After a stretch of relative calm, the credit market just flinched. Two high-profile, private-company blowups—First Brands and Tricolor Holdings—have rattled investors. “Everyone should be forewarned,” cautioned JPMorgan Chase CEO Jamie Dimon, while Bank of England governor Andrew Bailey called the tremors an “alarm bell.”
Behind such warnings lies a familiar fear: that somewhere in the opaque world of private credit lurk pockets of hidden risky leverage waiting to burst. In overheated markets—where AI exuberance and equity valuations have tested frothy levels—it is easy to see shadows everywhere. But that anxiety, while understandable, is misplaced. The bigger story isn’t hidden leverage; it’s how the capital market itself is evolving.
The real risk isn’t the rise of private capital. It’s the timeless cycle of plentiful capital environments resulting in speculation, overextension and the potential for fraud. Markets don’t break because information goes dark. They break when investors either forget the fundamentals or are focused on capital deployment and do not have the opportunity to validate the data while conducting due diligence.
Private credit has grown into a $2.1 trillion global asset class, and some worry it has spawned a shadow banking system beyond regulatory sightlines. Yet what is often missed is that private credit isn’t expanding the total pool of leverage—it’s displacing what once sat on public or bank balance sheets. The structure of risk has shifted, not exploded.
That distinction matters. In the public bond market, investors often price debt to sell, not to own. Liquidity becomes the organizing principle; speed and tradability often trump diligence.
We’ve all seen what happens when yield-hungry funds chase paper that looks attractive in a spreadsheet but hides weak underwriting. The collapse of Greensill Capital in 2021 is a prime example: The firm packaged supply chain finance loans with limited transparency and weak credit controls, ultimately leaving investors exposed to billions in losses when underlying borrowers defaulted. This episode shows how quickly euphoria can turn to regret when credit diligence is sacrificed for growth.
By contrast, private credit investors behave more like owners than traders. They underwrite risk for ownership—not resale—and that difference is profound. These funds are built on negotiated structures, tighter covenants and sustained engagement with borrowers. Their patience isn’t altruism—it’s alignment.
Critics call private markets opaque. I’d call them selective. They’re private because they can be—because their investors are sophisticated institutions willing to trade liquidity for control and visibility into the businesses they finance.
The recent failures of First Brands and Tricolor, while unsettling, weren’t signs of systemic weakness. They were cases of fraud. And fraud, unfortunately, is a constant in every era—think Enron, Tyco, Madoff. It’s not a feature of private credit any more than it was of public equities.
Diligence lapses, auditors miss red flags and bad actors exploit trust. Those episodes deserve scrutiny, but they don’t indict the system itself. The system underpinning this market makes it exceptionally hard for the factors that caused these recent blow-ups to happen repeatedly; however, the reality is, just like the public markets, there will always be exceptions.
If anything, today’s financial system is more resilient. Banks are far better capitalized than before the global financial crisis, with leverage ratios roughly half what they were. Private credit funds, for their part, concentrate risk among investors who can bear it. When a fund loses money, it’s pension or institutional capital that takes the hit—not taxpayer-insured deposits. That containment is healthy.
Private credit has stepped into spaces where banks, constrained by regulation, can no longer lend effectively. It has financed companies that might otherwise be starved of funding and, in doing so, broadened the economy’s circulatory system.
Of course, there will be excesses—there always are. The current AI-driven boom is a reminder that when too much money chases too few opportunities, mispricing follows.
Yet the notion that private credit poses systemic risk misunderstands its design and purpose. These markets tend to self-correct faster because they’re smaller, nimbler and managed by investors with real skin in the game.
That’s the lesson from this latest market scare: Don’t recoil from private credit—understand it. These investors aren’t chasing the next trade; they’re underwriting the next outcome.
Marc Cooper is a Member of the Forbes Finance Council and this article originally appeared on Forbes.com
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