Private Credit: A Normal Credit Cycle, Not a 2008-Style Systemic Crisis

Lawrence Gillum (0:00):

Private credit has grown into nearly a $2 trillion market — filling the void left by banks after the Global Financial Crisis. Now headlines are screaming ‘cockroaches,’ ‘fraud,’ and ‘gated funds.’ So is this the beginning of a systemic crisis — or just the growing pains of a maturing asset class? In this edition of the LPL Street View we explain why we think it’s the latter and not the beginning of a 2008-like crisis.

So what is private credit? Private credit is a broad asset class that is roughly $40 trillion in size and encompasses non-bank lending and debt investments that are not publicly traded. Instead of companies issuing public bonds that trade frequently, borrowers negotiate directly with investors—typically alternative asset managers—to create customized financing arrangements. Following the 2008 financial crisis, as bank regulation tightened, private credit expanded quickly, and today the direct‑lending market alone represents nearly $2 trillion in deployed capital in the U.S.

Lawrence Gillum (1:26):

The asset class spans several strategies, including mezzanine financing, real estate debt, distressed debt, and asset-backed lending — and while most of the categories I just named are still in very solid positions direct lending, which is a small piece of the private credit ecosystem, is the area that has been in the headlines recently.

Now for the rest of this discussion, I’ll refer to the direct lending segment as “Private Credit” as that has been the preference within the financial media.

So what’s happening? The recent stresses in the private credit market stem from a combination of higher interest rates, slowing borrower fundamentals, and sharp AI‑driven disruption pressures—particularly in software and SaaS (or software as a service), these sectors are heavily concentrated in the private credit market representing over 20% of loans in the market.

Lawrence Gillum (2:49):

Also, during the 2020–2021 cycle, many loans were underwritten with aggressive assumptions about growth, margins, and refinancing ease. As rates rose and valuations compressed, borrowers faced tighter conditions, weaker interest coverage, and a notable increase in the use of PIKs (which stands for payment in kind and means interest payments are not made in cash but rather in additional securities or increased principal) and signals that borrowers may not be able to afford cash interest payments.

As sentiment shifted in late 2025 and early 2026, redemption requests surged across several large private‑credit vehicles, outstripping normal quarterly limits. In response, managers imposed withdrawal caps, slowed redemptions, or activated formal gates. Now importantly, while they make for poor headlines, these mechanisms are designed to protect investors by preventing forced liquidation of loans in thin secondary markets, but they do highlight the inherent mismatch between frequent‑redemption promises and the illiquid nature of underlying assets. The opacity of private‑credit portfolios also amplified concerns: media stories about rising redemptions fueled additional redemption requests in a feedback loop resembling a modern bank‑run dynamic.

Lawrence Gillum (4:12):

Now despite these stresses, we don’t think we’re on the precipice of a larger systemic financial risk. For those of us that lived through the Global Financial Crisis, we see some similarities but distinct and important differences. And the distinction between credit risk and systemic risk is central. While defaults may rise and some 2020–2021‑vintage loans are likely to face refinancing pressure, overall corporate debt‑to‑GDP levels remain stable, and non‑investment‑grade corporate lending is broadly in line with levels of the past decade—meaning there is less debt in the financial system.

Loss rates in private credit also remain low, and even meaningful increases would still represent a modest share of total assets. Importantly, private‑credit vehicles are structurally designed to limit forced selling: redemption gates, withdrawal caps, and conservative valuation cycles act as first‑line stabilizers.

As well, loan-to-value ratios — which measure the loan amount relative to the enterprise value of the company — typically incorporate sizable equity cushions to protect lenders. Private credit loans often feature conservative loan-to-values in the range of 40-60% meaning private equity sponsors contribute substantial equity as well. And this creates a meaningful buffer that must be significantly eroded — through declines in company value, revenue drops, or other stresses — before the senior debt faces material impairment, enhancing downside protection compared to higher-leverage structures in some of these syndicated markets.

Lawrence Gillum: (5:32):

Finally, recent Federal Reserve research also indicates that while bank exposure to private‑credit vehicles is growing, it remains relatively small compared with other nonbank lending exposures, and banks appear to be well‑capitalized and sufficiently liquid to absorb potential stress. These factors collectively suggest that current pressures reflect a normal credit cycle, not a destabilizing systemic threat.

As noted investor Warren Buffett famously said, when the tide goes out, you see who has been swimming naked. And over the past few years liquidity has been abundant, but that liquidity is now ebbing. While private credit is indeed confronting real challenges—from rising PIK usage to software‑sector disruption to liquidity‑mismatch dynamics—these do not imply that the asset class is fundamentally impaired, in our view. Instead, we’re likely in a phase of heightened dispersion and differentiation. Managers with conservative valuation practices, senior‑secured portfolios, and prudent leverage are likely to be well positioned, while those that relied on optimistic underwriting or aggressive structures may struggle. The environment may remain challenging, but we think disciplined, risk‑aware private‑credit strategies can continue to perform effectively even as the cycle tests weaker areas of the market.

If you want to learn more about how we’re thinking about the private credit markets, make sure you check out the LinkedIn account and click on the newest Rate and Credit View: Private Credit at a Crossroads: Stress, Liquidity, and the AI Disruption Cycle

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