Private Credit’s Soaring Rise: $3–3.5T AUM & Risks Driving Regulatory Focus

Growth Trajectory and Market Size

According to Morgan Stanley, the private credit market size stood at approximately US$3 trillion at the start of 2025, up from about US$2 trillion in 2020, with expectations to grow to nearly US$5 trillion by 2029. [3] The Alternative Credit Council’s ACC & Houlihan Lokey data confirm rapid expansion, reporting global assets under management (AUM) of US$3.5 trillion as of December 2025, with deployment in 2024 rising by about 78% year-over-year. [1] Preqin data similarly paints a trajectory of near doubling of certain private credit AUM segments by 2030. [2][7]

Performance, Risk and Structure

Private credit has outperformed many fixed-income alternatives over the past decade: as of Q1 2015–Q1 2025, risk-adjusted returns (Sharpe ratios) over that period for private credit notably exceeded those of high-yield bonds, bank loans, corporate bonds, and US Treasuries. [3] Direct lending, especially senior secured, has shown materially lower loss rates—≈0.4% annually since 2017 vs. 1.1% for leveraged loans and 2.4% for high-yield bonds—while retaining higher returns during rising-rate and shallow rate-cut environments. [3]

Drivers of Demand and Strategic Opportunities

Key tailwinds include banks retreating under regulatory pressures; borrowers’ desire for speed, certainty, and flexibility in financing; the prevalence of floating rate instruments protecting investors’ interest income when benchmark rates are rising. [3] Senior direct lending appears especially well positioned if economic downturns are mild or rate cuts are shallow. Junior/hybrid capital solutions are being increasingly used in continuation fund structures and rescue financing in distressed environments. [3][6]

Challenges and Risk Factors

One of the growing concern areas is structural risk from liquidity mismatch, given the increasing use of evergreen or open-ended fund structures which allow more investor redemptions. Rating agencies like Moody’s flag that misalignment between redemption terms and liquidity can lead to bank-run-style stresses. [5] Underwriting looseness, falling interest coverage, elevated non-accruals among certain BDCs, and increasing exposure to unsecured consumer lending are making for riskier terrain. [4][6] Regulatory scrutiny is ramping up as the sector’s scale has become large enough to potentially pose systemic risk. [5][7]

Strategic Implications for Investors and Stakeholders

For institutional investors, allocating to private credit remains attractive for current income, downside protection via senior secured claims, and diversification relative to public markets. However, due diligence should focus on fund structures, liquidity terms, loss provisioning, and underwriting standards. For regulators, there is a trade-off: private credit provides fill-in for banks’ pullbacks, but transparency, stress testing, and oversight lag behind public credit markets. Fund managers may need to lean into junior capital, continuation vehicles, and rescue capital from defaults. Meanwhile lenders should assess macro impacts—liquidity, rate cycles, inflation, and recession risk—and plan accordingly.

Open Questions

• How resilient will private credit borrowers be under prolonged economic slowdown or higher funding costs?
• Will regulatory frameworks evolve to meaningfully enhance transparency, liquidity management, and valuation practices—especially in open-ended or retail-exposed funds?
• To what degree will public credit spreads, underwriting standards and covenant quality influence private credit returns as competition intensifies?
• How will potential defaults in consumer or unsecured lending segments affect investor behavior and regulatory reactions?