A stable system is not necessarily a visible one.
Public markets expose changing expectations continuously. Bonds trade, prices move and losses become visible even before a borrower misses a payment. Private credit operates differently. Loans are negotiated directly, held within funds and valued periodically rather than continuously.
That difference can be useful.
It gives lenders time to work with borrowers, reduces pressure to sell into weak markets and allows capital to remain committed through short-term disruption.
It also changes what observers can see.
A private loan may continue to carry a stable reported value while the borrower’s revenues weaken, refinancing becomes more expensive or the probability of full repayment declines. The risk has not disappeared. Its recognition has been delayed, modelled or transferred into a negotiation that occurs away from public markets.
Private credit risk is therefore not defined only by whether loans default.
It also depends on when deterioration is recognised, where leverage is held and how quickly investors, lenders and regulators can see the complete system.
The central structural question is:
Does private credit appear resilient because its financing is genuinely patient—or because deterioration becomes measurable later?
Erths assessment: Private credit can absorb volatility without eliminating risk. Its resilience depends not only on borrower performance, but on how valuations, leverage, liquidity and interconnections behave when losses can no longer remain private.
1. What private credit actually is
Private credit generally refers to loans made by non-bank investment vehicles directly to companies. The loans are usually negotiated between a small group of lenders and a borrower rather than issued as publicly traded bonds.
The market historically served small and medium-sized companies that could not obtain suitable financing from banks or public markets. It now extends into larger corporate transactions, infrastructure, real estate, asset-backed lending and companies owned by private-equity sponsors.
Investors commonly include pension funds, insurers, endowments, sovereign institutions and wealth-management clients. Asset managers assemble their capital into funds, originate or purchase loans and manage the relationship with the borrower.
Most traditional private-credit funds are closed-ended. Investors commit their money for several years and cannot ordinarily demand it back at short notice. Fund lifecycles commonly align more closely with the maturity of their loans than the funding structures of deposit-taking banks or daily-dealing investment funds.
This is an important source of resilience.
A lender holding long-term loans with long-term capital is less exposed to the immediate withdrawal pressure that can destabilise a deposit-funded bank or an open-ended fund.
Private credit is therefore not simply bank lending conducted with less regulation.
Its funding structure, contractual flexibility and investor base are different. Those differences can make it better suited to some forms of patient and specialised finance.
2. A market whose size is difficult to define
The Financial Stability Board estimated the private-credit market at between $1.5 trillion and $2 trillion at the end of 2024.
Other official estimates are higher. The Bank for International Settlements has placed global private-credit assets under management above $2.5 trillion. The apparent difference reflects varying definitions, reporting boundaries and market coverage rather than necessarily showing that either estimate is wrong.
Private credit does not have one universally applied boundary.
Some estimates include only direct-lending funds. Others include distressed debt, mezzanine finance, business development companies, asset-backed lending or related forms of non-bank corporate credit.
Funds, borrowers and financing structures may also span several jurisdictions.
The difficulty of measuring the market is itself part of the case.
Public markets produce centralised prices, issuance records and trading data. Private credit is distributed across contracts, funds, service providers and regulatory regimes.
Authorities may see particular institutions without seeing every layer of exposure connecting them.
The market can therefore grow faster than the system used to observe it.
That does not make private credit unregulated or unknowable.
It means that the complete picture must be assembled from multiple partial views.
3. Why the market grew
Private credit expanded because it solved genuine financing problems.
A direct lender can negotiate a loan around the specific needs of a company. It can move more quickly than a public bond issue, preserve confidentiality and offer terms that would be difficult to standardise for a widely distributed security.
Borrowers may receive one financing package rather than coordinating several banks or public investors. Private-equity sponsors can obtain financing aligned with an acquisition timetable.
Companies with complex assets, irregular cash flows or limited collateral can receive capital that a traditional lender may be unwilling to provide.
Investors receive access to floating-rate loans, contractual protections and an illiquidity premium. Fund managers may also develop specialised knowledge of particular industries and monitor borrowers more closely than a dispersed group of bondholders.
The market’s expansion was also encouraged by structural changes elsewhere.
Institutional investors searched for higher returns during the long period of low interest rates. Bank regulation and capital requirements changed the economics of lending to more leveraged companies.
Research from the BIS indicates that private credit expanded partly because its relative funding position improved and because it could serve borrowers inadequately supplied by existing banking systems. It also found that individual funds often remained concentrated in a relatively narrow range of industries.
These forces did not merely push risk out of the banking system.
They created a new form of intermediation with its own strengths and vulnerabilities.
4. Stability without continuous prices
The defining visual feature of private credit is the absence of a continuously traded market price.
A public bond can fall sharply in value because investors reassess the borrower, the sector or the economy.
That movement may be uncomfortable, but it provides information. It shows that the market’s assessment has changed.
A private loan is generally valued through periodic appraisal.
The process may use:
- the borrower’s financial performance;
- comparable public securities;
- expected future cash flows;
- recent transactions;
- the judgement of the fund manager;
- an external valuation provider.
This can produce smoother reported returns.
Smoother returns are not automatically artificial.
A lender that does not need to sell an asset today may reasonably value it according to the payments expected over its remaining life rather than the price available in a distressed transaction.
But lower reported volatility and lower economic risk are not the same thing.
Several different values can coexist:
- the amount the borrower is contractually required to repay;
- the value produced by the fund’s valuation model;
- the price another investor would pay today;
- the amount ultimately recovered if the borrower defaults.
In calm conditions, those values may remain close enough for the distinction to appear unimportant.
Under stress, the gap can become the central issue.
The Bank of England’s private-markets system-wide exploratory scenario identifies infrequent valuation as a potential source of vulnerability. It notes that infrequent valuations can reduce visible return volatility while making risks harder to assess and increasing the possibility of sharp, unexpected repricing.
The system may therefore look stable partly because it updates more slowly.
5. Flexibility or delayed recognition?
Private lenders can respond to a struggling borrower in ways that public markets often cannot.
They may:
- extend a maturity;
- amend a covenant;
- alter an interest schedule;
- provide additional capital;
- allow interest to be added to the loan balance rather than paid immediately in cash.
These actions can preserve real economic value.
A viable business may be experiencing a temporary fall in cash flow. Forcing it into insolvency could destroy jobs, customer relationships and productive assets.
A lender with committed capital and detailed knowledge of the company may be better positioned to wait for recovery.
The same flexibility can also postpone the recognition of impairment.
A maturity extension does not by itself show whether the borrower needs more time or cannot repay.
Payment-in-kind interest can preserve cash today while increasing the amount owed tomorrow.
A covenant amendment can remove an unnecessary restriction—or acknowledge that the original protection no longer reflects the borrower’s condition.
The distinction between patient restructuring and deferred loss is rarely visible from outside the transaction.
The Bank of England reported in July 2026 that some borrowers were managing refinancing and cash-flow pressure through amended and extended loans, payment-in-kind structures and other forms of forbearance. It cautioned that these measures might not be sustainable for every borrower over the longer term.
This creates a measurement problem.
The relevant question is not simply how many borrowers have formally defaulted.
It is how much economic deterioration has been absorbed through amendments, extensions, additional leverage and revised valuations before a default becomes necessary.
A low reported default rate can coexist with rising pressure.
The metric remains accurate within its definition.
Its interpretation becomes less reliable.
6. The network behind the loan
Private credit is often described as finance outside the banking system.
That description is incomplete.
Banks may lend directly to the same private-equity-sponsored companies. They may provide subscription lines and net-asset-value facilities to funds, finance business development companies, arrange leveraged loans or supply liquidity to investment vehicles.
Insurers and pension funds provide capital to private-credit funds and may hold private loans directly.
Asset managers can operate private-credit, private-equity and collateralised-loan-obligation businesses within the same group.
A borrower may have obligations across:
- private loans;
- public bonds;
- bank facilities;
- leases;
- sponsor financing;
- structured credit markets.
The risk has not necessarily left the traditional financial system.
Its path has become more complex.
The Financial Stability Board has identified deepening connections between private-credit funds, banks, insurers and private-equity firms, alongside potential vulnerabilities involving leverage, liquidity, concentration and cross-border exposure.
The Bank of England’s current system-wide exploratory scenario includes 46 participating institutions, including banks, pension funds, insurers, endowments, liquid-credit managers and alternative asset managers.
The broad participant group is necessary because no single institution represents or observes the complete system.
The exercise is designed to examine not only losses produced by a severe downturn, but the actions participants might take in response.
A bank may reduce financing to funds.
An institutional investor may slow new commitments.
A private lender may preserve cash for existing borrowers.
A sponsor may inject equity into one company while withholding it from another.
Each action may be rational in isolation.
Taken together, they may reduce the supply of credit more sharply than any one participant intended.
7. Where liquidity enters an illiquid market
Traditional closed-ended private-credit funds do not promise immediate access to investor capital.
This reduces the risk of a classic run.
The market, however, is changing.
Private credit is increasingly being offered through evergreen funds, interval funds and non-traded business development companies that permit periodic withdrawals.
These structures broaden access and can provide useful flexibility to investors.
They also introduce a potential mismatch.
The investor may be able to request cash every quarter, while the fund holds loans that cannot be sold quickly without accepting a discount.
Redemption limits, gates and notice periods are designed to manage that mismatch, but they do not make the underlying loans liquid.
The Bank of England reported elevated redemption requests at several retail-oriented private-credit funds in 2026, with some limiting withdrawals. These funds generally offered periodic redemptions subject to defined caps.
Although the mechanisms largely operated according to their terms, the episode illustrated how concerns about valuations and future access to capital can reinforce one another.
An investor who fears that a future redemption window may be restricted has an incentive to submit a request earlier.
A structure designed to provide limited liquidity can therefore produce defensive behaviour before the assets themselves experience a realised loss.
This does not describe the whole private-credit market.
Most funds remain closed-ended.
It does show how efforts to make private assets more accessible can import vulnerabilities associated with more liquid financial products.
8. What happens in a downturn?
The FSB has identified this absence of a full stress test as one of the principal uncertainties surrounding the market’s current size and complexity.
A severe stress would not begin with every loan failing simultaneously.
It would develop through several connected pressures:
- Corporate revenues weaken.
- Floating-rate debt remains expensive or refinancing costs rise.
- Highly leveraged borrowers seek amendments or additional capital.
- Lenders update valuations at different speeds and with different assumptions.
- Investors reduce new commitments or request available withdrawals.
- Banks reassess financing provided to funds, sponsors and borrowers.
- Fund managers preserve liquidity and become more selective.
- Viable companies find that credit is less available even though they have not defaulted.
The financial-stability risk is not only the loss on an individual loan.
It is the possibility that uncertainty about valuations and exposures causes multiple institutions to act defensively at the same time.
When participants cannot distinguish clearly between resilient and impaired assets, they may price for the weaker case.
Financing conditions can tighten beyond the companies that originally generated the concern.
Private credit could dampen that process if long-term capital continues to support viable borrowers.
It could amplify it if leverage, liquidity pressure and uncertainty cause lenders and investors to retreat together.
The answer depends on behaviour, not simply balance-sheet totals.
The Bank of England’s stress exercise is specifically examining whether the combined responses of banks and non-bank institutions could amplify financial stress, disrupt related credit markets and reduce finance available to companies.
9. The role of reporting
Better reporting can improve visibility.
Authorities need information about:
- borrower leverage;
- loan amendments;
- fund-level borrowing;
- investor redemption rights;
- sector concentration;
- valuation practices;
- connections with banks and insurers.
More consistent data can help identify where risks are accumulating and how stress may be transmitted.
The Bank of England is combining regulatory information with a system-wide scenario because ordinary institution-by-institution supervision cannot fully show what happens when participants respond to one another.
But reporting has limits.
A standardised form can record the terms of a loan.
It cannot determine with certainty whether an extension will preserve value or delay a loss.
A valuation methodology can become more comparable without becoming a continuously tradable price.
A map of interconnections can reveal where exposure sits without predicting how every participant will behave under pressure.
Private credit is built around bespoke agreements and negotiated responses.
Removing all discretion would remove part of what makes the market useful.
The regulatory objective is therefore not to make private credit identical to public credit.
It is to make the complete system visible enough that flexibility does not become indistinguishable from concealment.
This is the central reform constraint:
Greater transparency can improve the measurement of risk without eliminating the uncertainty inherent in illiquid, customised loans.
10. The Erths framework
Hidden Instability
Private loans can retain stable reported values while borrower quality, refinancing conditions or expected recoveries deteriorate.
The absence of a daily price can prevent temporary market sentiment from forcing unnecessary adjustment.
It can also delay the point at which accumulated weakness becomes visible.
Measurement Breakdown
Default rates, fund returns and modelled valuations may each be correct according to their definitions while providing an incomplete picture of economic stress.
Amendments, extensions and payment-in-kind interest can change the meaning of continued payment performance.
A loan that has not defaulted is not necessarily a loan whose risk has remained unchanged.
Structural Drift
Private credit developed partly to provide patient, specialised capital to borrowers poorly served by standardised markets.
As the sector grows, attracts retail capital and becomes integrated with larger financial groups, incentives may shift towards:
- preserving valuations;
- maintaining fee-earning assets;
- retaining investor capital;
- extending fund lifecycles.
The market can drift from using flexibility to preserve economic value towards using flexibility to preserve reported stability.
Reform Constraints
Improved disclosures, stress exercises and supervisory data can expose leverage and interconnection.
They cannot create a reliable market price for every bespoke loan, remove uncertainty from future cash flows or determine in advance whether lender forbearance is economically justified.
Sudden Collapse
Private credit is not necessarily more likely to collapse suddenly than public credit.
Its structure may absorb shocks more gradually because capital is locked in and lenders can negotiate directly.
The sudden element arises when delayed recognition is forced:
- a refinancing fails;
- a valuation is marked down;
- withdrawals reach their limit;
- several institutions revise their assumptions at once.
The visible adjustment may be abrupt even when the deterioration was gradual.
Signals to watch
The private-credit market should be assessed through more than headline assets under management or reported defaults.
1. Payment-in-kind interest
Is a growing share of interest being added to loan balances rather than paid in cash?
2. Amendments and maturity extensions
Are changes resolving temporary problems, or repeatedly moving repayment obligations into the future?
3. Valuation dispersion
Do different lenders assign materially different values to comparable borrowers or to different parts of the same capital structure?
4. Non-accruals and realised recoveries
How many loans stop producing recognised interest, and how much is eventually recovered after impairment?
5. Refinancing requirements
What volume of debt must be replaced, and at what cost relative to the conditions under which it was originally issued?
6. Fund-level leverage
How much borrowing exists above the underlying corporate loan, including subscription facilities, net-asset-value finance and leverage within investment vehicles?
7. Redemption pressure
Are investors requesting withdrawals faster than funds can generate cash from repayments and ordinary portfolio activity?
8. Bank and insurer exposure
Are regulated institutions increasing direct loans, fund financing, insurance allocations or indirect exposure to the same borrowers and sponsors?
9. Sector and sponsor concentration
Are individual funds dependent on a narrow group of industries, private-equity sponsors or recurring financing structures?
10. Credit availability to companies
During stress, does private credit continue to finance viable businesses—or does defensive behaviour restrict investment and employment across the wider economy?
What would change the assessment?
The Erths assessment would improve if:
- valuations adjusted consistently as borrower conditions changed;
- amendments and payment-in-kind structures declined as refinancing conditions normalised;
- losses and recoveries remained manageable through a sustained downturn;
- redemption structures operated without persistent restrictions or forced selling;
- banks, insurers and funds demonstrated that their exposures were not excessively concentrated;
- private lenders continued supplying capital to viable companies during stress;
- improved reporting reduced major gaps between institutional and system-wide views.
The assessment would weaken if:
- reported values remained stable while comparable public credit deteriorated materially;
- payment-in-kind interest and repeated extensions became widespread;
- investor withdrawals rose across several semi-liquid funds;
- banks reduced fund finance and corporate credit simultaneously;
- different institutions discovered overlapping exposure to the same borrowers only after losses emerged;
- uncertainty about private valuations caused credit conditions to tighten beyond the impaired assets themselves.
The decisive evidence will not be whether private credit avoids visible volatility.
It will be whether the market can recognise losses, allocate them and continue financing viable companies without requiring stability to be preserved through obscurity.
Conclusion
Private credit has become an important part of modern finance because it can do things that banks and public markets cannot always do efficiently.
It can negotiate around complex borrowers, commit capital for longer periods and restructure loans without forcing an immediate sale.
Those features can make the financial system more diverse and, under some conditions, more resilient.
But private credit changes the timing and location of information.
Risk that would appear through a traded price may instead appear through:
- a valuation committee;
- a covenant amendment;
- a refinancing negotiation;
- a restricted redemption window.
The system can remain calm while important assumptions change beneath the surface.
That calm should not automatically be treated as deception.
Nor should it automatically be treated as resilience.
The central question is whether flexibility is preserving economic value or postponing the recognition of loss.
Answering it requires visibility across borrowers, funds, banks, insurers and investors—not merely confidence in any one part of the system.
Private credit does not remove risk from view because it has removed the risk.
It changes where the risk can be seen, who is responsible for measuring it and when the wider system is required to acknowledge it.
The market above the surface may remain still.
The structure beneath it determines whether that stillness can last.
James Callard
Structural Analyst
James Callard writes on structural risk, institutional change, and the dynamics of complex systems. His analysis focuses on the patterns that shape outcomes before they become visible in markets or policy.