This is the second article in a three-part series on the risks of private credit. Part 1 described private credit and highlighted the risks to retail investors in private credit funds structured as nontraded business development companies (BDCs). This article widens the lens to private credit funds generally, identifying risks to retirement savers, to those who hold retirement annuities and insurance policies, and to the financial system. The third and final article in this series will recommend steps that Congress and regulators can take to reduce the risks of private credit.
In March 2026, Fitch Ratings reported that the default rate among U.S. corporate borrowers of private credit hit a record high of 9.2 percent. Financial and legal experts focused on the risks to investors who put their money in private credit funds, especially funds structured as nontraded business development companies (BDCs). Notably, nontraded BDCs and publicly traded BDCs can seek capital from retail investors, while other private credit funds are generally limited to raising capital from insurance funds, pension funds, endowments, and high-net-worth individuals. But the risks posed by those other private credit funds could still be transmitted to ordinary Americans and the financial system.
Many Americans who have no idea what a private credit fund is could be at risk. Workers who save for retirement through employer-sponsored retirement plans could be affected by private credit funds that do not perform well. Similarly, those who are already retired and receive a retirement annuity administered by a life insurance company, as well as those who hold insurance policies, could be affected by the growing investments of insurance companies in private credit funds. Those risks may multiply when insurance companies are acquired by private equity funds. And the risks can become more complex or hidden when private credit loans are packaged and sold as securitized debt products.
Finally, with the proliferation of linkages between private credit funds and traditional banks, insurance companies, private equity, and other nonbanks, banking regulators are facing growing challenges in monitoring risks to the financial system arising from debt that is hidden in private credit funds.
Risks to retirement savers who participate in employer-sponsored plans
In 2025, more than 80 million workers in the United States saved for retirement in a retirement plan sponsored by their employer—about 26 million in a pension plan and more than 65 million in 401(k)s and other retirement plans. Pension fund investments are made on behalf of the plan by pension fund managers. Between 2001 and 2021, pension plan allocations to alternative assets, which include private credit, increased from 14 percent to 39 percent. In 2025, U.S. pension plans allocated more than $47 billion to private credit.
Many managers of 401(k) plans offer investment options from which employees may choose. Managers of 401(k) plans have declined to offer private credit and other private market investment options to participants in the plans they manage due to potential liability if these opaque investments perform poorly and are later deemed imprudent investments for plan participants. Managers of both pensions and 401(k) plans are fiduciaries and thus required to act solely in the interest of plan participants—the employees.
In addition to the risks of private credit investments, all private credit funds, including all BDCs, charge fees that are often not transparent and usually significantly higher than those charged by public mutual funds and exchange-traded funds. These fees are often understated or inconsistently disclosed and likely include substantial incentive fees that are structured so that managers can easily meet their profit goals. These fees can significantly reduce the claimed returns from these investments.
Despite the risks of private credit and other private market investments, the Trump administration has taken steps to weaken the rules that have historically protected workers saving for retirement from these risky investments. The U.S. Department of Labor (DOL) proposed a rule in March that would allow investment advisers to market risky private investments, including private credit, to workers for their 401(k) accounts while protecting these fiduciaries—the fund managers—from prospective liability if those investments go bad. Yet the prospect of liability for bad investment offerings is an important mechanism to ensure that plan managers act prudently. The DOL received more than 46,000 comments—many from consumer groups, think tanks, and academics—warning of the risks of these private market investments and thus the inappropriateness of providing a safe harbor for investment advisers that offer them to retirement savers. The comment period closed on June 1, but no final rule has been released to date.
The average American has historically fared poorly when investing in assets that lack transparency. After the 1929 stock market crash, Congress passed laws requiring companies that seek investments from the public to disclose basic information about their operations, ownership, management, risks, and financial performance, so that investors could make sound investments and voting decisions. From then until the early 1980s, most large securities transactions were considered public offerings that required robust disclosures, while “private offerings” were generally limited to smaller transactions with a small number of investors—often family members—who had access to the same type of information required by public offerings.
Plan managers should be held to the highest standards in selecting investments for plan participants.
This principle has been significantly eroded over time as part of a long trend of financial deregulation. Loopholes and looser rules adopted since the 1980s have created multiple exceptions to this principle. For example, under the U.S. Securities and Exchange Commission’s Regulation D adopted in 1982, private companies or private funds can raise an unlimited amount of capital from accredited investors without having to comply with the rules required when shares are offered to the public. The term “accredited investor” includes pension funds and 401(k) plan managers who manage the retirement savings of millions of average working Americans—even though the workers themselves are not accredited and thus would be entitled to extensive disclosure were they to invest directly in the same funds. But pension, 401(k), and other retirement plan managers—no matter how sophisticated—need information to make sound decisions. Expertise alone has little value if not accompanied by disclosure of information needed to assess the funds or companies in which the expert might invest.
Workers saving for retirement in employer-sponsored plans need assurance that the investment advisers managing the plans are not taking inappropriate risks with their money. Plan managers should be held to the highest standards in selecting investments for plan participants.
Risks to retirees and policyholders who have annuities and policies administered by insurance companies
Many workers use their retirement savings to purchase an annuity when they retire. The retiree enters into a contract with an insurance company, in which the retiree agrees to pay a lump sum or periodic premiums to the company in return for the company providing regular checks to the retiree for the rest of their life. In addition to underwriting retiree annuity agreements, insurance companies provide insurance to a wide range of consumers seeking coverage for personal property, accidents, automobiles, homes, and much more. Insurance companies use the premiums they receive from retirees and policyholders to make investments that fund future payouts they must make. Since those payouts theoretically occur over many years, the insurance companies are able to make long-term investments.
In recent years, however, many of the largest insurers—especially life insurers that manage retirement annuities, among other policies—have invested heavily in private credit funds. According to the National Association of Insurance Commissioners (NAIC), private credit makes up 13 percent of cash and invested assets and 21 percent of bond holdings of U.S. insurance companies. The largest U.S. life insurers account for $352 billion, or 44 percent, of the industry’s $807 billion investments in private credit funds, most of which are illiquid because they are not publicly traded. Moody’s Ratings expects the industry to expand these investments, exposing insurance companies—and their clients and policyholders—to uncertainty in the valuations and default risk of private credit borrowers, concentration risks (i.e., too much investment in one type of asset), and an inability to quickly liquidate investments (i.e., convert them to cash) should the insurance company need to make huge payouts suddenly, for example, if a wide swath of policyholders is hit with a climate disaster all at once.
Riskier connections between private credit, private equity, and insurance companies
Insurance companies increasingly are being purchased by private equity firms that seek the long-term revenue flows from insurance premiums paid by policyholders. For example, private equity firm Apollo owns Athene, an insurer with $387 billion in investments; and 73 percent of Athene’s investments were originated by Apollo, while private credit assets make up more than 15 percent of Athene’s total assets. This type of ownership structure is common in the industry.
These ownership structures have driven life insurance companies to increase their investments in risky private-company loans originating from their owners. Insurance companies, which are primarily regulated at the state level, are required to keep a certain amount of safe investments, such as U.S. Treasurys, as a financial cushion to ensure policyholders receive the benefits they were promised in a timely fashion. For life insurers, the amount of capital they must hold is based in part on the riskiness of their investments—their “asset risk.” This risk is established, in part, using credit ratings from independent credit-rating agencies.
A recent Columbia Business School study found that, while credit ratings relied on by the U.S. life insurance sector used to be publicly disseminated and priced by the market, a growing share are now obtained through private letter ratings from smaller credit-rating agencies and are only disclosed to the issuer of the debt and limited investors, which would include the owners of the insurance company. Thus, the privately rated bonds are not subject to scrutiny by investors, experienced analysts from large rating agencies, and other public-market participants, a process known as market discipline. The study’s authors analyzed investments by life insurers, which are among the largest holders of corporate bonds and related products, finding that the largest insurers seek the most private letter ratings, rather than ratings from the top-three public credit-rating agencies: S&P Global, Moody’s, and Fitch. They also found that privately rated bonds are more likely than publicly rated bonds to be impaired in the future.
Robert Pozen, a distinguished senior lecturer at the Massachusetts Institute of Technology, concludes from this and other data that state insurance regulators should not allow capital requirements for private credit to be based on private ratings, due to the absence of market discipline. Private borrowers do not disclose much information, and their bonds are not publicly traded, so credit ratings necessarily must be based on subjective judgments, assumptions, and models. If private ratings overestimate the likelihood of repayment for private credit investments, life insurers’ capital cushions could end up being insufficient to absorb higher-than-expected policyholder losses.
A growing share of private-equity-owned life insurers’ investment in private credit funds is in asset-backed securities. These are created by bundling private credit loans and slicing the bundle into securities backed by the loans. The bundle is often divided into separate levels of securities with different risks and returns. As Pozen points out, layers of complexity add to the assumptions and models a rating agency can use.
Risks to the financial system
All of the risks mentioned above are spreading as private credit funds become increasingly interconnected, not just with life insurance companies but also with deposit-taking banks. In addition to obtaining funds from insurance companies and high-net-worth investors, private credit funds borrow money from traditional banks. As of the end of March 2026, the largest U.S. banks reported at least $100 billion of exposure to private credit firms through loans to the firms. This means the exposure to the riskier bets made by private credit funds is effectively spread out among a wide swath of investors and depositors who may not have signed up for that higher risk. In a Federal Reserve Bank of New York survey of market contacts from spring 2026, private credit was one of the top-four most-cited sources of potential shocks over the following 12 to 18 months. Yet the growing private credit market has not been tested during a severe economic downturn.
Risks to the banking system
The savings that average Americans deposit in their local bank are becoming intertwined with private credit through the banking system, and regulators have not kept up. Banks that take deposits insured by the federal government are subject to extensive rules to ensure that they do not take excessive risks with depositors’ money—or, worse, trigger a taxpayer bailout. While private credit funds do not take deposits, ordinary Americans’ savings and the financial system are still at risk as more and more private credit funds, including BDCs, obtain loans from traditional banks, which do take deposits. The private credit funds then use those bank loans, along with funds from other investors, to make loans to private companies. Thus, in addition to the risks from retirement plan and insurance company investments in private credit funds, risks of private credit are also transmitted to ordinary Americans’ savings through the banking system.
Off-balance-sheet risks
When traditional banks make loans to private credit funds, these banks are indirectly funding loans to private companies that they probably would not lend to directly due to the underlying risks. This practice enables banks to keep these loans and the associated risks off their balance sheets, but the risks remain embedded in the private credit funds and BDCs. Private credit
funds themselves may hide these risks from their creditor banks and investors. For example, to stave off defaults that would otherwise reduce the stated values of their assets, private credit funds may allow borrowers who cannot meet their payment obligations in cash to instead add the payments to the loan amount due. This obscures the extent to which loans are underperforming—or not performing—from the funds’ investors and from regulators. These payment-in-kind (PIK) provisions are now regularly written into nontraded BDC loan agreements. As of December 2025, the 10 unlisted BDCs with the most PIK loans as a share of total income had shares that ranged from 2.27 to 8.44 percent.
Concentration risks
Private credit funds’ lack of transparency may also hide cross-sectoral risks. In a recent report, the Financial Stability Board, an international organization that monitors and makes recommendations to promote financial stability, found that private credit funds’ investments are becoming more concentrated, with more than a third of private credit deals globally in 2025 going to companies involved in the artificial intelligence (AI) industry. Experts warn that a sharp correction in asset valuations in the AI industry could lead to large losses for private credit investors. This could be triggered, for example, by a shortfall in the supply of electricity, which could result in delays or cancellations of projects. Financial regulators need to have a better understanding of this and other potential cross-sectoral risk factors that could destabilize the financial system.
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Conclusion
History has taught us that rapid growth in unregulated markets can put the broader economy at risk. The 2008 financial crisis arose in part from sudden growth in certain derivatives that were lightly regulated, paired with poor due-diligence practices in extending mortgage loans that formed the foundation of those derivatives. Yet the rate of private market growth, including private credit, is outpacing the growth of U.S. publicly traded securities markets that historically have been the most robust and trusted in the world. The private markets, which include private equity, private credit, venture capital, and hedge funds, reached $30 trillion of assets under management in 2022. While smaller than the $120 trillion public capital markets, private markets are growing at a faster rate than public markets and now exceed the size of the U.S. banking sector. In fact, there were only about 3,900 publicly listed companies in 2025, down from 8,000 in 1996.
With a size of more than $1.4 trillion, the private credit market is a good place for policymakers to begin reducing the risks of private markets. Private credit funds have both investment and banking characteristics. Investors buy shares in the private credit fund, which uses investor money to make the loans. Thus, investors own shares of the fund, while the fund acts like a bank to the companies in its portfolios. Despite this, private credit funds are not subject to bank supervision, and most private credit funds are not subject to the full disclosure rules that apply to traditional banks or public companies that raise capital from ordinary investors.
The author would like to acknowledge the helpful comments of Robert Pozen and Renée Jones on earlier drafts of this article.