- U.S. private credit has ballooned to roughly $3T, and early stress is showing via rising defaults, PIK usage, and investor redemptions.
- Headline direct-lending defaults are still modest (~1.8%), but broader distress and restructuring measures imply higher effective stress and elevated 2026 risk, especially in the middle market.
- Bank lending to nonbank lenders/NDFIs has surged to about $1.7T, creating opaque links that could transmit losses back into the banking system.
- Key fragilities include liquidity mismatches in semi-liquid funds, opaque valuations, loosened underwriting from competition, and returns dependent on high interest carry.
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Private credit—or direct lending by nonbank lenders—has become a major feature of the financial landscape, filling gaps left by banks post-2008. The sector is growing both in scale and complexity. As of late 2025, estimates place U.S. private credit around $3 trillion. It has expanded into new geographies, risk layers, and into fund structures that involve perpetual capital and easier access for retail and institutional investors alike.
While headline default and loss rates have so far remained just moderate, multiple indicators suggest the risk of deterioration is rising. Trailing 12-month default rates in direct lending are roughly 1.8 % (KBRA data), but adjusted measures that include distressed liabilities or restructurings push effective rates higher (~4-5 %) when stress events are included. Expectations for middle-market borrowers defaulting in 2026 are elevated.
Bank exposure to private credit and NDFIs has become a potential channel for systemic risk. Loans by U.S. banks to NDFIs reached about $1.1 trillion by end-2024 and climbed further to ~$1.7 trillion by September 2025, comprising approaching one-third of commercial & industrial lending by large banks. These exposures often lack transparency. For example, JPMorgan initially failed to break out its non-bank lending across borrower types, limiting insight for regulators and investors.
Structural risks intensify in the context of competition and risk pricing pressures. As capital raised has outpaced traditional deal flow, managers are pushed toward higher return strategies (PIKs; sub-investment grade; less constrained by covenants). Fund losses, reduced distribution yields, and heightened liquidity demands (even redemptions) are emerging.
Looking ahead, 2026 is poised to be a test year: more defaults (especially among middle-market and weaker credits), widening dispersion across vintages and managers, increasing regulatory focus, particularly around disclosures, valuation practices, and bank exposure to private credit platforms. Stress may emerge quietly, via mark-downs, LME (liability management exercises), and covenant waivers, rather than large headline bankruptcies—unless macro shocks accelerate.
Strategic implications for banks, asset managers, and investors include: tightening underwriting and due diligence for private credit exposure; enhancing data and transparency; stress testing portfolios for opaque assets; differentiating managers based on structural protections; and anticipating regulatory shifts around nonbank lending disclosures.
Supporting Notes
- U.S. private credit estimated at ~$3 trillion in 2025, with projections of growth toward $4.9 trillion by 2029.
- Trailing-12-month default rate in direct lending roughly 1.8 %, with forecasts for higher defaults among middle-market borrowers in 2026.
- Effective default rates (including distressed restructuring) in private credit approaching ~5 % for certain segments versus <2 % in public high-yield, signalling under-recognised stress.
- Loans to non-depository financial institutions by U.S. banks expanded to about $1.1 trillion end-2024 and ~$1.7 trillion by September 2025; exposure equals nearly one-third of C&I lending in many large banks.
- Use of PIK structures increasing, often appearing even in senior secured placements; about 8 % of investment income for public BDCs coming from PIK.
- Private credit funds like Blue Owl and others saw redemption requests up to 15 % from shareholders in late 2025 driven by falling dividends and fears of defaults.
- European private debt raised €56bn (~$66bn) through first nine months of 2025, 17 % above full year 2024, signalling shifting geographic trend in fundraising.
- Structural protections (covenants, early engagement) remain stronger in private credit than in high-yield bonds, helping contain losses so far.