to track, and much of the data is self-reported. The FSB's blunt conclusion is that data gaps make it "genuinely hard to know how large the problem is" [source: FSB, 2026]. So when you read a headline figure, treat it as an estimate within a wide band, not a measured fact. What is not in dispute is the direction: every serious source agrees the market has grown fast and continues to grow.
Why it boomed
Private credit did not appear from nowhere. Its rise is the mirror image of what happened to banks after the 2008 financial crisis, layered on top of a decade of cheap money.
The regulation story
After 2008, regulators made banks hold much more capital against risky loans, especially leveraged loans to indebted companies. That made some lending less profitable for banks to keep on their books — and created space for funds that face lighter capital rules to step in. The BIS finds that stricter bank regulation is a real but moderate driver of private-credit growth: a one-standard-deviation increase in regulatory stringency is associated with roughly 7% more private-credit activity [source: BIS, 2025].
Here the perspectives diverge, and both deserve a fair hearing. Supporters call this healthy diversification: risk moves out of leveraged, deposit-funded banks and into funds whose investors have signed up for it and cannot demand their money back overnight. Critics call it regulatory arbitrage — the same risky lending, relocated to a corner of finance where supervisors can see less. The Federal Reserve's own research notes, without judgment, that banks "may find it more profitable to lend to risky corporate borrowers indirectly" by financing private-credit funds rather than lending to those borrowers directly [source: Federal Reserve, 2025].
The bigger drivers
Regulation is not even the largest factor. The BIS finds the efficiency of the local banking system matters most: where banks are less efficient, private credit fills the gap fastest — associated with about 33% more activity per standard deviation. Low interest rates were the other engine; a one-standard-deviation fall in policy rates is linked to roughly 12% more private-credit activity, with supply-side money-chasing-yield becoming the dominant force from 2010 onward [source: BIS, 2025]. Private equity's appetite for debt to finance buyouts did the rest. The market is also strikingly concentrated: the United States accounts for around 87% of global originations [source: BIS, 2025].
What the regulators are warning about
The 2025–2026 warnings are not predictions of collapse. They are a catalogue of vulnerabilities that could amplify a shock. Four themes recur.
Borrower quality
The IMF's October 2025 stability report found that about 40% of companies borrowing from private lenders had negative cash flow from operations at the end of 2024, up from roughly 25% in 2021 [source: IMF, 2025]. That does not mean 40% will default — many are growing companies investing heavily — but it does mean a large share depend on continued financing rather than their own cash to service debt. The IMF also flagged that private-equity owners have been "levering up" the companies they own to fund payouts to their investors, straining debt sustainability further [source: IMF, 2025].
Valuation opacity
Because private loans rarely trade, funds value them using models rather than market prices, and update those marks with a lag. The IMF warned that a decline in borrowers' credit quality "has yet to appear in accounting valuations" [source: IMF, 2025]. In plain terms: if the marks are stale, reported losses can lag reality — a concern regulators call mark-to-model risk. The FSB lists valuation opacity as one of its four core vulnerability clusters [source: FSB, 2026]. This is a warning about what we cannot yet see, not a confirmed loss.
Interconnectedness
The comforting story that private credit isolates risk from banks is only half true, because banks lend heavily to the funds. The Fed found large U.S. banks held about $95 billion in committed credit lines to private-credit vehicles at the end of 2024, of which roughly $56 billion was drawn — up 145% in five years, and concentrated in a handful of the biggest banks [source: Federal Reserve, 2025]. The IMF put banks' broader exposure to private credit at more than $500 billion and warned that stress at non-banks can "quickly transmit to the core banking" system [source: IMF, 2025].
Liquidity mismatch
Newer private-credit funds increasingly market themselves to individual investors and offer periodic redemptions — the right to pull money out. But the underlying loans cannot be sold quickly. If many investors ask for their money at once, funds may have to "gate" withdrawals or sell assets into a weak market, which the FSB warns could make stress procyclical — amplifying a downturn rather than absorbing it [source: FSB, 2026].
The 2025 test: what First Brands and Tricolor really showed
This is where separating warnings from confirmed losses matters most. The First Brands and Tricolor failures were real, and the disclosed exposures were large. Jefferies revealed roughly $715 million of exposure to First Brands through a subsidiary that had been buying (or "factoring") the company's invoices to retailers such as Walmart and AutoZone [source: Banking Dive, 2025]. UBS disclosed around $500 million, and JPMorgan and Fifth Third took losses too, the latter alleging that Tricolor had pledged the same collateral for multiple loans [source: Banking Dive, 2025].
But here is the nuance that both critics and defenders should acknowledge: these were largely not private-credit losses. The exposures ran mostly through public asset-backed securities, broadly syndicated bank loans, warehouse lines, and invoice factoring — the traditional plumbing of finance — rather than through direct-lending funds. Cambridge Associates, reviewing the episode, concluded the failures "were not unique to private credit," involved apparent fraud by "a few bad actors" rather than a macro breakdown, and that "most high-quality private-credit managers identified warning signs early and largely avoided both situations" [source: Cambridge Associates, 2025].
In other words, the 2025 blow-ups were a stress test of underwriting discipline across all of credit — banks, auditors, and rating agencies missed the problems too — more than a verdict on private credit specifically. They proved that fraud and hidden leverage can hide anywhere, which is exactly why the regulators' emphasis on transparency and data matters.
The case for calm
There is a serious argument that the alarm is overdone, and it deserves equal space. Its strongest point is structural: private-credit capital is locked up. Investors commit money for years and cannot stage a deposit-style run, so a fund facing losses has time to work them out rather than being forced to fire-sell. Where funds do offer redemptions, gating mechanisms convert what could be a panic into managed, slower outflows.
The evidence so far has been reassuring on defaults. Direct-lending default rates ran around 1.5% in 2025, below the roughly 3.8% for broadly syndicated loans [source: Cambridge Associates, 2025]. The Fed's analysis of bank lending to private credit found those loans had lower default and delinquency rates than banks' loans to other non-banks, and that even a severe stress scenario would dent big banks' capital ratios only marginally [source: Federal Reserve, 2025]. Industry groups point to the Fed's 2025 stress test as evidence that private credit and hedge funds are not, on current exposures, a systemic threat [source: MFA, 2025]. The counter-caveat, which honesty requires: that same test did not rigorously measure banks' private-credit and private-equity exposures, so a clean bill of health is not the same as a thorough one [source: MFA, 2025].
What to watch
Private credit is neither the villain nor the hero of these headlines. It is a large, fast-growing, and unusually opaque part of the financial system that has not yet been tested by a real recession. The reasonable position is neither panic nor complacency, but attention to a few specific signals.
Watch whether stale valuations catch up to reality as more loans come due — if reported marks fall sharply, it will tell us the opacity mattered. Watch the redemption-facing retail funds: managed outflows are fine, forced asset sales are not. Watch the bank–fund linkages the Fed is now measuring, since that is the channel through which non-bank stress could reach the core banking system. And watch whether authorities follow through on the FSB's central recommendation — to close the data gaps and harmonize definitions so that, next time, "how big is the problem" has a real answer [source: FSB, 2026]. The boom is real. Whether it becomes the next stability story or simply a bigger, better-understood market depends largely on how much light gets let in before the next downturn does the testing for us.