Private credit went from a rounding error to a $2.5tn market that now lends where the banks pulled back. Here is how it actually makes money, who runs it, how a reader anywhere can get exposure, and where the risk the headlines miss really sits.
Key takeaways
- Private credit is non-bank lending directly to companies, usually privately negotiated and held to maturity rather than traded. It grew from ~$0.2bn to over $2.5tn between the early 2000s and 2024.
- The United States holds over 87% of the market, but insurers and pensions globally are the demand engine now.
- Long-run returns have been strong. The benchmark direct-lending index has run at 9.50% annualised since 2004.
- The income is interest, so it is generally taxed at ordinary-income rates, which makes it tax-inefficient in a taxable account.
- The core risk is that the asset class has never been fully tested through a deep, prolonged default cycle, and 2025 delivered the first serious stress tests.
The 60-Second Version
Private credit means lending money directly to companies outside the public bond and bank-loan markets. It has gone from a rounding error to one of the largest credit markets on earth. It grew from roughly $0.2 billion in the early 2000s to over $2.5 trillion by 2024, and one industry count puts total assets under management at US$3.5 trillion by end-2024, up 17% in a single year. The International Monetary Fund now says the market rivals other major credit markets. At that size it has stopped being a niche. It is now part of the ordinary machinery of how companies borrow.
The case for it is a yield story with a track record attached. The Cliffwater Direct Lending Index has returned an annualised 9.50% since its 2004 inception, with only one negative calendar year. The largest publicly traded fund in the space, Ares Capital, ran a $28.7 billion portfolio at a roughly 10% return on equity through 2025 while keeping bad loans below its long-run average. Real companies borrowed real money at double-digit rates, and lenders were largely paid back.
The counterargument arrived on schedule. In 2025 the auto-parts group First Brands filed for bankruptcy with liabilities reported between $10 billion and $50 billion and allegations of fraud running through its financing. A year earlier, lenders had seized the software firm Pluralsight in a debt-for-equity swap after its private-equity owner wrote the equity to zero. The market that had never seen a real downturn started to see one. How private credit makes money, who runs it, how an investor can get exposure, and where the risks that the headlines tend to miss actually sit all follow from that turn in the cycle.
I. What Private Credit Actually Is
Private credit is lending arranged privately between a fund and a borrower, without a public bond issue or a syndicated bank loan, and usually held to maturity rather than traded on a market. That is the whole thing. A pool of capital lends money to a company. The loan does not trade on an exchange. The lender expects to hold it until it is repaid.
The distinction that matters is who is not in the room. In a traditional corporate loan, a bank originates the debt and either keeps it or sells pieces into a syndicate. In a public bond, the company issues securities that trade daily and are priced by the market minute to minute. Private credit removes both. One fund, or a small club of funds, negotiates directly with one borrower. Terms are bespoke. Pricing is set at origination and does not move on a screen. If the borrower gets into trouble, the lender deals with it directly rather than through a bond-market stampede.
Most of the money sits in one sub-strategy: direct lending, which is senior, secured loans to mid-sized companies, typically those owned by private-equity firms. “Senior” means first in line to be repaid if the borrower fails. “Secured” means the loan is backed by the company’s assets. These are the least risky loans a private-credit fund makes, and they are the bulk of the market. Around the edges sit riskier flavours: mezzanine debt (loans that rank below the senior debt and pay more to compensate), distressed debt (buying the loans of companies already in trouble), and asset-based finance (lending against a specific pool of assets like receivables or equipment).
The reason it pays more than a bond is the reason it is harder to sell. You are lending to a company that is smaller, more leveraged, and less transparent than one that could tap the public market, and you are giving up the ability to exit quickly. That trade, extra yield in exchange for illiquidity (the inability to sell quickly at a fair price), is the whole investment thesis. Most of the rest of the story is a working-out of its consequences.
Almost all of these loans are floating-rate. The interest resets with a benchmark short-term rate, so the yield rises when central banks raise rates and falls when they cut. In the US that benchmark is SOFR; sterling loans reference SONIA and euro loans reference EURIBOR (USD LIBOR moved to Term SOFR in 2023, GBP LIBOR to SONIA in 2021, and EURIBOR remains in use). That single design choice explains most of how the asset class behaves through an economic cycle, which Section VIII works through in detail.
II. From a Rounding Error to a $2.5 Trillion Market
The growth curve is worth dwelling on, because the speed of the growth is itself both the opportunity and the source of the risk.
The Bank for International Settlements, the central bank for central banks, dates the modern market to the early 2000s, when private-credit assets under management were around $0.2 billion. By 2024 the same measure was over $2.5 trillion. Global outstanding loan volumes tell the same story on a shorter timeline: from roughly $100 billion in 2010 to over $1.2 trillion by 2024. Broader industry counts that include committed-but-undrawn capital run higher still. The IMF put the figure at $2.1 trillion of assets and committed capital in April 2024, and one 2025 industry report reached US$3.5 trillion, up 17% from a year earlier. Different measures, same direction: near-vertical.
The turning point was the 2008 financial crisis. When banks pulled back from riskier corporate lending under new capital rules, the money that companies still needed had to come from somewhere. It came from funds. What started as a gap-filler became a structural feature of how mid-sized companies finance themselves.
The BIS economists who mapped this growth put it plainly:
“Private credit has grown rapidly over the past two decades and expanded into more and more industries.”
Fernando Avalos, Sebastian Doerr and Gabor Pinter, economists, Bank for International Settlements
That expansion “into more and more industries” is the quiet part. A market that lent to software companies and healthcare roll-ups now lends against data centres, aircraft, consumer loans and insurance balance sheets. The question every serious investor should hold in mind is whether the underwriting discipline that built the track record travelled with the money into all those new corners. Nobody knows yet, because the market has grown faster than any downturn has had a chance to test it.
The consensus among the largest managers is more growth. Morgan Stanley estimates the market could reach roughly $5 trillion by 2029. How much weight that forecast deserves depends heavily on how the loans written in the recent boom perform through the next recession, and the managers making the forecast are also the ones selling the product.
III. Why the Money Keeps Coming
Growth this steep never comes from a single cause. The BIS ran the econometrics and put numbers on the drivers rather than settling for a tidy narrative, and three forces show up as statistically significant. The first is interest rates: a one-standard-deviation fall in policy rates is associated with a roughly 12% rise in private credit. When safe assets pay nothing, capital hunts for yield, and private credit is where yield lives. The second, and larger, is bank retreat: a 0.17-point drop in banking-system efficiency is associated with a roughly 33% increase in private credit. Where banks lend less well, funds lend instead. The third is stricter bank regulation, which adds a modest but statistically significant push in the same direction.
The bank-retreat driver repays a closer look, because it explains the mechanism. Individual banks used to keep large chunks of a corporate loan on their own books, and hold sizes that once reached $75m to $100m have contracted to $30m to $50m. A company that needs $60 million to fund an acquisition used to get it from one or two banks. Now the banks can only comfortably hold half that each, and assembling a syndicate is slower and more expensive than calling a single direct lender who will write the whole cheque within days. That speed and certainty of execution is a service in itself, and it is a large part of what private credit sells.
Then there is the demand side, the capital that wants in. Insurance companies are the accelerant. In one 2026 survey, 40% of insurers planned to increase allocations to investment-grade private credit and 36% to asset-backed finance. Insurers hold long-dated liabilities and need long-dated, higher-yielding assets to match them. Private credit is a near-perfect fit, which is why several large managers have bought or partnered with insurers to secure a permanent funding base.
The final driver is retail access, engineered through the fund structures themselves. A business development company is a listed or non-traded fund vehicle purpose-built to lend to mid-sized companies and pass the income through to shareholders. It must distribute at least 90% of its investment-company taxable income to keep its pass-through tax status (and 98% to avoid an excise tax). That rule turns a BDC into a yield-delivery machine, which is exactly what a retail investor reaching for income wants. Europe has its own answer to the same problem, the ELTIF and the UK LTAF, both covered in Section VI. Supply had retreated from the banks, demand was arriving from insurers and savers, and the fund vehicles were purpose-built to connect the two sides.
Callout stat: A 0.17-point drop in banking-system efficiency is associated with a ~33% increase in private credit. Where banks step back, funds step in, and that is the single largest driver in the data.
IV. The Players
This is a market run by a small number of very large firms and a smaller number of named people who built them. Knowing who they are tells you a good deal about where the risk sits.
Apollo Global Management, run by chief executive Marc Rowan, is the firm that most aggressively fused private credit with insurance, using its insurance affiliate as a permanent, low-cost source of capital to lend at scale. Rowan has become the loudest public defender of the asset class against the charge that it is a systemic risk in waiting, and his response to that charge appears in Section XVII.
Blackstone runs the single largest private-credit fund in the world through Blackstone Private Credit Fund, ticker BCRED, whose fees and returns are broken down in Section VI. Ares Management runs Ares Capital Corporation (NASDAQ: ARCC), the largest publicly traded business development company and the closest thing the asset class has to a blue-chip proxy. Blue Owl Capital runs Blue Owl Capital Corporation (OBDC) and has built itself specifically around direct lending and the insurance-capital model.
How concentrated and clubby the market has become shows most clearly in who turns up when a big loan goes wrong. When the software firm Pluralsight was restructured in 2024, the consortium that took control was a roll-call of the whole industry: Blue Owl, Ares, BlackRock, Goldman Sachs, Golub, Oaktree, Benefit Street and Guggenheim. The same names appear again and again because they are the ones with the balance sheets to write nine- and ten-figure loans. That concentration cuts both ways. These are sophisticated, well-capitalised lenders, which is a genuine strength. But when they are all exposed to the same borrower, a single blow-up touches most of the club at once.
Rowan is the individual name to watch, because he has staked Apollo’s future on the thesis that this market is not only safe but safer than the banks it replaced. If that thesis holds, the firms above compound for a decade. If it fails, they are the ones left holding the paper, which is why his conviction is worth taking seriously without taking it at face value.
V. A Global Market, an American Core
Geographically, the market is heavily concentrated. Over 87% of total private credit sits in the United States, around $1 trillion in 2024, up from just $90 billion in 2010. For now it is an American asset class with international ambitions.
The American dominance is not an accident of culture. It follows from the deepest private-equity market in the world (private credit and private equity grew up together, one financing the other’s buyouts), the largest pool of mid-sized companies, and a legal system built for creditor-led restructurings. When a US borrower defaults, the lender knows roughly how the fight will go, and that predictability is worth real money to a creditor.
Europe is the clear second market and the more interesting frontier for growth, precisely because its banking system is more entrenched and its private-credit penetration lower, which leaves more of the bank-retreat driver from Section III still to run. The demand side is globalising faster than the supply side. The insurers and pension funds pushing capital in are spread across every developed market, even where the loans themselves still originate mostly in America.
For an investor anywhere in the world, the practical consequence is straightforward. Much of the underlying lending still happens in the US and in US dollars, so exposure to this asset class is, today, largely exposure to the US mid-market economy. An investor outside the dollar zone carries currency as a live variable in the return, one that has nothing to do with whether the underlying loans get repaid. What has changed is the packaging. A UK or European reader no longer has to reach for a US-domiciled fund to get in: EU ELTIF 2.0 funds, UK long-term asset funds, and a long-standing set of London-listed debt trusts now offer £ and € routes into the same lending, and Section VI works through each of them.
VI. How to Actually Get Exposure
There is no single “buy private credit” button, and the vehicles differ enormously in liquidity, cost and who is allowed in. Your home country decides a lot of it, so this section splits the routes into the US vehicles (still the deepest pool) and the ones a UK or European reader can actually buy.
The two broad US routes are business development companies and non-traded interval or perpetual funds. A publicly traded BDC like Ares Capital trades on an exchange all day like a stock, so you can buy and sell it in seconds. A non-traded fund like Blackstone’s BCRED offers only periodic, limited liquidity (typically quarterly, capped), which is the price of holding illiquid loans without a daily-traded share price whipping around.
| Vehicle | Ticker / access | Domicile | Liquidity | Headline fees | Notes |
|---|---|---|---|---|---|
| Ares Capital | ARCC (NASDAQ) | US | Daily, on-exchange | BDC-level fees | Largest listed BDC; ~10.36% dividend yield as of 1 July 2026 |
| Blackstone Private Credit Fund | BCRED (non-traded) | US | Quarterly, capped | 1.25% mgmt + 12.5% incentive | World’s largest private-credit fund; Class S adds up to 3.5% upfront + 0.85%/yr servicing |
| Blue Owl Capital Corp | OBDC (NYSE) | US | Exchange-listed | BDC-level fees | Direct-lending-focused BDC |
| Apollo European Private Credit ELTIF | AEPC ELTIF | EU (Luxembourg) | Semi-liquid, periodic | Fund-level fees | Evergreen ELTIF 2.0; first-lien senior secured European direct lending, CSSF-approved |
| Ares European Strategic Income ELTIF | AESIF ELTIF | EU (Luxembourg) | Semi-liquid, periodic | Fund-level fees | European private-credit ELTIF for non-US investors |
| CG Apollo Global Diversified Credit LTAF | UK LTAF | UK | Semi-liquid, periodic | Fund-level fees | UK DC-pension route into global private credit; LTAFs ISA-eligible from April 2026 |
| Sequoia Economic Infrastructure Income | SEQI (LSE) | UK-listed | Daily, on-exchange | Trust-level fees | FTSE 250 debt investment trust; infrastructure private debt |
| BioPharma Credit | BPCR (LSE) | UK-listed | Daily, on-exchange | Trust-level fees | One of the largest London-listed lending trusts |
Fees are where a lot of the return quietly leaks away, so they repay close reading. BCRED, the flagship, charges a 1.25% management fee on net assets plus a 12.5% incentive fee on income, meaning the manager takes 12.5% of the income the fund earns above a hurdle, plus 12.5% of realised gains net of losses. On top of that, its Class S shares can carry an upfront placement fee of up to 3.5% and an ongoing 0.85%-a-year shareholder-servicing fee. Those layers are the difference between the gross yield the loans produce and the net yield that reaches you.
For all that cost, the flagship delivered. BCRED reported a 9.6% annualised distribution rate and a 10.0% annualised inception-to-date total return on its Class I shares as of 31 October 2025, and raised $14.5 billion in 2025, its biggest fundraising year since launch. The listed alternative, Ares Capital, paid a dividend yield of roughly 10.36% as of 1 July 2026, with a Q4 2025 dividend of $0.48 a share, and you can sell it any second the market is open.
The choice between the listed and the non-traded route sits at the heart of the asset class. The listed BDC gives you liquidity and a share price that can swing on sentiment. The non-traded fund gives you a smoother reported value and a higher fee load, with the exit door only open a crack each quarter. Neither is better in the abstract. They simply price the same underlying loans in different ways, and which suits an investor depends on how much they value being able to sell.
If you are not in the US
The deepest, cheapest, most liquid single vehicle in this market genuinely is US-only: a listed BDC like Ares Capital, bought on NASDAQ, with a daily price and a decade-plus track record. There is no exact European equal. But a reader in the UK or the EU no longer has to buy a US-domiciled fund to get real exposure, and the routes below are all live and regulated.
In the EU, the vehicle to know is the ELTIF (European Long-Term Investment Fund), rebuilt as ELTIF 2.0 in January 2024 to make it semi-liquid and sellable to ordinary investors rather than institutions only. Apollo won CSSF approval in Luxembourg to launch three evergreen ELTIFs in September 2025, including the Apollo European Private Credit ELTIF (AEPC), which lends primarily first-lien, senior secured to large-cap and upper-mid-market European companies, available to investors across Europe, Asia and Latin America subject to local rules. Ares runs a comparable European Strategic Income ELTIF for non-US investors. These lend in euros against EURIBOR, so a euro-based reader carries far less currency risk than they would in a dollar BDC.
In the UK, the equivalent wrapper is the LTAF (Long-Term Asset Fund), the FCA’s structure for holding illiquid assets like private credit inside mainstream products. The market has grown to £7.3bn in assets, up from £5bn in June 2025, and LTAFs became eligible for stocks-and-shares ISAs from April 2026. Apollo announced the CG Apollo Global Diversified Credit LTAF in March 2026, a semi-liquid, globally diversified private-credit portfolio aimed initially at UK defined-contribution pension schemes.
The oldest UK route needs no new wrapper at all: London-listed debt investment trusts, which trade on the LSE like any share and have offered credit exposure for a decade. The largest include Sequoia Economic Infrastructure Income (SEQI), a FTSE 250 infrastructure-debt trust, and BioPharma Credit (BPCR). Their attraction right now is also their warning: listed private-credit vehicles have been trading at their widest NAV discounts in over five years, a median of roughly 26% (a 0.74 price-to-forward-NAV ratio) at the end of March. A discount that wide can be a bargain or a market telling you it does not trust the reported values, which is exactly the opacity problem Section XI is about.
For those who want private-credit-adjacent exposure inside a plain, daily-dealing fund, some UCITS-eligible strategies hold liquid credit (broadly syndicated loans, CLO tranches, high yield) rather than true illiquid direct loans. That is a related asset, not the same one, and a reader should not mistake a daily-liquid loan fund for the illiquidity premium that comes with true direct lending. The genuine direct-lending exposure sits in the ELTIF, LTAF and listed-trust routes above.
VII. The Unit Economics, Worked Through
Strip away the marketing and a direct-lending fund does a simple set of things. It borrows cheaply, lends dearly, absorbs some losses, takes a fee, and hands the rest to shareholders. Ares Capital’s own numbers for the quarter ended 30 September 2025 let us run those steps with real figures.
The portfolio stood at a fair value of $28.693 billion. The weighted-average yield on accruing debt, the average interest rate the fund earns on the loans that are still paying, was 10.6%, down from 11.7% a year earlier as central-bank rates eased (remember: floating-rate loans, so the yield falls when rates fall). Against that income, the fund booked losses on the loans that stopped paying. Nonaccruals, loans no longer accruing interest because the borrower has fallen behind, sat at just 1.8% at cost, below the firm’s post-crisis historical average of 2.8%.
Follow the money through. The fund lends at roughly 10.6% and loses income on about 1.8% of the book to bad loans. Add modest borrowing at the fund level to amplify the equity return, subtract the management and incentive fees, and what falls out the bottom is an annualised return on equity of 10% for the quarter and a declared Q4 dividend of $0.48 a share, about 9.6% annualised on the fund’s record net asset value of $20.01 per share.
That is the whole business in a paragraph. A roughly 10.6% gross loan yield runs through a book with under 2% bad loans, and is then geared and fee’d down to a roughly 10% return on equity and a roughly 9.6% cash yield in the shareholder’s hand. The shareholder yield holds up so close to the gross loan yield because the loss rate has been low, and that low loss rate is the assumption the whole structure rests on. If nonaccruals doubled from 1.8% toward a recessionary level, the shareholder return would compress fast, because the fee and the borrowing costs do not fall just because the loans stop paying. The economics stay attractive only for as long as the underwriting holds.
Callout stat: Ares Capital earned a 10.6% average yield on its loans while losing income on only 1.8% of the book, and turned that into a ~10% return on equity. The margin lives in the gap between the yield earned and the income lost, and a low loss rate is what keeps that gap wide.
The European numbers rhyme rather than match. Pan-European direct lenders price core mid-market senior loans at EURIBOR plus roughly 500 to 700 basis points, for all-in senior yields around 8.5% to 11.0%, so the same lend-dear, lose-little arithmetic runs on a euro base rate instead of a dollar one.
VIII. How It Behaves When the Macro Turns
Because the loans are floating-rate, private credit does not respond to the economy the way a bond portfolio does. An investor who understands how it behaves across the four possible regimes is far less likely to be caught out by it.
| Regime | What happens to the yield | What happens to the borrower | Evidence |
|---|---|---|---|
| Rates rising, economy strong | Yields climb with the benchmark, the best regime | Higher rates, but revenue growth covers it | Direct-lending returns peaked near 12% in the 2022 hiking cycle |
| Rates rising, economy weak | Yields climb, but so does the risk of default | Interest bills rise into falling revenue; the squeeze | Borrower fixed-charge coverage fell from 1.40x to ~1.04x as costs rose >50% |
| Rates falling, economy strong | Yields ease back; the 10.6% drifts toward normal | Cheaper debt, healthy revenue, comfortable | ARCC yield fell from 11.7% to 10.6% as rates eased |
| Rates falling, economy weak | Yields fall and defaults rise, the worst mix | Cuts help, but often too late for the weakest | The recessionary test the market has not fully faced |
The mechanism that matters most is in the second row. The Federal Reserve’s own researchers found that direct-lending returns are positively and significantly associated with monetary-policy shocks, and when rates spiked in 2022 returns rose toward 12%. The same rate rise that lifts the lender’s yield lands on the borrower as a bigger bill. J.P. Morgan measured the squeeze. It found that average fixed-charge coverage, how many times over a borrower’s cash flow covers its fixed financing costs, for private-credit borrowers fell from 1.40x in early 2022 to about 1.04x on a forward basis by early 2023, as floating-rate interest costs rose more than 50%. A coverage of 1.04x means the average borrower was earning barely enough to pay its financing costs, with almost nothing to spare. The lender’s rising yield and the borrower’s rising distress are two views of the same event. The regime an investor least wants to hold into is one of falling revenues combined with the accumulated damage of the high-rate years still working through the weakest borrowers.
IX. The Tax Character
This is general information, not tax advice; the treatment depends entirely on your jurisdiction and your personal circumstances, and you should take professional advice before acting.
The tax treatment of private credit works against the investor in one specific way, and the structure of the problem is the same across most jurisdictions even though the rates differ. The fund vehicle itself usually avoids being taxed twice. Where private credit is accessed through a regulated-investment-company-style vehicle (the BDC structure being the clearest example) the fund itself typically pays no entity-level tax because it distributes at least ~90% of its income straight through to shareholders. The income is not taxed at the fund and again at the investor. It flows through once.
The problem is what kind of income it is. Because a private-credit fund earns its return by lending, the money it passes through is interest, not qualified dividends, and interest is generally taxed at the investor’s ordinary-income rate, which in most jurisdictions is higher than the rate applied to long-term capital gains or qualifying dividends. Any capital-gains component of the return is taxed at capital-gains rates, but the bulk of a direct-lending return is interest.
The practical consequence holds across jurisdictions: private credit produces a high, steady, but tax-inefficient income stream. A 9.6% distribution taxed at an ordinary-income rate can end up net-of-tax worth considerably less than a lower headline yield taxed favourably. In most systems that makes it far better suited to a tax-deferred or tax-sheltered wrapper than to a plain taxable account. A US investor would reach for an IRA or 401(k); a UK investor for a SIPP or, now that LTAFs qualify, a stocks-and-shares ISA; a European investor for whatever tax-advantaged pension or insurance wrapper their country provides. Where exactly the line falls depends on your country and your tax bracket, which is why the advice disclaimer above matters more here than it would for a simpler asset.
X. Three Case Studies, One of Them a Warning
The aggregate track record is built loan by loan, and the individual outcomes show more than the index does. Ares Capital proves the bull case. Pluralsight and First Brands show how it breaks.
The proof: Ares Capital, 2004 to 2025. Since its 2004 IPO, Ares Capital scaled into the largest US business development company, running a $28.7 billion portfolio by late 2025 while keeping nonaccruals below its long-run average and sustaining a roughly 10% return on equity and a roughly 10% dividend yield. This is the standing evidence for the bull case: well-underwritten senior direct lending, run by a disciplined manager, compounded through two decades and multiple rate cycles. When the asset class wants to be trusted, this is the record it points to.
The first warning: Pluralsight, 2024, when lenders became owners. The private-equity firm Vista Equity bought the software-training company Pluralsight for $3.5 billion in 2021. By May 2024, Vista had written its equity to zero. Rather than force a fire sale, the private-credit consortium that had lent the money, Blue Owl, Ares, BlackRock, Goldman Sachs, Golub, Oaktree, Benefit Street and Guggenheim, took 100% ownership of the company through a debt-for-equity swap, cut its funded debt by $1.3 billion and injected $250 million of new capital. It was the first marquee case of private lenders seizing a whole company, and it cut both ways. Private credit’s held-to-maturity structure let the lenders restructure calmly rather than dumping the debt into a panicked market. It also meant a “senior secured loan” had turned into equity in a business whose previous owner had just walked away for nothing.
The second warning: First Brands, 2025, when the numbers were a lie. The auto-parts maker First Brands Group filed for Chapter 11 in late 2025 with liabilities reported between $10 billion and $50 billion against assets of $1 billion to $10 billion, funded through opaque off-balance-sheet financing. The damage spread through the club: Jefferies’ Point Bonita fund had $715 million of exposure, UBS O’Connor over $500 million, and Millennium took a $100 million writedown. A November fraud filing alleged $700 million misappropriated, invoices inflated fifty-fold, and $2.3 billion of receivables simply missing. This is the failure that no floating-rate coupon compensates for. It was not a borrower squeezed by rates, but a borrower whose books were allegedly fabricated. Due diligence cannot price a fraud it never sees, and First Brands turned the abstract worry about private-credit transparency into concrete, nine-figure losses across the club.
XI. The Core Constraint
The binding constraint on private credit is not yield and it is not demand. It is that the loans do not trade, so nobody knows what they are really worth until they are repaid or they fail.
Illiquidity works in the fund’s favour on the way up and against it on the way down. When conditions are good, it is a feature: because the loans are not marked to a moving market every day, the reported value is smooth, and a fund can restructure a troubled borrower patiently instead of selling into a panic, exactly as the Pluralsight lenders did. When conditions turn, it becomes the problem. A smooth reported value is not the same as a stable real value. In a market with no daily price, losses do not show up gradually; they arrive all at once, at the moment a loan is finally recognised as impaired.
The First Brands failure is the constraint made visible. For years the reported value of that exposure was whatever the models said. Then, in a matter of weeks, it was $715 million of exposure at Jefferies and a $100 million writedown at Millennium. The value had not actually been stable. The lack of a market had merely hidden the change until it could no longer be hidden.
This is why the IMF flagged the market for closer watch despite the strong returns. A $2.5 trillion market whose true value is only revealed loan by loan, at maturity or at default, is opaque by construction. Everything good about private credit, the yield premium, the patient workouts, the smooth returns, is paid for with this one constraint. The investor is being paid to hold something that cannot easily be valued or sold. An investor who understands that going in owns the asset class on its own terms. One who forgets it will read the first real default cycle as a betrayal, when it is only the constraint doing what it always does.
XII. Inside the Asset
To understand what you actually own, follow one loan from birth. A private-equity firm buys a mid-sized company and needs debt to finance the purchase. Instead of a bank syndicate, it calls a direct lender, which agrees to write, say, a $60 million senior secured loan. Before signing, the lender does what a bond investor never can. It sees the company’s full private financials, negotiates covenants (contractual promises the borrower must keep, like maintaining a minimum level of cash flow relative to its debt) and prices the loan at a spread over a floating benchmark. That is how you reach a 10.6% headline yield: a base rate plus a negotiated spread for the borrower’s specific risk.
The loan then sits inside a fund, a BDC or an interval fund, alongside hundreds of others, and the fund’s investors receive the income after fees and losses. The covenants are the lender’s steering wheel. Because there are only one or a few lenders rather than a diffuse bond market, when a borrower trips a covenant the lender can intervene early: renegotiate, inject capital, or in the extreme take the keys, as the Pluralsight club did. This is the genuine structural advantage of private over public credit, which is control. A bondholder in a public issue is one of thousands and can only sell. A direct lender is at the table.
It is worth being clear about what that yield is compensating you for. The 10.6% is paid because the borrower is smaller, more leveraged, and less liquid than a public-market company, and because the lender has surrendered the ability to sell. Reduced to its economics, the loan is a bet that a private-equity-owned, mid-market company will keep generating enough cash to service floating-rate debt through whatever the economy does, and that if it does not, the collateral and the covenants will recover most of the money. That bet has paid off through the recent cycle. Whether it pays off through a bad one is the question the whole asset class still has to answer.
XIII. The Central Dilemma
In 2025 the asset class produced two numbers that flatly contradict each other, and reconciling them is the whole difficulty.
On one side is the benchmark. The Cliffwater Direct Lending Index has returned 9.50% a year since 2004 with only one negative calendar year, and 9.3% in calendar 2025. Senior direct-lending losses have run at just 0.4% since 2017, against 1.1% for leveraged loans and 2.4% for high-yield bonds. By that read, private credit has delivered higher returns and lower losses than its public-market cousins, a rare combination that should not persist if markets were perfectly efficient.
On the other side is the same year’s stress signal. Fitch’s private-market monitor showed a 9.2% private-credit-backed default rate in 2025, a genuinely alarming number until you read the segment-level data underneath it, which shows far lower rates of 1.62% for loans under $25m, 3.38% for the $25 to 49.9m band, and 1.44% for loans of $50m and above. Both readings cannot sit comfortably beside each other, and that tension is the dilemma. One measure says the losses are minuscule and the model works. The other says defaults spiked. Direct lending’s own annualised return was still 9.00% as of February 2026, which suggests the low-loss reading is closer to the lived experience so far, though “so far” is doing a lot of work in that sentence.
The way to reconcile them is to see that both describe a market in transition. The 0.4% loss rate is the record of a benign era, and the 9.2% headline default rate is an early tremor from the era that follows. An investor who anchors only on the first is looking at the past, while one who panics only at the second is misreading a stress headline that the segment data partly deflates. What matters is not deciding which number is right but recognising that the asset class is being priced on a loss history its own current conditions are starting to challenge, and that will not be settled until a full cycle has run.
XIV. The Next Frontier
The frontier of private credit is the migration from lending to companies toward lending against assets, and toward the insurance balance sheets that fund it.
The clearest signal is in the insurer survey from Section III: 36% of insurers plan to increase allocations to asset-backed finance, alongside the 40% adding to investment-grade private credit. Asset-based finance means lending against pools of receivables, equipment, consumer loans, aircraft or royalties rather than against a company’s general cash flow, and it is where the growth is heading, because it is where the insurers’ long-dated capital wants to go. Apollo under Marc Rowan built its whole strategy on this fusion of insurance capital and private lending, and the rest of the industry is following.
This is also where the earlier warning from the BIS, that the market has expanded into more and more industries, becomes concrete. The underwriting skill that produced a 0.4% loss rate in senior corporate direct lending is not automatically the same skill needed to underwrite a pool of consumer loans or aircraft leases. The frontier is expansion, and expansion into unfamiliar collateral is exactly where a track record built elsewhere can mislead.
Morgan Stanley’s ~$5 trillion by 2029 forecast anchors the frontier. Getting there means roughly doubling the market in five years, and most of that new lending will be in these newer, less-tested corners, funded by insurance capital that has its own regulators watching. This is where the returns of the next decade will largely be made, and also where the next First Brands, if there is one, is most likely to be hiding.
XV. Lessons from History
Private credit as a formal asset class is young, but non-bank lending is not, and the pattern it most resembles has a clear historical rhyme worth heeding.
The first lesson is the origin story itself. The market exists because of the 2008 crisis. Banks retreated under new capital rules, and funds filled the gap. The BIS quantified how durable that mechanism is: bank retreat is the single largest driver in its model, a ~33% increase in private credit for each meaningful drop in banking-system efficiency. The lesson is that this asset class is fundamentally a transfer of credit risk out of the regulated, deposit-funded banking system and into funds. That transfer is real and probably healthy, since the risk now sits with long-term investors who chose it rather than with depositors, but it remains untested at scale through a genuine bust.
The second lesson is about untested track records in general. Every credit instrument that produced high returns with low losses through a benign decade, from securitised mortgages before 2008 to leveraged loans at various points, looked like a free lunch until the cycle turned and revealed which lenders had been underwriting and which had been reaching for yield. Private credit’s 0.4% senior loss rate since 2017 is the record of a period with no deep recession and no prolonged high-default environment. The number is real and it is genuinely good, but by construction it has never been tested by the conditions that break credit markets.
The third lesson is that the losses, when they come, come from the corners nobody was watching. First Brands was not a failure of the core senior-direct-lending thesis. It was an alleged fraud in a more opaque, off-balance-sheet financing structure. History says the next serious losses in private credit are more likely to come from the newer frontier of Section XIV, the asset-backed and specialty corners the money is rushing into, than from the well-lit centre of the market where the track record was earned.
XVI. The Case For It
Set out plainly, the bull case is strong and rests on evidence rather than enthusiasm.
Start with the returns, because they are the whole point. The benchmark index has compounded at 9.50% a year since 2004 with a single down year, and the cross-asset comparison is genuinely favourable: global private-credit indices returned around 9.8% to 10.3% a year from 2001 to 2024, against 6.9% for high-yield bonds and 5.1% for leveraged loans, while losing less. Higher return and lower loss than the public-credit alternatives, over more than two decades, is what the index data shows rather than what a brochure asserts.
Second, the income is high and current. A 9.6% cash distribution rate from BCRED or a ~10.36% dividend yield from Ares Capital is real money paid regularly, not a paper gain you have to sell to realise. For an investor whose need is income rather than growth, that is directly useful in a way an appreciating stock is not.
Third, the floating-rate structure is a built-in hedge against exactly the risk that hurts a bond portfolio most. When rates rise, a conventional bond falls in value. A private-credit loan simply pays more, with direct-lending returns reaching toward 12% in the 2022 hiking cycle. In a world where the direction of rates is uncertain, owning credit that gets better when rates rise is a genuine diversifier.
Fourth, the structural drivers are durable, not faddish. Banks are not coming back to mid-market lending at their old scale, since the $75m to $100m hold sizes shrank to $30m to $50m for regulatory reasons that persist, and insurers are still increasing allocations. The supply gap and the demand pool that built this market are both still there.
XVII. The Risks
The bear case is built on the same kind of hard evidence as the bull case, and five risks carry most of the weight.
The first risk is the one that keeps recurring: the asset class has never been fully tested through a deep, prolonged default cycle. The 0.4% loss rate was earned in benign conditions, and the IMF put the market on watch for precisely this reason. A track record with no recession in it is a hypothesis about how the loans would behave under stress, not evidence that they will hold up.
The second risk is opacity and the fraud it can hide. First Brands showed what happens when the numbers are allegedly fabricated, with $2.3 billion of receivables missing and invoices inflated fifty-fold, inside a market where nothing trades on a public screen to blow the whistle early. Without a moving price to signal stress, a lender often sees trouble only once it has already fully arrived.
The third risk is the borrower squeeze that high rates already caused: fixed-charge coverage falling to about 1.04x means the average borrower had almost no margin for a bad quarter, and the 9.2% headline default rate in Fitch’s 2025 monitor is the early evidence of that stress showing through. The fourth is concentration. The same eight-firm club that owned the Pluralsight restructuring is exposed to many of the same borrowers, so a systemic shock touches all of them at once. The fifth is fees: the 1.25% management plus 12.5% incentive plus up to 3.5% upfront load on the flagship non-traded fund quietly converts a strong gross return into a merely good net one.
Against all this stands the industry’s most forceful voice. Apollo’s Marc Rowan, asked about the systemic-risk fears, rejected them flatly:
“People have really just lost their minds, and the headlines get more and more hysterical and have almost nothing to do with the substance.”
Marc Rowan, Chief Executive Officer, Apollo Global Management, 25 November 2025
He may well be right that the systemic panic is overdone. But he runs one of the largest firms holding the paper, and his incentive to see it as safe is as strong as any sceptic’s incentive to see it as fragile. Neither camp’s confidence settles the matter. The next default cycle will, and it has not happened yet.
XVIII. The Alternative Fortune Verdict
Private credit is a real, large, well-run asset class that has delivered a rare combination of higher returns and lower losses than public high-yield or leveraged loans over two decades. Its defining feature is also its central weakness: you cannot easily value or exit what you own, and the loss history the whole asset is priced on has never met a real recession. So the honest verdict is not “great” or “dangerous” but conditional, and the condition is what you buy and who runs it.
Compared with its closest alternatives, the picture is specific rather than sweeping. Against public high-yield bonds, private credit has paid more and lost less, but you surrender liquidity and daily transparency to get it. Against a broad equity allocation, it offers a higher and more certain current income with far less upside. It is a lender’s return, capped by design, not an owner’s. Against cash or government bonds, it is plainly riskier and plainly higher-yielding, with a floating-rate structure that behaves better than fixed-rate bonds when rates rise. Which case is stronger depends entirely on whether your need is income you can rely on or growth you can wait for, and on how much illiquidity you can genuinely tolerate through a downturn when the exit door narrows to a quarterly crack.
The edge does not sit in the headline yield, which is visible to everyone and largely competed away between managers. It sits instead in manager selection and in staying in the well-lit centre of the market. The gap between a 0.4% and a 2.4% loss rate is entirely a function of underwriting discipline, and that discipline is not evenly distributed. The advantage belongs to whoever accesses a manager with a genuine multi-cycle track record, an Ares-type record of nonaccruals below the long-run average through 2025, in senior secured lending, and resists the pull toward the higher-yielding, less-tested frontier where the next blow-up is most likely to sit. In a market defined by opacity, what an investor is really buying is the transparency and the track record, not the yield on the page.
Questions worth asking before committing, grouped by how you would get exposure:
If you are looking at a listed BDC (e.g. ARCC, OBDC): – What is the manager’s nonaccrual rate versus its own long-run average, and how did it move through 2025? – Does the share price trade at a premium or discount to net asset value, and why? – How much of the portfolio is senior secured versus junior or equity-like?
If you are looking at a non-traded / interval fund (e.g. BCRED, CION Ares): – What are the full layered fees (management, incentive, upfront placement, servicing) and what do they take from the gross yield? – Exactly how and how often can you exit, and what is the cap on quarterly redemptions if others want out at the same time? – What is the current distribution rate, and how much of it is covered by net investment income rather than return of capital?
Across any vehicle: – How exposed is it to the newer asset-backed and specialty frontier versus core corporate direct lending? – In what tax wrapper would you hold it, given the income is taxed at ordinary rates? – Does the manager have a track record that predates 2010, that is, one that includes a real recession?
For more on how private credit sits alongside other alternative income assets, see Alternative Fortune’s private credit hub.
