Private credit funds make loans to companies – sort of, kind of – in a way that’s similar to how banks make loans. The key difference is that banks are regulated and private credit funds are not. Over time, banks have steered away from lending to smaller, less creditworthy, and more heavily indebted companies that typically comprise the private debt space, leaving the door open to what is often called “shadow banking.” This shift has afforded private credit funds considerable freedom to make loans under a wide variety of terms.
Underwriting standards can be more relaxed, though the borrowers pay for that flexibility through higher interest rates. Unlike traditional bank loans or publicly traded bonds, these loans are not traded in public markets. That makes them inherently difficult to value and difficult at best to sell quickly, rendering the market opaque and illiquid.
Nonetheless, institutional investors have poured capital into private credits over the last five to ten years, lured by higher yields and the promise of outsized returns. Those returns are often enhanced through additional layers of leverage. Because if a little bit of leverage is good, more must surely be better.
Private credit works great…until it doesn’t. Recent headlines are bringing to light the extraordinary growth of private credit investments along with the murky valuations, price mark-downs, rising defaults, heavy leverage, and the illiquidity of the underlying assets. Some market participants have even begun drawing comparisons to the subprime mortgage debacle of 2008. As was the case, the trouble appears to be surfacing in places investors might not immediately expect, particularly overseas.
Executives at some of Europe’s largest insurance companies have acknowledged their concern about private credit while seeking to reassure their investors about their own investments in the asset class. Axa SA Chief Executive Officer Thomas Buberl on Thursday, February 26th said on Bloomberg TV that Axa’s exposure to the asset class is “far below” that of their competition because the firm had been “very mindful in the past.” Allianz SE Chief Financial Officer Claire-Marie Coste-Lepoutre echoed those comments in another interview, saying that the company is “separating” itself from some trends in the private credit market. She’s “very comfortable” with Allianz’s exposure. The problem in private credit started when people were trying to create the illusion of liquidity in something that inherently doesn’t have liquidity,” Allianz CEO Oliver Baete said in a separate interview.
Meanwhile, a recent International Monetary Fund report highlighted that U.S. life and annuity insurers held roughly $1.8 trillion in private credit as of early 2026, representing 46% of their total fixed-income portfolio. Driven largely by a relentless search for yield, private credit exposure has grown rapidly, accounting for roughly 35% of overall investment portfolios for North American insurers. And where do insurance companies procure this private credit, if not from loans originated by a bank?
Business Development Companies (BDCs), essentially another name for private credit firms and their funds. Firms such as Banco Santander, Jefferies Financial Group, Apollo, Blackstone, Barclays, Castlelake, BlackRock, and TPG (just to name a few) now sit at the center of a growing wave of negative headlines involving loan mark-downs and rising defaults.
As with cockroaches, where there’s one, there are usually more. Making matters worse, some private credit funds have begun limiting investor redemptions (preventing clients from withdrawing their money) a practice known as “gating.” Cliffwater’s private credit fund recently faced investors redemptions equal to about 14% of its shares, but only allowed 7% to be withdrawn. Liquidity may not have been top of mind when investors’ originally committed to funds like this, but illiquidity sure has a way of focusing an investors’ mind when they want out.
The interconnection does not stop there. Generally, major banks such as Wells Fargo and J.P. Morgan Chase & Co, are not directly lending to the small private companies that make up the private credit markets, they have increasingly been acting as banks to the private credit funds themselves. These major banks extend financing to the private credit funds and accept the funds’ portfolio of loans as the collateral for lending them the cash. In other words, it is leverage built on top of leverage. If the value of the underlying loans decline, the collateral backing the major bank’s loan deteriorates. That can prompt banks to pull back curtailing financing and that may trigger margin calls and force private credit funds to return capital.
Combine that pressure with rising investors’ redemption requests and the situation has the potential to become more serious, not only for the private credit funds but possibly for broader credit markets as well as crossing over into other markets. What once looked like a stable high-yield investment is starting to resemble something else entirely: a downward spiral and a rush for the exits.
