The main risks of private credit are leverage at several levels, valuations that are updated infrequently, links to banks and insurers, liquidity mismatches in funds that offer redemptions, and borrowers that are often highly leveraged. The Financial Stability Board (FSB) estimates the market at $1.5 trillion to $2 trillion at the end of 2024 and says it remains untested by a prolonged economic downturn [1].
| Risk area | What the sources say |
|---|---|
| Borrower credit quality | Borrowers are often highly leveraged; outright defaults are low, but broader measures are rising [1] |
| Valuation | Valuations are less frequent and involve discretion [1]; the FCA found gaps in conflicts management and independence [2] |
| Bank links | Mostly credit lines to funds; the size is uncertain [1] |
| Leverage | Debt sits in portfolio companies, funds, sponsors and investor financing [1] |
| Liquidity | Closed-ended funds still dominate, but vehicles with redemptions are growing [1] |
| Data | No harmonised definitions and limited loan-level data [1] |
What do regulators mean by private credit?
The FSB uses “private credit” to mean nonbank direct lending to medium-sized companies, negotiated on a bilateral basis. It says there is no common definition, so figures from different sources may not be comparable [1]. The United States is the largest market, followed by the euro area and the United Kingdom [1].
The same report lists benefits. Private credit can finance companies that banks are unable or unwilling to lend to, and loans often carry protections for the lender, such as senior status, collateral and covenants [1]. The risks below are what the FSB calls “potential vulnerabilities”, not forecasts of loss. For a wider explanation of the market, see our guide to private credit in Europe.
Has private credit been tested by a downturn?
Not in its current form. The FSB says private credit remains untested by a prolonged downturn, at its current size and concentration in a few economic sectors [1]. The Bank of England makes a similar point: private markets, and the financial system connected to them, have not yet been through a significant credit cycle downturn [3]. It adds that the ecosystem grew in a low interest rate environment, so a return to more normal rates puts pressure on it [3].
How exposed are private credit borrowers?
Borrowers are often more leveraged than companies in the broadly syndicated loan market. Where they are rated, the FSB says external research finds them often rated around single B-, and it notes that some lending practices may obscure true leverage [1]. Borrowers that rely mainly on private credit typically lack a public rating, which makes the wider credit market harder to monitor [1].
Defaults are low but the picture depends on how they are counted. A study cited by the FSB puts outright defaults at around 1%, rising to around 5% when “selective defaults” are included [1]. Selective defaults are loan restructures on non-arm’s-length terms, in which the lender effectively helps the borrower avoid a default [1]. The FSB also points to payment-in-kind (PIK) loans, which let a borrower add interest to the loan balance instead of paying it in cash. It says certain PIK arrangements are associated with borrower stress, except where a private equity sponsor backs the company, and that their use has risen significantly since 2022 [1].
For a manager’s view of monitoring these signals, see our article on covenant monitoring.
How are banks connected to private credit?
Banks lend to private credit funds, mostly through credit lines, and the FSB says the size of these exposures is uncertain. Data from FSB members captures around $220 billion of drawn and undrawn lines, while commercial data suggests the total could be more than twice as large. The FSB describes both estimates as a relatively small share of banks’ total assets and CET1 capital [1].
It identifies other links that could add to credit vulnerabilities [1]:
- Fund portfolio financing. A form of securitised lending that lets funds take on leverage.
- Revolving credit facilities. Banks may lend to companies that are at the same time borrowing from private credit funds.
- Partnerships. Private credit-focused partnerships between banks and asset managers are becoming more common.
The Bank of England likewise describes private markets as relying on bank financing and as having growing links with the insurance sector, which could increase fragility if underlying vulnerabilities are not addressed [3]. Our articles on subscription lines and NAV facilities and on significant risk transfer cover two ways banks and funds finance and share risk.
Why is valuation a concern?
Private credit loans have no regular market price, so firms estimate values. The FSB says valuations are often carried out less frequently and may involve significant discretion, which can amplify uncertainty in stress. It adds that ratings from smaller, lesser-known agencies may be used to attract insurers that rely on ratings for regulatory purposes [1].
The Financial Conduct Authority (FCA) reviewed valuation practices at firms managing private equity, venture capital, private debt and infrastructure assets, covering about £3 trillion of global assets under management, of which about £1 trillion was UK [2]. Its findings include [2]:
- Nearly all firms had valuation governance, and all firms in the in-depth phase had valuation committees. In some cases the minutes did not record how decisions were reached.
- All firms identified conflicts around fees and remuneration, but other valuation conflicts, such as investor marketing and redemptions, were only partly identified and documented.
- Some firms had senior investment professionals making up all or most of the committee’s voting members. The FCA said these firms did not meet its expectations on independence and that it would follow up.
- Most firms had no formal process for valuations outside the regular cycle.
The FCA did not validate the fair value of specific assets, so the review describes processes, not whether valuations were right [2].
Where does leverage sit in private credit?
Leverage sits at several levels at once. The FSB lists portfolio companies, private credit funds, the sponsor and investor financing, and says this layering may amplify losses during market stress [1]. The Bank of England’s Financial Policy Committee names the widespread use of leverage as one of three features that could cause systemic risk, together with opaque valuations and reliance on rating agencies, and correlation with other risky funding markets [3].
Insurers and pension funds are significant investors. The FSB notes that private equity firms are acquiring stakes in, or owning, insurers that themselves lend in private credit, which can create pockets of risk that are hard to detect [1]. For the difference between lending and ownership, see our comparison of private credit and private equity.
Can investors get their money out of private credit funds?
In most funds, not on demand. Private credit funds are traditionally closed-ended, which limits liquidity mismatches, but the FSB says vehicles with redemption options are increasingly offered, and retail investors are taking part more [1].
- Euro area. Around 20% of private credit funds are open-ended, and around 75% of those allow monthly or more frequent redemptions. The FSB cites figures showing households are 2% of investors in euro area private debt funds, against 43% for insurers and pension funds combined [1].
- United Kingdom. Most funds remain closed-ended, though semi-liquid and evergreen funds have grown. The FSB notes that liquidity mismatches in UK-managed funds are limited to a small number of funds, because most match redemption terms to the liquidity of their assets [1].
Our guide to European private credit fund structures explains the main vehicle types.
Why can regulators not measure these risks well?
The FSB says data challenges hinder monitoring. There are no harmonised definitions of private credit, and loan-level and fund-level data are less granular than for other corporate lending [1]. Its further work will look at links between nonbanks, liquidity mismatches in funds, how to map the ecosystem, supervisory discussions and data gaps [1].
What can investors take from this?
These reports are written for authorities and firms, not for investors. Our reading is that they point to questions an investor can put to a manager before committing capital:
- How often is each position valued, and who votes on the valuation committee? [2]
- How much leverage sits in the fund and in its borrowers, and which credit facilities does the fund use? [1]
- Are defaults reported only as outright defaults, or do they include restructures and PIK use? [1]
- Do redemption terms match how quickly the underlying loans can be repaid or sold? [1]
Our article on private credit due diligence sets out more questions, and our piece on risk management frameworks looks at the manager’s side.
Where can you discuss these risks?
Lenders, LPs, banks and advisers meet at Private Credit Days Europe, our conference in London on 18–19 November 2026. The event page has the agenda, ticket types and current prices.
Written by the DD Talks editorial team. Reviewed 12 November 2026. This article is general information and is not investment, legal or financial advice.
Sources
- Financial Stability Board, Report on Vulnerabilities in Private Credit, 6 May 2026
- Financial Conduct Authority, Private market valuation practices, 5 March 2025
- Bank of England, written evidence to Parliament (PMG0021) (read 12 November 2026)
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