Private Credit, Explained: Why Wall Street Is Suddenly Nervous
April 7, 2026
Private Credit, Explained: Why Wall Street Is Suddenly Nervous
Private credit used to be one of finance’s quieter success stories. It lived mostly outside the glare of public markets, in funds that lent directly to companies rather than buying broadly traded bonds.
For years, that seemed like a winning formula:
- Borrowers got faster, more flexible financing
- Investors got the promise of higher yields than they could find in traditional fixed income.
As banks pulled back from some kinds of corporate lending after the financial crisis, private credit firms rushed in and built a vast new corner of the market. Today, the broader private credit market is estimated to be roughly a $2 trillion global asset class.
At its simplest, private credit is non-bank lending. Instead of a company borrowing from a traditional bank or issuing bonds to the public market, it borrows from private funds. Much of that lending has gone to middle-market companies, especially firms that want customized financing terms or quick execution. That flexibility is a big part of private credit’s appeal.
Loans are often negotiated directly, held to maturity, and structured around the specific borrower. That can be attractive in stable times. But it also means the market is less transparent and less liquid when stress starts to build.
So why is everyone worried about it now?
- Forbes reported in March that some of the biggest fortunes tied to private credit (including the cofounders of Blue Owl) have fallen sharply.
- We’re seeing a new fear that artificial intelligence could erode the business models of software companies that borrowed heavily from private lenders.
A meaningful share of business development company portfolios (BDC) is tied to software borrowers, and those companies are now being scrutinized more closely as investors ask which ones are durable and which ones may be more vulnerable to AI disruption.
Reuters reported that roughly one-fifth of BDC loans were tied to software borrowers as of the third quarter of 2025. It also reported that more than a third of private-credit agreements to software borrowers included payment-in-kind (PIK) features by the end of 2025, up threefold in three years. PIKs let borrowers defer cash interest and add it to principal instead. That can buy time, but it can also delay recognition of trouble rather than solve it.
Investors are worried that some portfolios may be carrying loans at values that do not fully reflect changing business conditions. JPMorgan marked down collateral securing some of its loans to private-credit players, and banks are now charging higher rates on key financing lines used by private-credit funds.
Liquidity: Another Pressure Point
Private credit works best when investors are willing to leave their money in place. But a growing share of the market is now owned by vehicles aimed at less patient, retail-adjacent investors. Retail money tends to want more liquidity than the underlying loans can provide.
Their share of total assets under management rose from less than 1% in 2010 to almost 13%, mainly through BDCs, with even newer access points emerging through ETFs.
Regulation
Regulators are considering rules that could make it easier for private assets to enter 401(k) plans. The U.S. Labor Department issued proposed rules intended to clarify how trustees can add alternative assets to retirement plans.
Supporters see that as broader access to private-market returns. Critics see the risk of bringing more ordinary investors into products that are harder to value, harder to exit, and more complex than standard mutual funds.
What does it all mean?
Chair of the Federal Reserve Jerome Powell has said that the Fed is watching the sector closely, and while there may well be losses, it probably won’t lead to a financial-system meltdown.
The concern is not that private credit is inherently bad. It is that this fast-growing, lightly transparent market has moved into an era of stress.The market is being asked harder questions:
- What are these loans really worth?
- How strong are the borrowers underneath them?
- What happens when investors want out before the assets can be sold?
The answer is to proceed with discipline – partner with conservative managers, stay mindful of liquidity, and resist the temptation to treat private credit as risk-free simply because it has delivered steady returns.
Private credit is no longer Wall Street’s best-kept secret – it’s a $2 trillion market now being tested in real time. The question is no longer whether it works in good times, but how it holds up when conditions turn.
Is it still an opportunity… or the next silent risk hiding in plain sight
About Jack Mullen of Summer Street Advisors:
As Founder & Managing Director of Summer Street Advisors, Jack Mullen leverages decades of experience in valuation, underwriting, and risk management to lead multi-million and multi-billion dollar CRE transactions.
Previously with GE Capital and large institutional banks, he has shaped investment strategies for some of the industry’s largest deals. A recognized leader, his insights are featured in GlobeSt.com and CREFC Finance World, and he is a sought-after speaker at industry conferences and top universities.
For strategic advice on your portfolio or transaction, contact:
Insight
Share This :
