Private credit’s transformation from a niche lending channel into a multi-trillion-dollar financing engine is reshaping global debt markets and raising urgent questions about stability, transparency, and investor risk. The sector, once focused on mid-market borrowers, has rapidly expanded in scale and ambition, increasingly resembling the public bond market in both structure and reach. With assets under management nearing $3 trillion in early 2025 and projected to swell to $5 trillion by 2029, the line separating private lending and traditional fixed income is now thinner than ever—and that convergence is flashing several red lights.

Private Credit’s Expansion Pushes It Toward the Bond Market

The shift is not simply about size. It reflects a structural evolution. Private lenders now offer products that mirror almost every segment of the public fixed-income universe—investment-grade loans, high-yield debt, asset-backed financing, infrastructure credit, and real-estate debt. Investors who once viewed private credit as a complement to syndicated loans now increasingly treat it as a direct substitute.

This expansion has been driven by borrowers seeking bespoke financing, investors hunting for yield in a world of volatile public markets, and banks stepping back from riskier segments due to regulatory constraints. As borrowing needs grew—particularly during periods of market stress—private lenders filled voids previously occupied by banks or public markets, enabling companies to raise hundreds of millions or even billions through customized financings.

The result is a market whose structures, pricing dynamics, and underwriting practices are beginning to mirror those of the leveraged-loan and high-yield bond markets before 2020.

A Competitive Boom Intensifies Underwriting Concerns

Such rapid convergence, however, brings risk. As more private funds compete for large, high-profile deals, underwriting discipline has weakened. Experts warn that practices increasingly resemble the looser standards seen in pre-pandemic syndicated markets: weaker covenant protections, elevated leverage levels, and aggressive assumptions for refinancing.

The collapse of First Brands, which defaulted on more than $1.5 billion of private loans, underscored how fragile this ecosystem can be. The liquidity crunch caught lenders off guard, highlighting the opacity and limited real-time financial visibility inherent in private markets. Investors now worry that competition for deal flow is pushing managers to accept risk without adequate compensation, especially among mid-sized companies vulnerable to rising financing costs.

Another challenge is portfolio overlap. Mega-deals are limited, meaning investors who hold multiple private credit funds may unknowingly increase exposure to the same borrowers—a concentration risk that contradicts the diversification private credit promises to provide.

Growth Without Liquidity Raises Structural Red Flags

Despite its resemblance to public credit, private lending lacks one of the public market’s most critical stabilizers: liquidity. Positions cannot easily be sold, and even emerging secondary mechanisms remain too immature to support meaningful flow during periods of market stress. This raises the prospect that private credit could experience public-style volatility without the accompanying infrastructure to absorb shocks.

Regulators have also flagged concerns that opaque, highly leveraged non-bank lenders may amplify systemic stress in a downturn. With hundreds of billions pouring into the sector in a short time, yield compression and increasingly complex deal structures heighten the risk of a bubble forming.

Looking Ahead

The private credit boom is unlikely to reverse, as institutional demand remains strong and borrowers continue seeking flexible financing outside traditional banks. Yet the very growth that fuels the industry also elevates its vulnerabilities. Investors will need to monitor underwriting discipline, liquidity developments, and regulatory scrutiny, while policymakers increasingly view private credit as a potential source of systemic risk in the next economic downturn.