Private Credit: A Hot Market Reaches a Crossroads

Two recent corporate defaults have aggravated market anxiety about private-credit funds’ scrutiny of borrowers’ risks, prompting calls for tighter oversight and better underwriting standards for the lightly regulated lenders.

One of these defaults, by software-as-a-service provider Medallia, reportedly cost private-equity firm Thoma Bravo and co-investors $5.1 billion in lost equity in April, when the private-equity firm began mulling whether to turn Medallia over to its lenders, who may restructure the company. The same month, dental services provider Affordable Care defaulted on a $1.4 billion private-credit loan used to support private-equity firm Harvest Partners’ 2021 purchase of the company for approximately $2.7 billion.

Private credit’s mounting liquidity concerns and leverage risks, along with macroeconomic pressures, are testing its resilience. Investors requested $20.8 billion in redemptions in the first quarter, in some cases exceeding the 5% cap set by firms including Apollo Global Management, Ares Management, Blackstone, Blue Owl Capital, and KKR. Anxiety over private credit is now raising concerns in Washington, D.C., as the Trump administration moves ahead with plans to allow private assets in retirement accounts.

Sen. Jack Reed (D-R.I.), a member of the Senate Banking Committee, sent a letter to Treasury Secretary Scott Bessent in March urging him to make a “prompt review of risk that is building up in the credit markets and to assess whether these risks may become systemic.”

Because investors are pulling out of private‑credit funds, a greater share of their financing is coming from commercial banks, and following the 2008 financial crisis, they are more heavily regulated, said Maria Loumioti, associate professor of accounting at the University of Texas’ Naveen Jindal School of Management. “If you want to avoid a systemic risk, banks should get more involved and work with the private-credit funds in monitoring their positions,” she said. “They have to request more data and more diligence.”

Two issues are raising regulators’ concerns over private-credit underwriting standards. The first is President Donald Trump’s August 2025 executive order directing the Securities and Exchange Commission (SEC) to work with the Department of Labor to find ways to allow alternative investments, including private credit, in 401(k) retirement accounts. That has prompted questions about how default risk could affect annuities and life insurance pools. About one-third of North American life insurers’ assets are now tied up in private credit, according to an October report by the International Monetary Fund.

The SEC’s “obligation is to meet [investor demand for exposure to private markets] with both openness and rigor— expanding pathways with appropriate investor protections,” SEC Chair Paul Atkins said at an industry roundtable in March, but he did not spell out what protections would be “appropriate.” Instead, he reiterated the administration’s position that “private markets have earned their place as a pillar of capital formation. Widening access to them without weakening protection is an ongoing act of calibration that we are committed to getting right.”

But in a sign of widening federal oversight of private credit, Bessent told a conference in Dallas the prior month that when private-credit assets are moved to regulated financial institutions, the Treasury will get involved in the regulatory process, even though it has no formal oversight of nonbank lending. Referring to the inclusion of private credit in investment accounts, Bessent said the administration will not allow American workers’ savings and investment accounts to become a “dumping ground” for “rotten” assets, according to Reuters.

In early April, the Treasury announced that it had convened two months of meetings with U.S. and foreign insurance regulators to discuss recent developments in private-credit markets, including “emerging risks, risk management practices, and outlooks for the sector.”

The second concern attracting regulators’ attention is the growing threat of sudden defaults posed by the estimated $1 trillion in private-credit assets in insurance pools. The National Association of Insurance Commissioners (NAIC), which advises state regulators, adopted new insurance company reporting requirements on March 5; NAIC President Scott White said that increasing transparency as to how insurers manage their portfolios is a key priority for state regulators this year.

Not everybody is reassured.

JPMorgan Chase CEO Jamie Dimon warned in an April letter to investors that weakening underwriting standards will likely inflict greater-than-expected losses on all leveraged lending, and he proceeded to catalog the problems with the sector. “Credit standards have been modestly weakening pretty much across the board,” he noted, “i.e., more aggressive and positive assumptions about future performance (called add-backs), weaker covenants, more use of PIK (payment-in-kind; not paying interest in cash but accruing it), more aggressive private ratings (particularly in insurance companies), and more arbitrage (not always a great sign). Also, by and large, private credit does not tend to have great transparency or rigorous valuation ‘marks’ of their loans—this increases the chance that people will sell if they think the environment will get worse—even if actual realized losses barely change.”

As Dimon noted, critics have identified multiple major areas of concern about private credit underwriting standards. Here are some major concerns regulators are likely to scrutinize:

Payment in kind: This funding mechanism for borrowers who can’t make required interest payments adds interest to the principal balance, growing the outstanding debt. While PIKs enable a distressed company to avoid going bust, the lender can maintain the distressed firm on its books as a performing loan, providing a potentially misleading picture of the health of its portfolio.

Maintenance covenants: These are lending terms requiring the borrowing company to satisfy a series of financial tests at required intervals, such as reporting earnings before interest, taxes, depreciation, and amortization (EBITDA) quarterly. Maintenance covenants serve as early warning tools, alerting lenders when the borrower is in distress. CR3 Partners, a consulting firm, said around 90% of private-credit loans are “covenant-lite,” eliminating many of the warning signs.

Insufficient due diligence: Because of increased competition for business, some private-credit firms may reduce the time they spend conducting in-depth due diligence on the borrower. “I tend to think an Apollo has a reputation at stake and they are not going to risk the Apollo brand on doing a bunch of crazy stuff,” said Gregory Nini, professor of finance at the LeBow College of Business at Drexel University. “But a smaller, newer private-credit fund trying to establish itself may be a little loose on their underwriting at first. That’s probably a legitimate risk.”

Inflated marks: How private-credit funds value their assets, known as marks, is an area of increasing controversy. For privately held funds, managers have discretion as to how much they value an asset and when they disclose it. Last year, the publicly traded S&P BDC Index declined 13.9% while privately held business-development companies reported 8% to 10% growth over the same period. 

“The market’s signal is clear: Either portfolios’ health has deteriorated, or valuations are inflated and concealing risk,” wrote Sonali Basak, managing director and chief investment strategist; Aaron Schwartz, vice president of Research & Education; and Peter Repetto, vice president and investment strategist at fintech firm iCapital, in a March report.

Sorting out the meaningful signals from the static is never easy, whatever the context, but in the case of private credit, the unease is palpable. 

“Everyone says, ‘Oh, the world is not leveraged,’” former Goldman Sachs CEO Lloyd Blankfein remarked recently, summing up the state of private credit. “That’s exactly what everybody said in the mortgage crisis, until you suddenly discover that there was a lot of mortgage risk in Iceland. It sort of smells like that kind of a moment again. I don’t feel the storm, but the horses are starting to whinny in the corral.”  

This article appears in the June 2026 issue of Global Finance Magazine.