The risky lending business known as "private credit" is causing some very public problems for banks and investors — with implications that go far beyond Wall Street.
"Private credit" refers to an opaque but fast-growing corner of the financial world: When private-equity firms and other companies that aren't banks lend money to businesses, such as software companies and auto lenders. Banks often are more reluctant to lend directly to these businesses, which they see as riskier bets — but they're still exposed to them, because banks do lend to private credit firms.
The private credit sector has been growing for years, and is now estimated to be a $3 trillion industry, according to Morgan Stanley. But its mounting problems are also becoming increasingly visible, especially after two companies backed by private credit companies declared bankruptcy in September. Those bankruptcies raised concerns about how carefully private credit firms were vetting the companies they lend to — and how they, and the banks and investors that finance them in turn, would get their money back.
"When you see one cockroach, there's probably more," JPMorgan Chase CEO Jamie Dimon, whose bank had also financed one of the failed companies, warned during an October conference call.
More "cockroaches" have been skittering out of the private-credit woodwork in recent weeks. Blue Owl, one of the largest and most prominent private-credit lenders, in February said it would sell off $1.4 billion in assets in order to give money back to some of its investors. The announcement was intended to reassure Blue Owl's investors — but instead, it sparked widespread panic about a collapse in private-credit assets. (A spokesman declined to comment.)
Now more investors in several private credit firms are trying to pull their money out of the industry — and the panic is spilling over into the stock market.
Blue Owl's shares have fallen about 40% since the start of the year. The shares of other big private credit companies, including KKR, Apollo, and Blackstone, are also down by 20% or more.
"When everyone is rushing to the door at the same time, there's an inherent panic that occurs that also affects sentiment. I think we're seeing some of that here," says investor Olaolu Aganga, head of portfolio construction for Citigroup's wealth-management division.
Wall Street's private credit angst is related to its AI anxiety
This growing panic comes at a time when U.S. investors have already spent months swinging between terror and delight — especially over tariffs, the runaway artificial intelligence boom, and, most recently, the war in Iran and its shock to global oil prices.
So as Wall Street swings from record high to selloff and back again, private credit's onetime promise has turned into another source of market instability.
"It's [only] March, and we've had AI angst, private credit angst, and now we have a war — so there's a lot of angst," Aganga says.
Some of the private credit angst is directly intertwined with AI. Big Tech companies and their bets on artificial intelligence have powered the stock market for years — but investors are increasingly worried about whether and how much those investments will pay off. At the same time, they're also worried that AI will soon render many software companies obsolete — and private credit companies are big lenders to those software companies.
"Everyone's terrified. They don't know who the winners are. They don't know who the losers are," says Jared Ellias, a law professor at Harvard and coauthor of an academic paper about private credit.
"The great fear is that private credit is going to turn out to have financed a lot of the losers, and then those private credit funds are going to be left with huge losses," he says.
How private credit's problems threaten ordinary people
In the short term, Wall Street's private credit selloff is cutting into the retirement accounts of some individual investors — including those who have bought into private credit companies through mutual funds or their 401ks.
The even bigger-picture worry for ordinary consumers is that the problems with private credit will ripple throughout the mainstream financial system, sparking some sort of larger meltdown. Investors and financial regulatory experts point to the sector's lack of transparency as one cause of this concern: Private credit firms are not regulated like banks, and do not face the same level of scrutiny or government-mandated disclosures over who or what they lend to.
"We simply don't know where that money is going (who it is being lent to) and the full extent of the risks being taken," says Brad Lipton, a former senior advisor at the Consumer Financial Protection Bureau and now the director of corporate power and financial regulation at the Roosevelt Institute, a progressive think tank.
"If investors get spooked about risk and start to pull their money out, we could see a 'run' on the companies doing the lending and a crisis," he adds in an email to NPR.
Lipton and investors also worry about how much the problems with private credit lenders can infect the mainstream banking system. U.S. banks have lent some $300 billion to private credit companies, according to Moody's.
As more problems with private credit companies have surfaced in recent weeks, bank stocks have sold off. The KBW Nasdaq Bank Index is down more than 11% since the start of the year, while the benchmark S&P 500 is only down about 3%.
Still, Harvard's Ellias says he's not currently worried about private credit companies sparking a 2008-style conflagration.
"This isn't AIG, this isn't Lehman Brothers — this is a bunch of investors who may turn out to have made a bad bet," says Ellias.
He's more worried that a prolonged downturn in private credit will hurt the companies that borrow from them — and who can't get funding as easily or quickly from banks. If small or medium-sized businesses can't get funding to help grow, the overall economy could slow down.
But he acknowledges that at a certain point, bad bets can snowball into a bigger problem for Wall Street and the larger economy.
"Financial stability is always about confidence," Ellias says. "If private credit turns out to be this place that we lose confidence in, and then we lose confidence in everything else by association – that could be a way that there's contagion out of this."
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