Published on Jan 27, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Private credit.
For years, it lived in the shadow of private equity - quieter, less glamorous, easy to ignore. But this year, it’s been plastered across financial headlines - and for good reason.
It’s massive, keeps growing fast, and - depending on who you ask - it’s either the savior of modern lending or the next monster hiding under the bed.
But here’s the part worth pausing on. . .
It’s massive, keeps growing fast, and - depending on who you ask - it’s either the savior of modern lending or the next monster hiding under the bed.
But here’s something I’ve learned. . .
Most people I’ve seen talking about private credit don’t really understand how it works. And honestly, even I’m still wrapping my head around parts of it - and that’s the problem.
The bigger and more complex a financial system becomes, the less anyone really knows where the risks are hiding until it’s too late.
Private credit has gone from a niche corner of “shadow” finance to a multi-trillion-dollar machine lending to companies banks wouldn’t touch. And increasingly, banks themselves are funding that machine.
History tells us that mix - rapid growth, leverage, opacity, and interconnectedness - is exactly how fragility builds.
So today, let’s peel this back and actually make sense of what private credit is, why it exploded, and why the warning signs are starting to matter.
Simply put, private credit is just lending done outside the traditional banking system – aka lending not from a Wells Fargo or Chase, but from private groups that don’t operate under hefty bank-style regulations.
The easiest way to picture it is this way - imagine your neighbor John wants money to start a business, but the bank turns him down – labeling him too risky. A group of well-off neighbors down the street hears what he’s cooking up and decides to pool their capital and lend to him privately instead. That’s essentially private credit - just scaled from $50,000 to $50 million.
This is why some people call private credit part of “shadow banking1.” Not because it’s shady, but because it sits just off to the side of the regulated banking world while still behaving like a lender (it creates credit).
Still confusing? I don’t blame you. It’s difficult to grasp for a reason.
So let’s compare the two worlds - the bright, regulated banking highway and the side road where private credit lives.
Private credit sits in that second camp.
Not illegal. Not hidden. Just outside the glare.
Long story short, private credit has been around for decades (essentially since the 1980s). But it was relatively niche.
That all changed after the 2008 financial crisis.
After the chaos of the housing bubble imploded - regulators looked at banks and said, “You took too much risk with too little capital - never again.”
Enter the Dodd-Frank Act - a framework that forced banks to keep higher capital requirements, stricter stress tests, and a regulatory overhaul that made traditional lending far more expensive and far less flexible for banks.
The whole point of post-crisis regulation was to make risky lending costlier for banks.
And it worked. Maybe too well (ironically).
Because when banks pulled back from riskier and middle-market loans, a massive funding gap opened up. Companies still needed money - banks just weren’t the ones providing it anymore.
At the same time, the world was drowning in a zero-interest-rate environment. Pension funds, insurers, endowments - everyone was sitting on cheap cash and desperate for yield. Thus, private credit suddenly looked juicy - offering higher returns without the daily mark-to-market trauma of their assets.
Then came private equity (PE).
PE firms realized they didn’t need banks either. They could build - or partner - with private credit funds to finance their own leveraged buyouts.
And banks? They still wanted in (there’s tons of money being made). They just had to go through the back door.
And that’s the whole big issue I’m getting to (more shocking data below)
Here’s the big question everyone wants to know. Is private credit dangerous?
Not inherently. Private credit has real benefits - especially for small and mid-sized firms that banks may avoid.
But like all things in economics and finance – something good can eventually become a systemic risk.
Meaning - there are serious concerns coming from the complexity, leverage, concentration, and opacity baked into this system. Because when lending happens “in the shadows,” risks tend to hide there too.
And do not be fooled - shadow banks can definitely rattle the traditional system.
Why? Because many big banks (and insurance firms, pensions funds, etc) lend to private credit funds3. Thus, if a private lender blows up on toxic loans, the losses don’t just stay “in the shadows.” They boomerang right back to the entire system - and the ripple effects can spread from there.
Back to our neighbor John example:
That’s private credit’s double edge - it fills a real need, but it can also push risks to parts of the system where fewer people are watching.
And that's where things are getting worrying.
It shouldn’t be difficult to see the symbiotic relationship between traditional banking and private credit now. Their fates are tied together - whether they like it or not.
For example, banks haven’t just stepped back from lending. They’ve just been actively financing the very shadow banks that replaced them.
Since last year, large U.S. banks (>$10B in assets) have been required to disclose their lending to shadow banks. And the data shows about $1.2 trillion in exposure, dominated by just the top 25 banks.
The point here is that there’s been an enormous amount of leverage plowed into private credit that’s extremely concentrated.
And private credit is not looking any different.
Thus, just as private credit deals peaked, the macro backdrop around the world began to slow. Growth decelerated. Rates stayed higher for longer. Refinancing got harder. And suddenly, the tide pulled back.
Put simply, private credit is under serious stress.
Furthermore, at least 45 firms have been taken over by their lenders - the highest count in six years.
At the same time, private loan margins have been steadily shrinking as too much capital chases too few deals6. Meaning excess competition from both private credit funds and the broadly syndicated loan market is squeezing returns (a familiar late-cycle sign that anything growing this fast eventually runs into diminishing returns).
Now, even loans managed by giants like BlackRock and Blue Owl are showing their fragility.
For example:
And the cherry on top of all this is that private credit is now aggressively funding AI and data-center buildouts – which are massive, long-dated projects with (very) uncertain payoffs.
The point is, uncertainty in private credit is building.
And if there’s one thing investors can’t stomach – it’s uncertainty.
Private credit is both the hero and the villain of this cycle.
It stepped in when banks stepped back. It kept credit flowing. It kept deals alive and helped create some great firms and products we use today through financing.
But somewhere along the way - it grew into a system so large and so intertwined with traditional finance that the line between “innovation” and “fragility” blurred.
That’s not static noise. It’s a signal.
Thus, while there’s a lot to admire about private credit. There’s also a lot we still don’t see.
And in markets, what you don’t see is usually what hurts you.
As always, this is just some food for thought.
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