Typically, end-investors invest through private credit funds managed by specialist fund managers, though business development companies (BDCs) in the US are another type of investment vehicle growing in popularity. BDCs are closed-ended investment vehicles that are generally publicly listed and can be bought and traded daily on an exchange, allowing investors to participate in the private credit market. BDCs raise funds from investors and use the capital to on-lend to borrowers, typically small and mid-sized companies.
Growth spurt following the global financial crisis especially since 2016
The private credit market expanded significantly following the global financial crisis, as banks retreated from leveraged lending and tightened their credit standards, focusing primarily on large corporate borrowers.
Larger corporations, private equity-backed companies and even those with higher credit ratings have also increasingly turned to private credit as a flexible financing option. The direct relationship between decision-makers and borrowers speeds up borrowing and enables customised terms such as size, type, timing, and flexible drawdowns based on hurdles, making private credit an attractive, faster alternative to traditional debt fundraising, which can take weeks or months.
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A key role of private credit is also in filling the financing gap of lending to small and medium companies, many of which were deemed too small or too risky to secure funding from banks or public debt markets. Despite small and medium companies representing the backbone of most economies, finance remains one of the greatest barriers to the growth of such companies. The low-rate environment subsequent to the global financial crisis also spurred investor demand to seek higher rates of returns elsewhere, providing a ballast to the growth of the sector.
Largely still an institutional asset class but may change
Private credit assets under management (AUM), including BDCs, stood at US$2.1 trillion ($2.7 trillion) at the end of 2024. They are estimated to reach US$2.3 trillion in 2025, and forecasted to double in five years to US$4.5 trillion by 2030, as per Preqin forecast. This number does not incorporate structures outside the traditional closed-end fund, such as investment-grade private credit, investments by insurance companies via separately managed accounts and private asset-based finance. Given this exclusion, the full opportunity set within the private credit market is likely larger.
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The market is dominated by the US, followed by Europe, and the Asia Pacific private market represents only around 7% of the global private market AUM (excluding BDCs) according to Preqin.
That said, the Asia Pacific region is demonstrating growth that is outpacing the global average. The attractiveness of private credit has led institutional investors such as pension funds and insurance companies to eagerly invest into these funds for higher return and lower volatility. In Singapore, currently private credit is generally limited to institutional and high-net-worth investors, although the Monetary Authority of Singapore has proposed a regulatory framework for retail investors to invest in private market investment funds.
However, it is less tested versus public markets
Private credit appears to offer a higher portfolio diversification with a low correlation to public markets and provides attractive risk-adjusted returns during a low-interest rate environment. Investments are also structurally more advantageous compared to other alternative assets as most private credit investments are structured as closed-ended funds with a defined investment period. Returns are in turn much more predictable and the investment provides consistent cash flow, albeit typically on floating rates for private credit direct lending.
Additionally, debt usually sits higher in the capital structure and is seen as one of the lower risk alternative investment classes. That said, compared to public markets, private credit is highly illiquid, with less transparency over pricing and the performance of the underlying investments.
Separately, private credit went from a niche asset class to a more mainstream one only in the past decade. Barring a sharp but brief downturn during the pandemic, private credit as an asset class has not experienced a sharp decline in credit conditions and it remains unclear how correlations will behave during periods of extreme credit stress. In contrast, public markets have weathered multiple credit cycles.
Cockroaches in the shadows?
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However, private credit is far from risk-free. In the past year, we saw several major alleged frauds and defaults in the private credit sector that have brought about concerns over the asset class. Most notably, the bankruptcy of Tricolor Auto Group and alleged fraud by First Brands Group.
When problems hit mainstream media in September 2025, attention also turned to whether credit risk in the private credit market had been understated amidst the sector’s fast growth in recent years. Investors raised doubts about whether the rapid expansion may have led to a lack of due diligence in the sector. This is especially so as financial institutions that were involved in these cases, whether as debt arrangers, investors or lenders, are perceived to be sophisticated parties.
Additional comments from finance industry leaders that the bankruptcies may signal further stress among other private credit borrowers (although quickly rebutted by private credit sector participants) added to further concerns and market volatility, although confined to high-risk segments.
Regulators have been paying attention
Regulatory scrutiny of private credit has intensified amid concerns about potential systemic risks. There are interlinkages between private credit and the global financial system, especially as banks have increased their lending to non-bank financial intermediaries such as private credit firms.
We note that regulators are cognisant of these issues and are taking action in requesting regulated entities to provide more information for ongoing monitoring. In November 2025, the Chair of the Financial Stability Board (FSB) highlighted in a letter to G20 leaders the increasing role of non-bank financial intermediaries, and emphasised that the FSB remained committed to assessing the implications of these changes for the resilience of the financial system and ensuring that the evolution of non-bank finance does not compromise financial stability.
Current stresses are likelier idiosyncratic than posing systemic risk to banks
In our view, current private credit stresses appear mostly idiosyncratic rather than systemic to banks. Based on our observations, the interlinkages between the private credit sector and the banking sector are mainly through debt facilities extended by banks to the private credit sector such that BDCs and private credit funds where the money may be on-lent to private credit borrowers.
To lead to a failure of a bank, either of two scenarios would need to happen in our view:
- A widespread default among private credit borrowers (which can stem from failures in their typically higher-risk underlying portfolio of end-borrowers), which in turn erode bank capital buffers and create solvency issues for a bank; or
- A crisis of confidence resulting in a bank run and severe funding pressure for a bank.
However, exposure alone does not by itself lead to a systemic crisis. End-borrowers of private credit would need to default, and the default likely needs to be highly correlated before a private credit fund or BDC itself defaults. Additionally, the defaults of private credit funds and BDCs need to be large such that the bank’s capital buffer is insufficient to provide a buffer.
The second scenario is a likelier possibility in our view should an event of severe credit stress occur. That said, recent bank failures have taught us that even in the adverse scenario of a bank collapsing, as long as the bank is not systemically important and/or other mitigation strategies for financial system stability are in place, this is still unlikely to cause a systemic risk to the financial system.
Interlinkages through insurance garnering attention
Private credit is also interlinked to the global financial system through insurers, both via their investments into private credit and insurer’s involvement in credit default swaps tied to private credit. The Bank for International Settlements published a paper this year which called for enhanced supervision, harmonised standards and macroprudential oversight to mitigate risks and preserve the sector’s important role in the financial system, particularly given the rising exposure to private credit by insurers.
Notably, life insurers owned by private equity-linked entities have shifted toward illiquid and hard-to-value structured credit and direct lending to boost yields. While their private credit investments are generally rated, the ratings may reportedly be performed by smaller rating agencies with potentially lower staff-to-rating assignment ratios. Furthermore, when an insurer is owned by a private equity fund manager, and the same asset manager is also active in private credit, it creates a perception of conflict of interest, as the insurer may be encouraged to hold private credit assets. By geography, US insurers are the most exposed to private credit, followed by the UK. In contrast, Europe (excluding the UK) and Asia Pacific exposures are modest.
Ezien Hoo is a credit research analyst with OCBC’s Global Markets Research team while Veron Ong Jun Xiang is an intern with the team
