By Henry Wildes, Senior Business Editor
Private credit is lending done by private investment funds rather than banks, and it offers investors in those funds higher returns than more traditional lending would. It’s existed since the 1980s, but stayed a small, obscure corner of finance until the 2008 financial crisis, when banks pulled back from lending to midsize companies and private funds stepped in to fill the gap. Since then, the United States private credit market has grown to roughly $1.3 trillion. Over the past year, that pitch has run into a harder question: Can anyone outside these funds actually tell how risky the loans inside them are?
Two bankruptcies last fall made that question impossible to ignore. Auto parts supplier First Brands Group and subprime auto lender Tricolor Holdings collapsed within weeks of each other. Both involved alleged fraud, not bad luck. Investigators going through First Brands’ books found roughly $2 billion in unaccounted-for funds and billions more in off-balance-sheet borrowing that had never been disclosed to lenders. Tricolor is alleged to have pledged the same loans as collateral to multiple lenders at once, a practice called double-pledging.
What’s unsettling isn’t just the fraud, it’s how invisible it was until it was too late. Private credit loans don’t trade on public markets, so there’s no ticker constantly updating what a loan is worth—fund managers estimate that value themselves. In both the First Brands and Tricolor cases, lenders and managers were still carrying the defaulted loans at full value right up until the companies fell apart. That’s the real worry: the system built to catch a lie before a company implodes may not actually work.
Cambridge Associates has argued First Brands and Tricolor were company-specific frauds, not evidence of corruption across the whole industry, and that the fallout wasn’t contained to private credit either. First Brands’ broadly syndicated loans hit collateralized loan obligations, and traditional banks and public credit markets got burned by the same frauds. This suggests that the failure was in fraud detection at two companies, not in the structure of private lending itself. Still, a few things about that structure make it difficult to just take Cambridge Associates’ reassurance at face value.
Start with who’s allowed to invest now. For most of its history, private credit was dominated by institutional investors. Publicly traded business development companies, or BDCs, have let ordinary investors buy into middle-market lending through a regular brokerage account since the 1980s, but the real shift has come more recently with the rise of non-traded and “interval” funds built specifically for retail investors. These funds let people buy in as they would with a mutual fund, but only allow withdrawals during specific windows, and only up to a limited percentage of the fund’s assets. Roughly $250 billion of the private credit market is now held this way, according to J.P. Morgan Asset Management. The catch is that if too many investors try to cash out during the same window, the fund can limit or freeze withdrawals rather than sell off loans at a discount just to raise the necessary cash. Blue Owl Capital, one of the industry’s largest managers, did exactly that earlier in the year on one of its retail-facing funds after a wave of withdrawal requests. That’s a reasonable move for the fund itself, because it prevents an immediate collapse, but it also draws a lot of scrutiny to the industry.
Another worry is whether AI is making software companies, historically treated as dependable borrowers, less predictable. According to J.P. Morgan Asset Management, software makes up about 20% of the average private credit fund’s portfolio, and the worry is whether AI will erode the earnings those loans depend on for repayment.
The default numbers don’t show a broad unraveling, though they’re moving in the wrong direction. KBRA’s default monitor, a forward-looking gauge covering active and likely defaults, climbed to 3.3% by borrower count and 2.4% by dollar value in the second quarter of 2026, up from 3.1% and 2.2% in the first quarter. The agency’s forecast for the actual 2026 default rate is 2%, up from 1.5% in 2025. Interest coverage, which measures EBITDA against interest expense, has held roughly steady at 1.6x, and median leverage has stayed around 6.1 times EBITDA. This doesn’t necessarily reflect a crisis. However, the default-rate gap that has historically favored private credit over public credit seems to be narrowing.
Institutional investors, who hold most of this market, haven’t run. A survey in J.P. Morgan’s Guide to Alternatives found 51% plan to increase their private credit allocations, and 41% plan to hold steady. Lawmakers are watching anyway. In April, Democratic members of the House Financial Services Committee sent inquiries to Blackstone, Ares, KKR and other major private credit managers, pressing them on how they market their funds to investors, value the loans inside them and manage risk.
It’s still not clear exactly how at risk the market is. Most analysts still call the bankruptcies isolated, not systemic. JPMorgan Chase CEO Jamie Dimon struck a more cautious tone on the bank’s Oct. 14 earnings call, when JPMorgan announced a $170 million write-off tied to Tricolor. “I probably shouldn’t say this, but when you see one cockroach, there’s probably more. And so everyone should be forewarned on this one,” he said. Dimon was flagging that once fraud surfaces in one place, it tends to turn up elsewhere. Isolated cases only stay isolated if the next one gets caught before it becomes a headline, and right now the same funds holding the loans are also the ones deciding what those loans are worth. That difficulty in assessing the risks is why investors and regulators are watching private credit so closely.
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