Private credit, lending from nonbank financial intermediaries (NBFIs), has been on the rise:

Source: Fillat et al. (2025), FRB Boston.

From Fillat et al. (2025):

In the United States, the private credit market grew in real terms from $46 billion in 2000 to roughly $1 trillion in 2023, with the growth accelerating notably after 2019 (Figure 1) due mostly to direct lending.2 Broadly syndicated loans (large loans originated by banks and distributed to a group of investors, typically other banks and institutional investors) and high-yield bonds (corporate bonds issued by lower-rated corporations that offer higher interest rates due to the higher credit risk) are the two prominent forms of business credit with which PC lending competes. According to the commercial data provider Pitchbook LCD (formerly Leveraged Commentary and Data), broadly syndicated lending represented $1.3 trillion of debt as of the last quarter of 2023, while high-yield bonds represented $1.6 trillion, according to the International Monetary Fund’s Global Financial Stability Report (IMF 2024).

Historically, private credit has not been thought of as posing systemic risk, as noted by a Report from the Managed Fund Association (MFA):

The loan covenants private credit firms use to protect their investments and monitor borrowers’ financial health are typically stricter than credit originated by banks, which is often broadly syndicated. Unlike syndicated loans, private credit funds hold loans to maturity and bear all of its credit risk, incentivizing them to impose stricter covenants than those imposed by banks.

Covenants may include requirements to maintain certain financial ratios or restrictions on additional borrowing, asset sales, or dividend statements. Such conditions have helped private credit achieve lower historical default rates compared with similar lending types.

A February 2024 Fed research note found that private credit direct loans have a default rate of just 1.6%—performing more than twice as well as high-yield bonds (3.3%) and over three times as well as syndicated loans (5%) (Fang and Haque, 2024).

The Boston Fed report is from May, while the MFA report is from late August, both predating the recent failures of, for example, First Brands. From Fink (November 2025):

Consultancy Oliver Wyman estimates that the market for all asset-backed lending in the United States alone is $5.5 trillion, but private credit currently has only a 5% share. To tap the market, credit funds are increasingly partnering with banks. The firm notes that in the last two years, PE firms and major banks have signed at least 10 private credit partnerships, with half of these partnerships focused on opportunities in asset-backed financing (ABF).

That said, the bankruptcy in late September of US auto parts supplier First Brands Group is calling into question some of the assumptions made about private credit’s interest in ABF and indeed about the entire category of nonbank lending.

In fact, the expansion of ABF, based on a borrower’s cash flow from its assets rather than its operations, presents new opportunities and risks for borrowers, lenders, investors, and potentially the financial system. The trend reflects several underlying developments in corporate finance and the broader economy. With growth ebbing in many sectors, so-called “direct,” operating cash-flow lending to corporates, by both banks and credit funds sponsored by private equity firms and others, appears to have reached its peak.

How does this link in with the other concern in the financial system? Fink continues:

The latest category of ABF is increasingly taking the form of data centers and other infrastructure that serve as the foundation of the new economy.

Indeed, the boom in artificial intelligence, along with the growing “tokenization” of payments—the use of blockchain technology to settle transactions more quickly and securely—has led to soaring demand for data center capacity, and tech companies are borrowing from private credit funds to expand it despite ample cash coffers.

…

“Private credit has not yet been stress-tested,” [NYU Professor Viral] Acharya says. He worries that, rather than issue more equity in case of credit downgrades, private equity firms will draw down their bank facilities. In that scenario, he says his main concern is that “the risks will play out on banks’ balance sheets.”

That risk may be most acute in data centers, driven largely by compute demand for AI applications developed by big tech firms, or hyperscalers, as the technology has yet to produce significant revenue for them despite already huge investments.  And Fitch Ratings in September warned that tariffs on steel and aluminum, sharply rising electricity costs, geopolitical tensions, the end of US federal support for wind and solar power, and a slowing economy all pose increased challenges for data center operators.

So there are risks, and mitigating factors. I’d say we’re in a precarious time, particularly with unnecessary political/policy shocks being generated all the time — but who knows? Here’s a nice check-list, from Fitch.

Source: Fitch, 29 Sep 25.