The warning arrived as the market opened wider
On September 28, 2026, two senior SEC staff officials focused attention on a deceptively simple question: what are privately negotiated loans worth when there is no active market quoting their price? Their statement addressed valuations, borrower information and the difference between cash interest and income recorded before cash arrives. It was a reminder about existing accounting and disclosure requirements, explicitly not a new rule or an enforcement finding against the industry. [1]
Two days later, the Bank of England published a record of its September 25 meeting. It described continued withdrawal pressure at business development companies during the third quarter and warned that parts of private credit remained vulnerable to tighter financing conditions. It also judged UK banks well capitalized and liquid. The combination captures the story: an important source of business finance is facing a more demanding test, while an industry-wide collapse is not what the evidence establishes. [2]
How a financing gap became a large market
Private credit grew around companies that did not fit comfortably into conventional lending channels. Some were too small to issue public bonds economically, yet too indebted or unusual for a bank’s standard loan process. The IMF’s April 2024 account traced the modern market back roughly three decades. Borrowers gained a lender able to negotiate a customized package quickly; pension funds and insurers gained access to higher-yielding investments in return for accepting risk and tying up money. [3]
The expansion after the global financial crisis is often explained through tighter bank regulation and investors’ search for yield during years of low interest rates. That is part of the account, but it is incomplete. BIS researchers in September 2026 found that demand from software and technology businesses helped drive the acceleration after 2020. Their analysis linked stronger local demand for technology finance with greater direct-lending growth, rather than attributing the whole expansion to banks being pushed out. [4]
The fit was practical. A software business may have recurring subscription revenue but few factories or machines to pledge. A specialist lender can assess customer retention and future cash generation, and negotiate claims over the business. That creates financing opportunities. It also means that a senior claim may rest on the value of a continuing business, rather than assets easily sold after failure. The BIS research found weaker borrower fundamentals and narrower pricing differences during the boom, alongside evidence consistent with support for business formation and employment. These are research findings, not proof that every technology loan is fragile. [4]
Following the money from savers to borrowers
A private debt fund typically collects commitments from investors and calls for the money as loans are made. A manager chooses borrowers, negotiates terms, monitors performance and handles workouts. A pension fund may be an investor seeking to meet future retirement payments; an insurer may invest premiums or hold private loans directly. A private-equity sponsor can be the owner of a borrowing company, a different role from the credit fund that lends to it. These connections help explain why a loan made outside a bank can still matter to familiar financial institutions. [6]
Business development companies, or BDCs, are another channel. They finance businesses using equity capital and borrowing, including bonds and bank credit lines, without taking bank deposits. Some have exchange-traded shares; others offer limited periodic repurchases. [7] The listed investor normally exits by selling to another investor, while a repurchase request asks the vehicle itself to return money. Those routes put different pressures on the lender’s cash. [11][19]
Private credit is broader than a single product. Direct corporate lending, property debt, infrastructure lending and financing secured on assets can have different borrowers and loss patterns. This article concentrates on corporate direct lending and its investment vehicles. Findings about that segment should not automatically be applied to every privately arranged debt investment. [20]
Why the trillion-dollar totals do not match
The IMF’s April 2024 article put the global market above $2.1 trillion for 2023, counting assets and committed capital. The Fed’s May 2026 stability report described about $1.4 trillion of private-credit lending using data from the second half of 2025; its chart combines invested capital of North America-focused private debt funds with total assets of BDCs and credit-focused interval funds. These are differently scoped estimates, not two observations from a single growth series. [3][7]
Uncalled investor commitments, often called dry powder, are not yet company loans. Assets under management, net assets after borrowing and financing capacity measure different things. Adding them together can double-count a financing chain. Larger headline totals need definitions before they describe exposure. [6]
The information base is improving. The Fed’s September 11, 2026 Financial Accounts release incorporated private-credit lending vehicles and loans into its sector accounts. That is a meaningful statistical advance. It does not provide outsiders with every borrower’s current cash flow, every contractual protection or every layer of leverage. [17]
Why borrowers pay more, and why investors accept the lockup
The borrower is buying more than dollars: speed, certainty of execution, confidentiality and flexibility can matter when funding an acquisition or refinancing debt. The lender receives interest and may receive fees for arranging or changing the loan. Private-credit loans have commonly carried floating rates, so the interest bill changes with the benchmark plus a negotiated spread. Fed researchers documented higher spreads than broadly syndicated institutional loans, while noting that the gap changes over time. [5]
A hypothetical example makes the cash-flow tension visible. A company borrowing $100 million at a 4% benchmark plus a 5% spread owes $9 million in annual interest before fees. If the benchmark rises to 6%, that bill becomes $11 million without any additional borrowing. The lender’s gross interest income rises if the company pays, but so can the lender’s own funding cost. The borrower may have less cash available for hiring, investment or repayment.
For investors, the loan’s coupon is therefore not the fund’s net return. Borrowing expenses, management and incentive fees, operating costs, missed payments and losses all stand between the two. Gains or losses when investments are sold also matter. A high distribution can coexist with falling asset value; neither the distribution rate nor a single quarter’s interest income measures the full investment outcome. [9]
One portfolio shows why the denominator matters
Ares Capital Corporation provides a concrete, limited example. Its July 29 release reported that loans on non-accrual status represented 2.4% of total investments at amortized cost on June 30, 2026, compared with 1.8% on December 31, 2025. Measured at fair value, those shares were 1.4% and 1.2%. These are the company’s reported figures for one listed BDC, not default rates for all private credit. [9]
Non-accrual means the lender has stopped accruing interest income under its applicable accounting policy. A troubled loan already marked down can have a much smaller weight at fair value than at cost. The two percentages answer different questions. Neither directly says how much cash will ultimately be recovered, or how many borrowers entered default during the period.
The same distinction applies to losses. A gross loss measure records losses before an identified offset, while a net measure may subtract recoveries or, in some presentations, gains elsewhere. The precise definition governs. A portfolio-level net figure can conceal variation between successful and unsuccessful loans without being incorrect. Comparing it with a borrower-default count or a balance-weighted non-accrual ratio would answer no consistent question.
Default is an event; distress can develop before it
A missed payment, a bankruptcy, an unfavorable debt exchange and a breach of a loan condition are not interchangeable events. Default series differ in whether they include distressed restructurings, how they weight borrowers and which loans enter the sample. A lender may extend a maturity or change payment terms before a formal payment failure. Such flexibility can preserve a viable company, but it can also postpone resolution when the underlying business has not recovered. [5][8]
The IMF’s October 2025 analysis explicitly included selective defaults in one direct-lending measure, encompassing certain maturity extensions and switches to payment-in-kind interest. It also found more defaults among firms that had borrowed before monetary tightening began in 2022. The underlying borrower samples were limited, so those findings are evidence about covered borrowers, not a census of the industry. [8]
That distinction is important. A loan originated when borrowing was cheap may have been sized around assumptions that no longer hold. A more recent loan might start with different pricing, leverage or protections. Rapid new lending can also change the portfolio denominator before newer loans have seasoned. An aggregate ratio may improve even while a particular older group continues to struggle. This is a measurement issue, not evidence by itself that anyone manipulated the result.
Income on paper and the price of an untraded loan
Payment-in-kind, or PIK, interest is added to the amount owed rather than paid in current cash. It can be part of the original contract or introduced later; its presence alone does not establish a default. In a hypothetical $100 million loan with 2% annual PIK and no repayments, $2 million is added after one year. The lender has a larger claim, but has not received that $2 million in cash. Whether it is ultimately valuable depends on repayment.
The September 28 SEC staff statement emphasized disclosures about rising PIK income, non-accrual decisions and modifications that high-level statistics may miss. It also stressed current information and careful judgment in fair-value estimates. Reported income and cash collection can diverge; a valuation based on stale borrower information may respond slowly to deterioration. Conversely, the absence of frequent market prices does not establish that a particular valuation is wrong. [1]
BIS researchers have described a related trade-off in retail access. Exchange-traded funds can introduce visible price signals into an opaque market, including discounts to reported net asset value. Those prices reflect what investors will pay for the vehicle as well as their view of its assets. They are informative, but are not a direct observed sale price for every underlying loan. [19]
Banks have moved upstream, not disappeared
Fed staff research published in May 2025 identified about $95 billion of commitments by the largest U.S. reporting banks to private debt funds and BDCs at year-end 2024, with $56 billion utilized. The unused portion was a potential call on bank , not an outstanding loan balance. Roughly 60% of the identified commitments were concentrated among five U.S. globally systemic banks. The researchers judged the measured stability implications limited at that time, with relatively strong bank claims and capacity to supply liquidity. The sample did not capture every global exposure. [10]
An August 2026 Fed study showed why the connection matters even without a bank loss. In its BDC sample, bank funding became more expensive during monetary tightening, and relationships were concentrated and persistent. A bank can lend to the intermediary that lends to the company. Higher funding costs can then reach the company through that chain. This was staff research, not a supervisory order. [11]
Analysis: leverage at the borrower, the lending vehicle and the investor level can amplify the same underlying disappointment. Collateral and seniority may protect one layer, while shifting losses to another. Simultaneous draws on bank lines can create a cash demand even before final credit losses are known. These mechanisms explain the regulatory interest without implying that every bank exposure is equally risky. [13]
The retail promise meets the loan’s timetable
Traditional closed-end funds reduce run risk by keeping investors committed for years. Semi-liquid vehicles instead offer periodic opportunities to ask for money back, subject to their terms. The Fed’s May 2026 report said many perpetual BDCs capped first-quarter redemptions at 5% of net asset value. Its assessment was that further redemption risks appeared limited and manageable, although persistent withdrawals could reduce credit availability for some borrowers. A repurchase limit can protect remaining investors from forced sales while leaving those seeking an exit waiting. [7]
The Bank of England’s September record showed that pressure had not simply vanished: it described elevated retail and wealth outflows and continuing BDC withdrawal pressure in the third quarter. The private-markets exploratory exercise was still underway to examine stress transmission and data gaps. These are the UK authority’s observations about internationally connected markets, not a new U.S. redemption rule. [2]
Insurers, oversight and the limits of the warning
Insurers and pensions bring long investment horizons, which can suit long-lived loans. But the ultimate obligations are to policyholders and retirees, and capital calls or unexpected cash needs can collide with illiquid holdings. The IMF’s 2024 research highlighted concentrations, layered leverage and cross-border insurance connections. Those channels merit examination separately from the limited-redemption fund products sold to individuals. [6]
Treasury’s May 7, 2026 meeting with state insurance commissioners and the National Association of Insurance Commissioners illustrates the response. Participants discussed private credit, offshore reinsurance, private letter ratings and risk-based capital. The announcement documented coordination and further engagement; it did not announce a new private-credit prohibition or capital rule. [12]
Nor has the policy direction been uniformly restrictive. On September 30, the SEC proposed changes involving performance fees, interval-fund repurchases and multiple share classes intended to expand retail access to private markets. They remained proposals at this article’s October 6 cutoff. Separately, an August final action extended compliance with the February 2024 Form PF amendments to July 1, 2027. That postponement should not be confused with a new disclosure regime already operating. [14][15]
A useful lending model with an unfinished stress test
The Financial Stability Board’s May 2026 report emphasized deepening links among funds, banks, insurers and private-equity firms, together with gaps in data. It also identified the central historical limitation: private credit has not faced a severe downturn at today’s size and scope. That is a reason for uncertainty, not a forecast that a severe loss episode is inevitable. [13]
The resilience case has substance. Long-term capital gives lenders time; a small creditor group can negotiate quickly; and specialist lenders can serve businesses that would otherwise struggle to borrow. But substituting other finance is not equally easy for all borrowers. Fed staff’s August 11 study examined differences and movement between private-credit and leveraged-loan markets, warning that a private-credit pullback could leave some middle-market businesses with fewer alternatives. [18]
Better evidence is part of the next chapter. On September 2, the New York and Dallas Feds published details of a planned voluntary survey of private-credit firms, with initial aggregate findings anticipated in the first quarter of 2027. The announced project is a data-gathering effort, not proof of an enforcement action. [16]
Analysis: the decisive distinction is between losses that investors can absorb over time and pressures that force many institutions to retrench together. Cash repayment, recoveries after restructurings, loan- performance and the ability to honor funding commitments will help separate those outcomes. The expansion has changed who finances businesses. The warnings concern how clearly that risk can be seen, how honestly it is measured and what happens when several parties need cash at once.
Sources
- SEC staff: fair-value measurement and disclosure considerations for private assets, September 28, 2026Filing / reportBack to text: ↑1↑2
- Bank of England: September 25 Financial Policy Committee meeting record, published September 30, 2026SourceBack to text: ↑1↑2
- IMF: Fast-Growing $2 Trillion Private Credit Market Warrants Closer Watch, April 8, 2024SourceBack to text: ↑1↑2
- BIS Quarterly Review: Financing the digital economy: the role of private credit, September 14, 2026; staff researchSourceBack to text: ↑1↑2
- Federal Reserve: Private Credit: Characteristics and Risks, February 23, 2024; staff researchOfficial sourceBack to text: ↑1↑2
- IMF Global Financial Stability Report: The Rise and Risks of Private Credit, April 16, 2024, chapter 2SourceBack to text: ↑1↑2↑3
- Federal Reserve: May 2026 Financial Stability Report, funding risks and private-credit box; page updated May 28Official sourceBack to text: ↑1↑2↑3↑4
- IMF Global Financial Stability Report: October 2025, chapter 1, direct-lending credit risk and vintagesSourceBack to text: ↑1↑2
- Ares Capital Corporation: June 30, 2026 results, July 29, 2026 SEC-filed releaseFiling / reportBack to text: ↑1↑2
- Federal Reserve: Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications, May 23, 2025; staff researchOfficial sourceBack to text: ↑
- Federal Reserve: The Price of Bank Funding Behind Private Credit: Evidence from Business Development Companies, August 7, 2026; staff researchOfficial sourceBack to text: ↑1↑2↑3
- U.S. Treasury: meeting with state insurance commissioners on private credit and insurance, May 7, 2026Official releaseBack to text: ↑
- Financial Stability Board: Report on Vulnerabilities in Private Credit, May 6, 2026SourceBack to text: ↑1↑2
- SEC: proposed amendments concerning retail access to private markets, September 30, 2026Filing / reportBack to text: ↑
- SEC: final extension of February 2024 Form PF amendment compliance date, August 31, 2026Filing / reportBack to text: ↑
- Federal Reserve Bank of Dallas: Dallas and New York Feds publish details of planned voluntary private-credit survey, September 2, 2026SourceBack to text: ↑
- Federal Reserve: September 11, 2026 Financial Accounts release and incorporation of private-credit sectorsOfficial releaseBack to text: ↑
- Federal Reserve: Private Credit and Leveraged Loan Markets: Similarities, Differences, and Substitution, August 11, 2026; figure notes revised August 13; staff researchOfficial sourceBack to text: ↑
- BIS Bulletin 106: Retail investors in private credit, July 9, 2025; staff researchSourceBack to text: ↑1↑2↑3
- Federal Reserve: Financial Accounts instrument definitions, Private credit loans; September 2026 release, reviewed October 6, 2026Official releaseBack to text: ↑