Who’s afraid of private credit?

We evaluate the private credit market in the US amid some fears about rising default rates.

There has been a pickup in private lending activity over the past few years, gaining prominence as an alternative channel for raising capital and for managing liquidity outside of traditional banks.

Private credit is valued at USD 2.7 trillion as of end-2025, based on Morgan Stanley data. Much of the growth in this segment occurred after the 2008 Global Financial Crisis, which had created the combined effect of several US bank shutdowns plus a sharp tightening in lending standards. The robust growth in private loans was again observed after the COVID-19 pandemic. These suggest an expansion in opportunities following episodes of financial stress.

Recently, however, there have been concerns regarding the rapid pace of private credit growth, particularly on rising loan default rates. JPMorgan Chase CEO Jamie Dimon was famously quoted in October 2025 when he claimed that there are likely more “cockroaches” hiding in the pile after two sizeable private credit defaults that year, one of which is a now-bankrupt auto parts supplier that defaulted on over USD 10 billion of debt.

We do not share the view that the private credit market is overheating, nor do we expect any wide-reaching market fallout from this scenario. Notably, even Wall Street’s banking giants are exposed to the private credit market through their asset management units. This highlights the strong growth and potential returns from this segment.

Strong growth, small base

There is no denying the robust growth in private lending in recent years, likely as corporates sought to secure deals when borrowing costs were relatively lower. Investors likewise find opportunities for capital growth through private lending as it allows them to earn more from higher interest rates – largely to cover for the relatively higher risk they assume – and to further diversify their portfolio. PitchBook estimates an average direct lending spread of 510 basis points (bp) in 2025, which is well above the average 350bp spread for bank syndicated loans.

Graph 1 captures the stark disparity between the growth in private and bank lending, with bank credit moving within a relatively narrow range of a 1.5 per cent decline to an 11.5 per cent expansion year-on-year. In contrast, direct lending, which accounts for over half of the private credit market, posted anywhere from a 50 per cent annualised reduction to as much as a 218 per cent increase over the last five years.

Between 2021 and 2025, new credit lines in the private lending space have grown by an average of 54 per cent against a 4.7 per cent average increase for loans extended by US banks. It is worth noting that the second quarter of 2026 saw a deceleration in new private debt, reflecting heightened negative sentiment among businesses due to the US-Iran conflict. Rising inflation, mainly due to higher fuel costs as well as continuing ripple effects of the 2025 tariff war, further dampened appetite for business expansions and the overall need for additional liquidity. Still, the growth in this space has been upbeat.

The growth appears phenomenal, but in nominal terms, private credit trails far behind: in April-June 2026, direct lending is estimated at USD 32.95 billion while bank credit totalled USD 19.5 trillion.

Drama over defaults

While robustness in private lending activity also explains the relatively higher default rates in the sector, we believe that this is far from alarming because corporate borrowers are generally well positioned to service their debts, as shown in Graph 2.

There has been a pickup in private loan defaults since late 2025 as delinquencies climbed to 2.73 per cent in January-March this year. This is far from the recent peak of 8.1 per cent in the second quarter of 2020, a one-off event due to pandemic-induced lockdowns that shut down businesses and consumer movement. The default rate has since improved to 2.51 per cent in April-June according to the Proskauer index, suggesting some market resilience despite recent economic shocks.

Businesses have also continued to enjoy strong profits growth in recent years, with June’s 22.8 per cent increase the strongest in five years. Profitability stands as one good metric regarding a borrower’s ability to pay off its loans on time. This provides us confidence that private credit remains healthy overall, with average default rates well below levels that would otherwise set off a negative chain reaction in the global financial markets. Some credit defaults will still occur, but this does not mean that the entire private credit market is systemically weak. Rather, we consider these as isolated incidents that can erode individual wealth but are far from triggering a wider collapse.

We are not afraid of the brisk growth in private lending. At Lundgreen’s Capital, we particularly like the private equity segment in Europe, where we find opportunities in high-growth companies in booming sectors like defence.

We remain bullish about private credit given more competitive returns in this space, especially when compared to traditional investment banking. Still, we advise investors to be selective regarding the sectors and companies they are financing – this is the same cautious optimism that must be carried out with any investment decision.