Private Credit: The Rising ‘Defaults’

Private Credit has emerged as a dynamic force in global finance, with assets under management projected to exceed $3tr by 2028. Driven by post-financial crisis regulatory constraints on traditional banks, nonbank financial institutions (NBFIs), including private credit funds and business development companies (BDCs), have filled the lending void for small-to-medium-sized enterprises.

This study explores the rapid expansion of private credit, highlighting its diversification benefits, flexible financing structures, and growing interconnectedness with banks, insurance companies, and asset managers. U.S. bank lending to NBFIs has surpassed $1tr, with global systemically important banks (G-SIBs) playing a pivotal role through subscription lines and collateralized financing, often treated as low-risk securitizations. The study highlights an alarming surge in selective defaults, which outpaced conventional defaults by a 5:1 ratio in 2024, driven by flexible covenants and payment-in-kind conversions.