KBRA releases research examining private credit's role as a source of systemic strength, tracing its history, function, and evolving contours of risk.

Given private credit’s rapid growth, coupled with an economy potentially on the verge of a credit cycle, the increased attention and scrutiny on the industry is warranted. However, KBRA notes that some of the press coverage and market research regarding private credit is often ungrounded in data or lacking a nuanced understanding of how the market evolved and functions. Most notably, much of the research from traditionally public market sources has overlooked how private credit diffuses, rather than amplifies, risk to the global financial system.

This paper focuses on the roughly $1.6 trillion direct lending portion of the private credit market. We explore the reasons behind the segment’s rapid growth—detailing how this is the direct and intended result of post-global financial crisis (GFC) regulatory actions—and outline why we believe the outcome has bolstered systemic strength. The paper also highlights the industry’s evolving contours of risk, as well as likely mitigants, involving the large quantity of dry powder and expansion into new asset categories, geographies, and investor types.

Key Takeaways

• KBRA believes private credit has reduced systemic risk relative to what would have occurred without its presence in the following ways:
  • Private markets were poised to grow. While one could argue the degree of this growth may have been partly fueled by the presence of private lenders, one could also argue that growth was inevitable. Without private credit and the regulatory environment that fueled it, much of the rise in lending to growth or highly leveraged middle market (MM) companies within private markets would likely have been curtailed if financing was limited to banks and traditional commercial finance companies.
  • Instead, the risks involved with growth or leveraged MM lending have been diffused away from depositor-funded systemically interconnected banks and market-sensitive finance companies to thousands of globally distributed, highly capitalized, long-term institutional investors—consistent with what global banking regulators intended in the wake of the GFC.
  • Further, when MM borrowers default, institutional investors absorb those losses through reduced returns on a relatively small portion of their portfolios—which is a much better shock absorber than capital-sensitive bank balance sheets dependent on high degrees of leverage.
  • KBRA also notes that private credit managers are better positioned to maximize recoveries and limit contagion given they are rarely forced sellers. And in any event, we are confident that these losses remain distant and well insulated from bank depositors and taxpayers.
  • In parallel, banks continue to participate in the recent rapid expansion of private markets in a mostly less risky format than would have occurred without the post-GFC regulations. Their exposure has been largely limited to senior secured positions in overcollateralized portfolios, such as secured credit facilities to funds or business development companies. KBRA views this as a significant net positive for the financial system.
• As its name implies, private credit may seem opaque—but in reality, private credit data is easily accessible to the stakeholders in each credit or investment vehicle. Those with a large, long-term vested interest have exceptional transparency that allows continuous monitoring and more informed decision-making around potential risks, while outsiders, by design, do not.
• That all said, we do see the contours of risk evolving in three ways across the private credit landscape:
  • We expect the MM borrower default rate over the next 24 months will likely increase relative to the rates observed over the past decade. This may cause operational challenges at times for some private credit platforms and a wider dispersion of performance.
  • Meanwhile, many private credit lenders are extending their reach into wider categories of debt and broader geographies; since not all platforms have experience in these areas, this could result in some overreach and accumulation of additional risk not previously managed by some.
  • Growth is also coming in the expanding breadth of investor categories, especially the rapid pursuit of retail channels. This will invite closer regulatory scrutiny and more consequential headline risk.

Click here to view the report.

Recent Publications

• Private Credit: Q1 2025 Middle Market Borrower Surveillance Compendium—the Calm Before the Storm
• Private Credit: Tariffs and Market Volatility Impact on Private Credit Corporates
• Private Credit: Business Development Company (BDC) Ratings Compendium: First-Quarter 2025
• Private Credit: Q4 2024 Middle Market Borrower Surveillance Compendium—5% at Risk
• Private Credit: 2025 Outlook

About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1010104

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