Private credit has grown at an extraordinary pace and has benefited from a world of higher interest rates thus far. What it has not yet faced, however, is a full economic downturn. This article explores why regulators have begun to scrutinise the sector more closely, focusing on the limited transparency in loan books, the growing use of leverage and the increasing exposure of retail style products. It also outlines how a downturn could reveal weaknesses in parts of the market that have never been tested by falling earnings and rising defaults. The piece considers what a regulatory response might look like, how the strongest platforms may be able to consolidate the market, and why smaller, fast-growing funds could find these pressures more difficult to navigate.

Post-financial-crisis bank regulation and tighter supervisory scrutiny made balance-sheet lending more expensive for traditional banks, opening space for non-bank direct lenders. In the late 2010s, a combination of low rates and abundant liquidity supported a surge in sponsor-backed activity; private credit gained share, particularly in the middle market and in transactions valuing speed and certainty of execution. When rates rose sharply from 2022, the predominance of floating-rate coupons meant higher cash yields for lenders, although it also increased interest burdens for borrowers. Industry estimates put global private credit assets under management at about $2 trillion in 2020 and around $3 trillion by early 2025, while average private debt fund sizes in 2024 were just under $1 billion, reflecting continued scale-up.

Could private credit as an asset class be too good to be true? High-profile bankruptcies, including First Brands and Tricolor, have sharpened questions around underwriting standards, transparency, and the degree of oversight compared with public markets. On the surface, private credit can look attractive for lenders. Floating-rate coupons reduce interest-rate duration risk and can lift cash yields when policy rates rise, and contractual interest payments provide a recurring income stream. But this is not a free lunch: higher base rates can also squeeze borrowers’ cashflows and raise default risk. Likewise, the absence of daily trading can dampen mark-to-market volatility, but it concentrates liquidity risk inside fund structures and can become a problem if investors seek exits during stress.

However, this narrative underplays the credit risk embedded in parts of the market. Many borrowers are highly leveraged, often in the middle market, and may have limited earnings resilience in a downturn. Payment-in-kind (PIK) features are present in a minority of private credit deals, but they can become more common when borrowers are under pressure, because interest is capitalised rather than paid in cash and distress can be masked. Liquidity is also a live issue: some private credit funds offer periodic redemptions (or other repurchase features) while holding fundamentally illiquid loans. This mismatch is manageable when outflows are modest, but it can become destabilising if redemptions accelerate. The growth of private credit has also been accompanied by greater use of private or “letter” ratings in certain channels, particularly where insurers hold the loans. The Bank for International Settlements (BIS) has warned that smaller rating agencies involved in these private ratings may face incentives that can bias assessments upward, obscuring true risk profiles.

Evidently, the sector’s growth has not gone unnoticed by regulators. As private credit expands into wealth and retail-adjacent channels and becomes more interconnected with the banking and insurance system, supervisory attention has intensified. In the United States, the SEC’s FY2026 examination priorities explicitly flag alternative investments such as private credit and funds with extended lock-ups, with a particular focus on recommendations, disclosures, and how products are sold to investors. In Europe, AIFMD II introduces a dedicated framework for loan-originating funds, including leverage limits (differentiated for open-ended versus closed-ended structures), stronger liquidity management expectations for open-ended vehicles, and related reporting/disclosure requirements. In the UK, the Bank of England has launched a system-wide exploratory scenario exercise focused on private markets to test how banks and non-banks active in private equity and private credit might respond to a severe downturn and whether those interactions could amplify stress. Taken together, these initiatives point toward a maturing regime of distribution, disclosure, and risk management. That is unlikely to end the asset class, but it should raise the bar for governance and data, and it will tend to favour scale.

The largest private credit platforms, including Apollo, Ares, Blackstone, and Blue Owl, are arguably better positioned than smaller managers to absorb higher compliance demands and navigate a full economic downturn. They have brand credibility, broad institutional relationships, and often more diversified product sets. Historically, investors tend to concentrate relationships during periods of uncertainty, preferring the perceived safety of established managers to smaller, less seasoned ones. This “flight to quality” means that as smaller funds face margin pressure from higher operating costs and more conservative leverage, mega-platforms may be able to continue raising capital and capture a greater share of inflows.

Furthermore, smaller and middle-market funds with less AUM are often less diversified, with portfolios concentrated in tens of companies rather than hundreds, meaning that single defaults can have outsized impacts. When the value of their assets begins to fall, some funds may attempt to sell troubled positions into the secondary market, but those sales can clear only at steep discounts. The market could therefore evolve toward greater concentration. We may see a wave of smaller funds acquired by larger platforms seeking to expand AUM and capture market share at distressed valuations, while others may choose to return capital and wind down.

For investors, this potential recalibration would mean adjusting return expectations. As compliance costs rise and competition consolidates, high single-digit to low double-digit returns may become more typical for many strategies, particularly where underwriting standards tighten and fee and leverage assumptions become more conservative. For an asset class that has grown on the promise of flexibility and outsized returns, the next chapter of private credit may require an adjustment to a new normal of discipline and more modest expectations.