This is the first article in a series on private credit.
Introduction and summary
Investors in private credit funds continue to worry about risky loans made by the funds and to ask for their money back. The international Financial Stability Board (FSB) has expressed concerns about lack of transparency in private credit funds and potential risks of these nonbanks to the financial system. Amid these reports, the Trump administration has proposed a new regulation that would, if finalized, make it easier for retirement plan managers to offer plan participants high-risk investments, including private credit.
These recent jitters over private credit—loans made to a private company by a financial company that is not a bank—bring home the important role of federal regulators in ensuring that financial institutions follow relevant rules. Instead of watching for emerging risks coming from the shadow banking sector, which includes any firm that offers bank-like services but is not regulated like a bank, the Trump administration would provide a liability safe harbor for retirement plan fiduciaries that offer private credit funds and other nonpublicly traded investments to ordinary Americans as a retirement savings investment.
The Trump administration’s actions ignore the fact that the shadow banking sector and the lack of regulation of certain capital markets were major factors in the 2007-09 global financial crisis. As financial innovation races forward and industry pushes to further loosen the rules, as it has done in the past, Congress and regulators are responsible for heeding the signs of risk building up in the U.S. financial system and shoring up financial safeguards to prevent a future crisis.
Risks from private credit are especially concerning because of the complex and growing linkages of private credit funds to other parts of the U.S. financial system, including traditional banks that hold Americans’ deposits and insurance companies that administer retirement annuities and underwrite life and other insurance policies on which millions of ordinary Americans rely. This article provides an explanation of the private credit industry, and two subsequent articles will analyze the risks of private credit funds to Americans and to the financial system and will provide recommendations for how to reduce the risks of private credit.
What are private credit and private credit funds?
Private credit is defined as any loan made to a private company by a financial company that is not a traditional bank. It is present in many places in the financial system, though some private credit loans are riskier than others. The companies that receive the loans are private, meaning they are not publicly registered and do not sell shares to the public. Some private credit loans are made to large private corporations, where the loans are considered investment grade, meaning the private company is unlikely to default on the loan.
Private credit funds are pools of money managed by nonbank financial institutions, or shadow banks, that are used to make private credit loans. Large investors including pension funds, insurance companies, sovereign wealth funds, and high-net-worth individuals invest their money into the pool, and the fund’s managers use that capital to make loans to private companies.
Some private credit funds can offer shares directly to ordinary investors
Some private credit funds are structured as business development companies (BDCs). BDCs were created by Congress in 1980 as a vehicle for ordinary or retail investors to invest in small and midsize private companies in need of capital but not registered with the Securities and Exchange Commission (SEC) and unable to secure adequate funding from a traditional bank. Retail investors are individuals who buy and sell securities for their own personal purposes, such as saving for retirement or funding education.
Generally speaking, the private companies receiving loans from BDCs can sell securities (i.e., raise capital) only to “accredited investors” who meet certain net worth and income requirements set by the SEC to ensure that the investors can take on risky investments that may result in loss. Thus, ordinary investors normally cannot invest directly in these private companies, which are often distressed and at high risk of default, but they may do so indirectly by investing through a public BDC.
A private credit fund must declare its intent to be treated as a business development company. Once registered, all BDCs must follow basic rules about their investment activities, including the percentage of their investments that must be invested in private domestic companies and a requirement that they offer management support to those companies.
Private credit funds have become a significant source of longer-term financing for private companies that are too risky to obtain loans from traditional banks. But the ability of certain private credit funds, especially those structured as nontraded business development companies discussed below, to offer shares to ordinary investors warrants closer scrutiny.
Nontraded BDCs raise unique risks
There are three kinds of BDCs, but only nontraded BDCs and publicly traded BDCs regularly sell shares to ordinary investors. Nontraded BDCs raise the most concern because the BDC shares are not publicly traded and those shares are less liquid, making them harder to sell once an ordinary investor buys in.
Types of BDCs
Private BDCs. Some BDCs are fully private, meaning they do not register their specific offerings of securities and cannot sell shares to the public. As BDCs, however, they do file SEC Form 10, a simple public registration form for the firm’s class of securities as a whole, and must make basic periodic company filings. These private credit funds can sell shares only to accredited investors, with limited exceptions. Accredited investors generally must have income higher than $200,000 ($300,000 jointly) for each of the past two years, or a net worth of more than $1 million excluding a primary residence. These funds, like private equity funds, are usually term limited and investors are expected to leave their money in the fund until it winds down, roughly five to seven years.
Publicly traded BDCs. These BDCs register with the SEC as a BDC that sells shares to the public and lists its securities on a national stock exchange such as Nasdaq or the New York Stock Exchange. Publicly traded BDCs must file SEC Form N-2, which calls for detailed information on a periodic basis about the fund, its risks, and its portfolio investments and strategy. Shares in these BDCs are highly liquid, meaning ordinary investors are free to purchase and sell their shares in publicly traded BDCs at any time.
Nontraded BDCs.* These BDCs also register with the SEC as a BDC that sells shares to the public and also must file SEC Form N-2 and periodic reports on the fund, its risks, and its investments. However, nontraded BDCs, as their name implies, do not list their shares on a national stock exchange. Instead, the shares may be sold directly by the fund to investors or through stockbrokers or financial advisers.
Because nontraded BDC shares are not listed on a national stock exchange, the BDC is required to obtain approval in each state where it seeks to solicit buyers for its shares. State laws generally require that investors in the shares meet “suitability” requirements, which are lower than the requirements for accredited investors.
Nontraded BDC lending to private companies first emerged in 2009 following the global financial crisis, when it became difficult for smaller private companies to obtain loans from traditional banks. But many private credit loans have floating rates, and the growth of nontraded BDCs took off in 2022 when interest rates began to rise. Today, nontraded BDCs collectively manage hundreds of billions of dollars of loans.
Price risk
The fact that nontraded BDC shares do not trade on a public exchange means that investors in those shares have less information about them. When shares are publicly traded on a daily basis, other investors, analysts, creditors, business reporters, and other market participants monitor the shares and collectively determine a fair price for a security, a process known as price discovery. Without this market discipline, it is more difficult for ordinary investors to know whether they are paying a reasonable price for nontraded BDC shares.
Liquidity risk
Investors who purchase shares in a nontraded BDC have limited options for selling or redeeming them. Many nontraded BDCs are semiliquid—meaning they offer investors the limited ability to redeem shares for cash. For example, investors may be permitted to redeem up to 5 percent of the fund’s net asset value each quarter, with rules for allocating the redemptions when total redemption requests exceed the limit. These funds are usually structured as perpetual or evergreen since they do not have a fixed end date when the fund winds down and because they sell shares and invest capital on a continuing basis.
Doubts have arisen about the value of tech sector companies funded by BDCs due to the rising competition these firms are expected to face from products and services driven by artificial intelligence. This has resulted in a dramatic surge in redemption requests this year, which suggests that ordinary investors may not have fully understood the risks—including valuation risk and liquidity risk—inherent in these investments or that they have less tolerance for the illiquidity embedded in these vehicles.
Default risk
While default risk exists across private credit, many of the private companies that nontraded BDCs loan to are already loaded with debt. The asset managers of the BDC perform due diligence, or the work of investigating the borrowing companies and assessing the risk of default—a job banks normally do. This can lead to investor worries if borrowing companies default. Investors can lose confidence in the fund and seek redemptions in large numbers, similar to a bank run. In late 2025 and early 2026, some of the companies funded through BDCs failed, defaulting on their loans and facing allegations of fraud by the SEC and the U.S. attorney’s office for the Southern District of New York. In addition, experts have pointed to possible financial mismanagement—all raising questions for investors about the BDCs’ due diligence in approving loans to private companies.
Private credit funds pose broader risks to Americans and the financial system
Private credit lending through vehicles such as private credit funds and BDCs has continued to grow in recent years. The FSB estimates the size of the global private credit market at $1.5 trillion to $2 trillion as of the end of 2024. According to the Federal Reserve, riskier debt, including private credit, owed by privately held companies makes up about 10 percent of total outstanding debt of nonfinancial businesses in the United States and is continuing to grow.
Concerns about retail investors in nontraded BDCs are not the only issue swirling around private credit. The risks of private credit generally raise broader concerns for Americans and the financial system. These include risks to:
- Retirement savers who participate in employer-sponsored plans that invest in or offer private credit funds
- Americans who have retirement annuities or policies administered by insurance companies that invest in private credit, especially when those insurance companies are owned by private funds
- The financial system when debt is hidden from regulators responsible for monitoring the stability of the financial system
These risks and concerns will be discussed in part two of this series.
Conclusion
Private credit is a broad term referring to any loan to a private company made by a financial company that is not a bank. Even though financial industry experts and leading financial organizations have assured regulators and investors that private credit funds, including nontraded BDCs, are not currently in danger of causing a financial crisis, most experts recommend greater scrutiny and monitoring of the risks the funds pose.
Although attention to the risks of private credit has focused on nontraded business development companies, experts are becoming increasingly concerned about the risks of private credit to Americans and to the financial system more broadly. The Trump administration’s proposal to weaken guardrails around investment of retirement plans in private credit funds and other private assets should be put on hold while Congress and regulators consider options for addressing the myriad risks of private credit. These risks and recommendations will be discussed in the second and third parts, respectively, of this private credit series.
* Authors’ note: Private business development companies (BDCs) are also nontraded but they are not publicly listed. In this brief, “nontraded BDC” refers to a BDC that registers publicly with the U.S. Securities and Exchange Commission but does not offer its shares for trading on a public stock exchange.
The authors would like to acknowledge the helpful comments of Renée Jones and Robert Pozen on earlier drafts.