For more than a decade, private credit was a niche topic, largely confined to specialists in private markets and the quarterly reports of a handful of alternative asset managers. Today it is anything but: the Financial Times and the Wall Street Journal devote near-weekly coverage to it, Jamie Dimon has compared the sector to a cockroach infestation, and regulators such as the Financial Stability Board (FSB) and the European Central Bank are openly asking whether the global financial system truly understands how much risk has migrated outside the regulated banking perimeter.
The underlying question is easy to state and hard to answer: is private credit a credit bubble forming outside the regulatory radar, or a structural, lasting shift in how companies get financed? This article goes beyond the headlines to examine the data, the recent stress cases, and the arguments on both sides of the debate.
What private credit direct lending actually is
Direct lending is the largest segment within the broader private credit universe. It involves funds managed by firms such as Ares, Blackstone, Apollo, KKR, or Carlyle lending directly to companies—typically mid-sized businesses, many of them backed by private equity—without a bank acting as intermediary and without the loan being syndicated or traded on public markets.
Unlike a traditional bank loan or a high-yield bond, these transactions are negotiated bilaterally. The result is greater structural flexibility (unitranche facilities, PIK toggles, bespoke covenants) in exchange for less standardization, lower market transparency, and, almost always, higher costs for the borrower.
This model emerged largely as a response to traditional banks retreating from mid-market corporate lending after the 2008 financial crisis and the tightening of capital requirements under Basel III. Where banks reduced their risk appetite, private credit funds found a gap that has continued to widen ever since.
From niche to financial-system pillar: the scale of the market
The numbers explain why the debate has escalated so quickly. The global private credit market was valued at roughly $2.1 trillion in 2025, and forecasts from PwC, Moody’s, and Global Market Insights converge on a sustained growth trajectory: somewhere between $3.4 trillion and $4 trillion by 2030, with more aggressive estimates placing the figure at $5.7 trillion by 2035.
Within institutional corporate direct lending alone, large alternative asset managers now oversee more than $1.3 trillion in assets, heavily concentrated in transactions linked to private equity buyouts. Add to that a relatively new phenomenon: the large-scale arrival of retail capital through semi-liquid vehicles (non-traded BDCs, interval funds, European evergreen structures), which already hold more than $640 billion and could surpass $1 trillion by 2028.
The consequence is twofold. On one hand, private credit has stopped being a marginal complement to bank financing and has become a primary funding source for mid-sized companies and M&A activity. On the other, its growing interconnection with banks, insurers, pension funds, and now individual investors has turned what was once “niche risk” into a meaningful component of the global financial machinery.
The cracks that triggered the alarm: First Brands and Tricolor
The media trigger for the current debate came in the autumn of 2025, when two U.S. companies—auto-parts manufacturer First Brands and used-car lender Tricolor—filed for bankruptcy within weeks of each other, amid allegations of fraud and double-pledged collateral.
The fallout was not confined to private credit: banks such as UBS and Jefferies disclosed exposures of $500 million and $715 million respectively to First Brands, while JPMorgan, Barclays, and Fifth Third Bank were left exposed through Tricolor’s credit lines. Jamie Dimon summed up market unease with a line that has since been quoted endlessly: “when you see one cockroach, there are probably more.”
What matters, however, is putting the real scale of these episodes into perspective. Firms such as Cambridge Associates and analysis from iCapital have pointed out that both cases were, above all, idiosyncratic frauds that affected syndicated loans, public ABS structures, and traditional bank warehouse lines just as much as private credit—not a systemic failure unique to the asset class. A post-mortem review of BDC exposure following First Brands’ collapse found aggregate exposure of just 0.05% of total sector assets under management.
That said, the episodes did expose a genuine problem: opacity around who is lending to whom, and how much debt may be secured against the same collateral without any single lender having full visibility.
Where the real systemic risk lies
The debate over whether private credit poses a systemic threat has become more precise as regulators and analysts separate noise from genuine structural vulnerabilities. Three areas concentrate most of the concern:
Hidden interconnection with the banking sector. The FSB has warned that global banks hold direct and indirect exposure to private credit funds worth hundreds of billions of dollars. In Europe, bank exposure to non-bank financial institutions (NDFIs) stands at roughly $4.5 trillion, around 9% of the sector’s combined loan book. The risk is not that private credit “blows up” in isolation, but that it transmits stress to the banking system through credit lines, warehouse financing, and cross-holdings.
Liquidity mismatches in evergreen vehicles. As semi-liquid structures have opened private credit to individual investors, episodes of sharp redemption requests colliding with the illiquid nature of the underlying assets have started to appear. Morgan Stanley has noted that, in early 2026, concerns over AI’s potential impact on software business models coincided with a surge in redemption requests across evergreen direct lending strategies—an issue that until then had mostly stayed buried in the fine print of these funds.
Selective deterioration in credit quality. Default rates remain relatively contained—around 4.5%–5.2% according to S&P Global and Fitch Ratings at the end of 2025—far from crisis-era levels. But competition among managers to deploy raised capital has compressed covenants and margins, and PwC’s Global Private Credit Survey 2026 shows that two-thirds of managers now consider heightened competition the primary pressure on fund returns, while 93% expect flat or lower returns in 2026.
The case against a “systemic crisis” narrative
Not everyone shares the alarmist tone. Asset managers such as Hamilton Lane have explicitly pushed back against comparisons between recent stress episodes and a broad-based crisis, arguing that private credit’s relative size within the global financial system remains limited, and that the problems observed are specific to individual borrowers rather than symptomatic of broad credit deterioration.
Analysis from private banking divisions such as Santander Alternative Investments further notes that traditional direct lending—built on predictable cash flows and senior secured structures with prudent leverage—has shown resilience across different rate environments, and that current regulatory scrutiny is focused mainly on valuation transparency and semi-liquid vehicles aimed at non-professional investors, not on the asset class as a whole.
The most balanced reading emerging from both camps is that private credit is not going through a systemic crisis, but it is entering its first meaningful large-scale credit-stress cycle after years of near-uninterrupted growth. In other words, this is the model’s first real stress test since its massive post-2008 expansion.
Private credit vs. traditional banking: a necessary comparison
Beyond the systemic-risk debate, it is worth understanding how private credit differs structurally from traditional bank financing, because that is where both its advantages and its blind spots originate.
| Dimension | Traditional banking | Private credit / Direct lending |
|---|---|---|
| Regulation | Strict (Basel III, prudential supervision, capital requirements) | Light-touch, fragmented across jurisdictions and fund structures |
| Price transparency | High (benchmark markets, public ratings) | Low (internal marks, model-based valuation) |
| Execution speed | Slow, risk-committee processes | Fast, decision concentrated with the fund manager |
| Debt structure | Standardized, syndicated | Bespoke (unitranche, PIK, flexible covenants) |
| Investor liquidity | Deposits, highly liquid | Low; evergreen vehicles offer only partial liquidity |
| Cost to borrower | Generally lower | Higher, reflecting a flexibility and illiquidity premium |
| System-wide exposure | Direct and closely supervised | Indirect, via banks, insurers, and NDFIs |
This table explains why the banking system itself, far from being a bystander, has become one of private credit’s principal shadow financiers—through credit lines extended to the funds themselves, participations in unitranche facilities, and the sale of loan portfolios to private credit vehicles to free up regulatory capital. Private credit has not replaced banking; in many cases, it has become deeply intertwined with it.
The European angle: opportunity in a less mature market
While the U.S. direct lending market shows signs of return compression from excess competition, institutional investors are reallocating capital toward Europe, where regulatory fragmentation and lower informational efficiency still allow for more attractive risk-adjusted return premiums. Spain’s mid-market, in particular, is going through a period of increasing activity, supported by the significant dry powder accumulated by funds after two years of macroeconomic caution.
This geographic divergence is not a minor detail: it suggests that the “bubble or not” framing is, in reality, too simplistic for a market that is rapidly segmenting across geographies, strategies (corporate direct lending, asset-based finance, distressed debt), and risk profiles that differ substantially from one another.
What institutional investors should watch
For a sophisticated investor, the practical takeaway is not to avoid private credit, but to sharpen selection criteria at a stage of the market cycle that no longer rewards indiscriminate exposure:
- Manager transparency around a borrower’s full capital structure. The First Brands case demonstrated that a lack of visibility into multi-layered financing (syndicated, private, off-balance-sheet) is more dangerous than the underlying credit risk itself.
- Genuine leverage discipline and covenant strength—not just nominal terms—particularly in sectors under pressure such as consumer, retail, auto, and software.
- Alignment between offered liquidity and the actual liquidity of underlying assets, a critical point for evergreen and semi-liquid vehicles marketed to private wealth clients.
- A bank’s or wealth manager’s own cross-exposure to NDFIs, which can create indirect contagion channels that rarely show up in standard quarterly reporting.
- Diversification across sub-strategies, given that asset-based finance is showing risk dynamics that are distinct—and in many cases more conservative—than pure corporate direct lending.
Conclusion: neither a broad bubble nor a perfect substitute for banking
Private credit is not experiencing a systemic crisis comparable to 2008, but it is no longer the “boring and predictable” asset class many institutional investors bought into during the last decade of low interest rates. It has entered a phase of required selectivity, one in which performance dispersion across managers will widen meaningfully, and in which its interconnection with traditional banking—far from having disappeared—has become more complex and less visible.
The right question, then, is not whether private credit will replace banking or whether it is a bubble about to burst. It is whether investors—institutional, and increasingly retail—have the tools and analytical discipline to distinguish between structures that have proven genuinely resilient and those that simply haven’t been tested yet. At Gala Capital, we continue to track this structural transformation of the credit market closely, with particular attention to how it translates into concrete opportunities and risks across the European mid-market.
Sources and references: Financial Stability Board (Report on Vulnerabilities in Private Credit, 2026), PwC Global Private Credit Fund Survey 2026, Moody’s, Global Market Insights, Morgan Stanley Wealth Management, Cambridge Associates, iCapital, Funds Society, Alternative Credit Investor.
