Private Credit: A Growing Asset Class Facing Its First Real Test

An Expanding Segment of the Market

Private investments, including private credit and private equity, have grown dramatically over the past decade. Many firms operating in this space have strong management teams, long track records, disciplined underwriting processes, and experience navigating multiple economic cycles. For certain investors these strategies can play a meaningful role in a diversified portfolio by providing exposure to different sources of return and, in many cases, higher returns than traditional public markets. At their best, private investment firms provide patient capital, close relationships with borrowers, and thoughtful risk management that can benefit both investors and the businesses receiving financing or investment.

However, like many areas of finance that experience rapid growth, the private credit industry is now facing its first meaningful period of scrutiny. Over the past year investors have begun to notice cracks forming in parts of the market. Headlines (albeit only a handful) about fraudulent borrowers, questions about valuations, redemption pressures in certain funds, and volatility in publicly traded alternative asset managers have prompted a closer look at how the industry operates. None of these suggests that private credit is fundamentally broken. Instead, it reflects what often happens when a rapidly expanding sector meets a more challenging economic environment.

The Regulatory Roots of Private Credit

The rise of private credit can largely be traced back to the regulatory changes that followed the global financial crisis. After 2008 policymakers moved aggressively to strengthen the banking system through legislation such as the Dodd Frank Act and global capital rules under Basel III. These reforms significantly increased capital requirements for banks and limited the types of risk they could hold on to their balance sheets.

The result was a “safer” banking system, but it also created an unintended gap in lending. Middle market companies that once relied on banks for financing suddenly found fewer traditional lenders willing or able to provide capital.

Private investment firms stepped into that gap. Over time they raised hundreds of billions of dollars from institutional investors such as pensions, endowments, and insurance companies and began providing direct loans to companies that banks once served. The strategy proved attractive during the low-interest rate environment that followed the financial crisis. Private credit offered yields well above traditional bonds, and the absence of daily market pricing made returns appear relatively stable compared with publicly traded assets.¹

However, the same characteristics that made private credit appealing can also make risks less visible.

The Debate Over Determining Volatility

Last fall an article in Barron’s shed light on a question some have as it relates to the difference between perceived volatility and actual economic risk. In the article, Cliff Asness, founder of AQR Capital Management which is a large liquid alternative manager, raised the issue where he described what he calls “volatility laundering.” His argument is that private assets can appear less volatile simply because they are not priced every day in public markets. When valuations are updated quarterly or less frequently, price movements appear smoother even though the underlying economic value may fluctuate more significantly during periods of stress.

This critique does not suggest that private credit assets are inherently unstable. Rather it highlights a structural difference between private and public markets. Public securities adjust continuously as investors process new information. Private assets adjust more slowly, which is not necessarily a bad characteristic. When economic conditions change the revaluation process can occur in larger steps instead of daily movements. Investors accustomed to steady quarterly returns sometimes discover that the true risk profile becomes more visible during periods of economic pressure.

Warren Buffet and the Tides

Recent headlines have also increased scrutiny on underwriting standards across parts of the industry. Several borrower failures, one even here in Texas, have drawn attention to the due diligence processes used by certain lenders. In some cases fraudulent or poorly managed companies obtained financing that later proved problematic. These incidents do not represent the majority of private credit activity, but they serve as a reminder that rapid growth in any financial sector can attract participants with varying levels of discipline and experience. Banks have long dealt with this, but heightened media coverage and renewed focus on this asset class have brought it to the forefront.

As with previous credit cycles, weaker borrowers and weaker lenders are often exposed first when economic conditions become more challenging. As Warren Buffett said, “only when the tide goes out do you discover who’s been swimming naked”.

Signals from Public Markets and BDCs

Public markets have begun to provide some of the clearest signals that investors are reassessing risk within private credit. Several publicly traded alternative asset managers that are heavily involved in the sector have experienced notable volatility here lately. Firms such as Blackstone, Apollo, and Blue Owl have seen their share prices fluctuate as investors evaluate the outlook for private investments and the potential impact of rising defaults or liquidity pressures.

Developments within some private credit funds have also highlighted the challenges that can arise when illiquid investments meet rising redemption requests. A larger retail focused private credit vehicle halted quarterly redemptions and shifted toward returning capital to investors through asset sales and periodic payouts. These events have intensified the discussion around semi-liquid private credit funds, which were designed to provide periodic access to capital even though the underlying loans may take years to mature.

The business development company (BDC) market provides another useful window into investor sentiment. BDC’s lend primarily to middle market companies and distribute most of their income through dividends. Because they trade on public exchanges their share prices often react more quickly than the valuations reported by private credit funds. Recently several BDCs have traded at discounts to their reported net asset values, suggesting that public market investors may be pricing in greater credit risk than private valuations currently reflect.

The Question of Broader Access

These developments have also fueled a broader debate about whether private investments belong inside retirement plans such as 401k’s. Large asset managers have increasingly advocated for expanding access to private markets within retirement accounts. Supporters argue that institutional investors have long benefited from private assets and that broader participation could improve diversification. Critics point out that many retirement savers may not fully understand the liquidity constraints and valuation complexities involved.

Liquidity remains the central issue. As noted in a MarketWatch article on this topic last year, liquidity can be a structural challenge because these strategies are designed to be long-term and illiquid. That structure may align well for those with a long-term timeline, but possibly not for those plan participants who are accustomed to daily liquidity, transparent pricing, and access to funds upon retirement

Private investments can make sense within portfolios, but they require investors to understand the tradeoffs involved, allocate accordingly, manage their overall portfolio and cash flow needs appropriately.

The Bottom Line for Investors

Despite the recent headlines it is important to maintain perspective. What we may be witnessing is less a crisis and more a normal stage in the evolution of this expanding sector. As an alternative to traditional bank lending, private credit has emerged as a key pillar of modern capital markets, helping businesses secure needed financing. The recent scrutiny around certain borrowers, redemption pressures, and volatility among publicly traded alternative asset managers is not a signal that private credit as a whole is faltering. Instead, it highlights an important reality: even assets that appear stable can carry varying degrees of risk. As with any investment, risk must be carefully assessed through disciplined portfolio construction, the use of strategies led by experienced managers who have navigated multiple market cycles, and a thorough analysis of both visible and less apparent underlying factors.

¹https://www.spglobal.com/market-intelligence/en/news-insights/articles/2026/1/global-private-credit-fundraising-increased-in-2025-96448289