(Private credit) has been in the headlines a lot lately. Some financial leaders have questioned whether banks are too exposed to the category.^1^ Regulators have raised concerns about opaque valuations and the risk of looser terms as capital pours in.^2^ These are valid points and worth paying attention to.
But real risks exist across (asset classes), public and private. Goldman Sachs has cautioned that they believe many stock valuations are overheated and running ahead of fundamentals.^3^ Private equity has struggled to deploy and return capital since interest rates spiked.^4^ Certain parts of real estate are still facing structural headwinds from the pandemic.^5^
All investments carry risk; the question is how those risks can be understood and managed. With private credit attracting so much attention right now, it’s a good moment to put those risks in context — and to consider how investors might approach the asset class strategically.
Why Private Credit May Have Staying Power
One of the common critiques you hear about asset classes that grow quickly (think crypto, for instance) is that they don’t serve a clear purpose in the financial system. That they’re driven more by hype than by function.^6^ That isn’t strictly true of private credit.
Since the 2008 financial crisis, many banks have retreated from large parts of the corporate lending market, leaving a structural gap. Thousands of private companies still needed financing, but many traditional channels had stepped away. Private lenders moved in to fill the void, usually offering flexible deal structures and working closely with borrowers to meet specific needs.^7^
In the 15 years since, private credit has become one of the fastest-growing segments of the financial system. McKinsey estimates the addressable market in the United States alone now exceeds $30 trillion.^8^
Why does that matter? Because originating, structuring, (syndicating), and distributing assets is fundamental to how the economy functions — and private credit has proven itself an indispensable link in that chain. While the risks and rewards of the asset class may shift with market cycles, its role is entrenched. Private credit is likely here to stay.^9^
Consider this example: private credit financed a record 77 percent of global leveraged buyouts in 2024. These transactions — among some of the most common ways companies are bought and sold — depend on a robust private credit market. It’s one of many ways private credit has become an essential financing tool for investment firms, private companies, and the broader economy.^10^
Key Risks of Private Credit and How to Manage Them
So what are some of the key specific risks of private credit? For investors, several stand out.
Valuations are often based on models rather than active market pricing, which means losses can take longer to show up in a downturn. Liquidity is limited, making it difficult, if not impossible, to exit positions quickly without taking a discount. Borrower quality varies, and in a slowing economy, weaker credits may face refinancing challenges. There’s also the potential for underwriting standards and deal protections to erode overtime, as competition for deals pushes lenders toward looser covenants, higher leverage, or more complex fund-level financing.^11^
The good news is that these risks are generally well understood and there are strategies to help manage them.
Disciplined underwriting and covenant enforcement remain the first line of defense, working to ensure that lenders have meaningful control rights if performance deteriorates. Diversifying across industries, deal sizes, and borrower profiles can reduce concentration risk.* Active monitoring — with lenders staying close to management teams and private equity sponsors — may allow for early detection of problems and potentially more options to protect value. Finally, matching the liquidity of the investment vehicle with the liquidity of the underlying loans helps avoid the kind of redemption pressure that can damage returns.**^12,13^
Altogether, private credit has grown into a distinct corner of the corporate lending market, offering exposure to borrowers and deal structures not typically available through public channels. In recent years, the asset class has outpaced some bank and public alternatives.14 But the same features that define it (complexity, opacity, and illiquidity) also introduce risk and demand a high degree of discipline, especially as the market’s competition intensifies. As with any asset, managing these risks — particularly the ones above — requires a clear and consistent strategy.^14^
For a deeper look at private credit, including a full breakdown of its potential benefits and risks, check out Crowd Street's private credit guide and other investor resources.
* Diversification does not guarantee investment returns and does not eliminate risk of loss.
** Distributions are not guaranteed.
