Private credit explained: why marks, liquidity and bank links matter

Why does private credit matter now? A market the Financial Stability Board sized at $1.5 trillion to $2 trillion has grown large enough, opaque enough and connected enough to banks that regulators no longer treat it as a niche corner of finance. In a May report, the watchdog said private credit at its current size and scope has not been tested during a severe economic downturn. Investors are no longer asking only how much these funds can lend. They are asking how those loans are valued, how quickly cash can leave, and how much of the plumbing still runs back through the banking system.

Private credit is lending done outside public bond markets by non-bank funds. A company borrows directly from a fund or a club of funds instead of issuing bonds to a wide pool of investors. The model expanded after the financial crisis, when banks pulled back from riskier lending and new capital rules made some forms of balance-sheet lending less attractive. What began as a way to finance mid-sized borrowers broadened into a much larger market that now reaches across corporate buyouts, specialty finance and other deal structures. The market has moved from specialist desks into mainstream policy conversations.

Scale captures only part of the story. The estimate itself varies by source, which tells readers something about the market’s opacity. The FSB put private credit at $1.5 trillion to $2 trillion, while Bank of England deputy governor Sarah Breeden told Reuters that private credit had gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years. Those figures are directionally consistent even if they are not identical. The market is now big enough that regulators care less about whether it is fashionable and more about how it behaves when the economy slows, defaults rise and funding becomes scarce.

Start with a mark. A mark is a fund’s valuation of an illiquid loan — a loan that does not trade often enough to give a fresh public price every day. In public bonds, investors can usually see where comparable debt cleared minutes ago. In private credit, valuation depends more heavily on models, judgement and sporadic transactions. That does not make the marks wrong. It does mean outside investors get less immediate price discovery, and a change in assumptions can move reported values faster than many expect.

Why marks matter

Borrower stress has made the issue harder to ignore. Reuters reported that more than a tenth of loans in one MSCI sample had been marked down by at least 50 per cent, while 13 per cent of smaller funds’ loans were valued below 50 cents on the dollar. MSCI described that territory as a level typically associated with deep distress or risk of restructuring. A lower mark is not the same thing as an immediate default, but it signals that lenders are reassessing what they may recover. Smooth quarterly valuations can hide sharp changes underneath until someone is forced to reprice.

Pricing is one layer. Data is another. The same Reuters report on private-credit markdowns said one third of investors reported that they did not have fully trusted private-market data. Investors are being asked to own assets that rarely trade, accept manager marks that involve judgement and evaluate borrowers whose finances are disclosed far less frequently than those of listed issuers. Private credit can look stable partly because the market is designed to move slowly on paper. Stability that comes from patient capital is a strength. Stability that comes from delayed information is harder to read.

There is also the liquidity question. A liquidity mismatch means money can leave faster than assets can be sold. If a fund promises investors periodic redemptions or depends on financing that can tighten quickly, while the underlying loans are negotiated, bespoke and hard to exit fast, pressure can build before any loan matures. The CNBC summary of the FSB warning put the issue in market terms: stress in private credit does not stay neatly inside one fund if lenders, borrowers and financing partners all start protecting themselves at the same time.

Where the bank links sit

Private credit is often marketed as an alternative to banks, but it is not cut off from banks. The FSB said drawn and undrawn bank credit lines tied to private credit amounted to $220 billion. Those bank links include credit facilities, revolvers and other funding arrangements that help funds manage cash, bridge deals or extend financing to borrowers. They create channels through which strain can travel. A fund may hold the loan risk, but a bank can still face exposure through lending to the fund, financing the deal or standing beside it in a larger capital structure. The market is outside public bonds, not outside the financial system.

Officials are now more interested in the plumbing than the sales pitch. The bullish case for private credit is familiar: direct lenders can move faster than public markets, structure loans more flexibly and keep financing available when syndicated markets wobble. None of that disappears because regulators are paying closer attention. But the 2026 warnings are a reminder that private credit’s strengths and weaknesses are linked. Flexibility often comes with complexity. Illiquidity can support patient lending, but it also makes risk harder to price in real time. Close ties to banks can broaden funding options, while also creating a path for contagion if losses spread.

The reader should stop treating private credit as a black box with a high yield attached. The FSB’s warning that the market has not been tested in a severe downturn is less a prediction than a statement about missing evidence. Investors know how public high-yield bonds, leveraged loans and bank balance sheets behaved under earlier stress episodes because those markets have been through them. Private credit at today’s scale has not. Regulators are trying to map risks before the next downturn does the mapping for them.

What to watch next

For investors, three signals stand out. Watch marks and recovery assumptions, because they reveal how managers are digesting borrower stress. Watch fund terms and financing arrangements, because liquidity pressure often shows up in the gap between promised access to cash and the time it takes to sell or refinance loans. And watch the bank links, because that is where a supposedly private market can become a broader financial issue. Private credit sits between borrowers that still need money, investors hunting yield and regulators asking whether the system’s newest giant has been priced too calmly for too long.