Behind the Buyout: How Private Credit Rebuilt the Crisis It Was Designed to Prevent

Image via EdgePoint

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Private equity firms have regularly drawn criticism for their approach to business, as they use leveraged buyouts to acquire companies (potentially cutting jobs and reducing service quality). Once they conduct their business, they leave companies buried in debt and walk away with massive profit. However, people often overlook what enables and encourages private equity firms to operate the way they do: private credit. 

Following the  2008 financial crisis, banks cut back lending in pursuit of economic reform, creating opportunities for non-bank lenders. Private credit, loans provided by non-bank institutions at higher rates with tailored terms, emerged to serve companies with unstable cash flows or distressed financial situations. The private credit market has since grown to $1.8 trillion, surpassing the balance sheets of many major banks. 

Private equity’s demand for leveraged loans in risky deals drove much of this growth, while banks were forced to hold back on lending following reform efforts. However, the same traits that fueled private credit’s growth (speed, flexibility, and nontraditional financing) are now sources of emerging structural vulnerabilities. While trying to escape the failures of traditional banking, private credit firms have simply rebuilt them through limited transparency, illiquidity, and excessive leverage—just outside of regulatory reach.

Due to their private structure, credit loans and investments only provide aggregated fund performance data. Investors  have limited insight into whether the loans they support are actually delivering the expected returns. Unlike traditional banks, private credit firms rarely disclose loan-level losses with frequency or detail, meaning signs of borrower stress could be foreseeable to the company long before they appear in investor-facing reports. As a result, issues can accumulate without clear visibility into losses until they are ultimately realized. 

In recent years, private credit standards have quietly deteriorated, driven by a push for lending, a lack of investor protection, and increased allowances for payment deferrals. These firms provide loans to a multitude of companies, entangling capital across multiple investments from which investors cannot easily withdraw funds, leaving both the firms and their investors stuck. This lack of liquidity traps capital even when risks emerge and limits investors’ ability to respond to deteriorating conditions. 

Concerns about transparency have prompted many major investors to pull back capital commitments across the sector, with withdrawal requests nearing 22%. To mitigate losses, firms have capped withdrawal requests at 5%, intentionally blocking exits for many of those who are looking to get their money back, while making it difficult to attract new investors. The pattern of trapped capital and frustrated investors is evident across the industry, with Blue Owl Capital becoming a symbol of the broader crisis in private credit. The investment management firm has been at the forefront of negative investor sentiment, with investors looking to withdraw money amounting to over $5.4 billion, and the firm’s share price has been down 40% just this year.

Across the industry, investors have sought to withdraw more than $14 billion from private credit firms in the first quarter alone, which those firms have struggled to return, creating a cycle of dissatisfied investors and skepticism about the credit outlook. At Apollo Global Management, credit accounts for roughly 85% of fee-paying assets; however,  investors are typically able to redeem only a small portion, around  2%, on a regular quarterly basis.

Compounding these concerns, investor confidence has been shaken, particularly given private credit’s large exposure to software and technology firms which now face  uncertainty from AI-driven disruption, adding sector-specific risk to a vulnerable foundation. The issue remains ongoing and increasing as the credit market’s structural issues are further exposed by an expected rise in leveraged loan defaults by 1.5% in 2027, a notable shift from historically low levels and faster than junk-grade bond defaults, which are expected to increase by 0.5%. 

Private credit firms’ limited visibility and constrained investor exits, alongside a negative outlook, make the future deeply uncertain for the sector, especially as current investors step away. The same private equity firms that private credit was built to serve are now among the first investors to pull  back, leaving the credit market without some of its biggest borrowers. The growth of a $1.8 trillion market outside the traditional regulatory framework was not an oversight – it was a choice, and its consequences will arrive all at once.

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This article was edited by Fatimah Waqas and Lauren Fattorusso.