In the last few weeks, private credit funds—nonbanks that lend out money to companies—have faced significant stress. Investors have asked to withdraw billions of dollars from funds, and some funds have been forced to sell off loans. Companies that provide private credit, such as Blue Owl, have seen their share prices fall sharply.
Many have pointed to these developments to argue that private credit is yet another investment innovation—like credit default swaps or mortgage-backed bonds—that could bring down the financial system.
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These critics have it backwards. In fact, private credit is less likely to suffer runs and is less leveraged than traditional banks. On the whole, it makes the financial system safer. Traditional banks still pose the biggest danger to American finance.
Private credit rose to prominence following the Great Recession, when new regulations made it harder for normal banks to lend money. The amount of money in private credit has grown by about 300 percent over the past decade. Today, private credit funds control more than $1 trillion in assets. They’ve attracted investors by providing high returns: over 8 percent a year in recent years, a far higher rate than a basket of typical corporate bonds yields.
These funds fill a vital economic need. Commercial and industrial loans constitute only a bit over 10 percent of all bank assets. By contrast, private credit is almost entirely devoted to lending to working companies that need money to grow. Though still a small part of the financial world, private credit now constitutes over 15 percent of all private company debt.
In an increasingly intangible world, private credit is also showing willingness to take on tech and other new-economy companies. According to a survey by a team of academic economists, the most important reason companies could not get bank credit and had to use private credit instead was that the companies lacked physical capital to put up as collateral. According to an estimate from the International Monetary Fund, about 40 percent of private credit was going to technology companies as of 2024.
Most private credit funds are semi-liquid, meaning that investors can withdraw their investments—much like withdrawing a deposit from a bank. But unlike a bank, these funds have withdrawal caps, usually set at about 5 percent of all assets in a fund per quarter. After that amount is hit, the fund can “close the gate,” as funds like those at BlackRock have recently done.
Though these caps can frustrate investors, they make the funds less likely than banks to suffer devastating runs or get forced into asset fire sales. Consider what happened to the three big banks that collapsed in the 2023 bank runs. Silicon Valley Bank lost 25 percent of its deposits in a single day, Signature Bank lost 20 percent in just a few hours, and First Republic lost 37 percent of its deposits in two days.
These bank runs harmed not just the banks’ customers but American taxpayers. The Federal Deposit Insurance Corporation seized all three banks and bailed out the depositors—even the ones who legally should have received nothing—to prevent the consequences such collapses could impose on the wider financial system. The FDIC predicted that the three banks’ failures would cost taxpayers over $30 billion—all to support banks of which few Americans had ever heard.
At the same time, we saw how withdrawal caps could preserve private investment funds. In 2022 and 2023, investors expressed concerns about Blackstone’s real estate fund and began withdrawing money. But Blackstone had a withdrawal cap, limiting the run. That meant it could hold on to its long-term real estate assets and even start buying a piece of the failed Signature Bank’s property loans.
The caps worked. As a Wall Street Journal headline summarized this year, Blackstone’s real-estate fund has staged a comeback.
Private credit funds are not only less subject to runs than traditional banks. They are also far less leveraged, meaning they have a lower ratio of debt to assets.
One of the largest sources of private credit are business development companies, a structure Congress created in 1980 specifically to lend to small- and medium-size companies. According to a 2025 paper, BDCs take on a little less than two dollars in debt for every dollar in permanent capital or equity. By contrast, big banks take on more than seven dollars in debt for every dollar in capital or equity.
The fact that private credit funds boast more stable investors and carry less debt means that any private credit failures are unlikely to cause a broader crisis. As the Treasury Department’s Office of Financial Research has written, “all but the most extraordinarily large credit losses on private lenders’ portfolios would be borne by their equity holders” rather than other investors or the wider economy. The office thus finds it “unlikely that distress at private lenders would transmit to the broader financial system.”
Bad loans and failures are an ordinary part of a capitalist system. Private credit will surely suffer these at some point. Private credit’s loans to software companies now being disrupted by artificial intelligence coding, for example, could lead to more losses.
But the fact that private credit’s failures are less likely to spread to the broader financial system is worth celebrating. Academics and regulators tend to be fearful of new things, but they should realize that private credit is a good innovation—and that the greatest dangers still come from old-fashioned banks.
Photo by Craig T Fruchtman/Getty Images