Private debt: origins, mechanics, and financial stability implications
In this paper Victoria Ivashina presents a comprehensive introduction to private credit synthesizing industry data, prior academic literature, and original data analysis. The databases used include:
- PitchBook Business Development Companies (BDC) database was used to track BDC loan portfolios, industry distribution of deals, Payment in Kind (PIK) usage (via principal increases as a proxy), and PE-backed loan shares
- PitchBook LCD data was used to analyze leveraged loan market volume, CLO issuance, and cross-market refinancing flows between private credit and leveraged loans
- SEC quarterly/annual filings of the nine largest BDCs were used to measure PIK income as a share of total investment income over time
- Survey data from Block, Jang, Kaplan & Schulze (2024) to evaluate private credit fund leverage ratios and PE-backing shares
Findings
- Market scale and structure. As of Q1:2025, the global private debt market reached $1.7 trillion in committed capital, more than tripling over the past decade. The market is dominated by two vehicle types: private credit funds (two-thirds) and BDCs (one-third).
- Private debt as a “new technology.” The paper frames private debt’s growth not as a threat to banks but as an extension of the high-yield corporate debt market into the middle market, where bank syndicated lending was structurally absent. Approximately 60–85% of BDC investments back private equity–owned firms.
- Post-GFC drivers. Two forces explain the modern era: (i) tighter bank regulation (especially the 2013 Leveraged Lending Guidance) constraining mid-market lending, and (ii) a prolonged low interest rate environment that drove institutional investors (pension funds, insurers) to shift allocations toward private assets.
- Financial stability. BDCs are well-capitalized as median risk-based capital ratios are 36% vs. 10% for banks under equivalent regulatory frameworks, making solvency-driven contagion to banks unlikely. Private credit funds are even more resilient due to locked-in, illiquid equity capital.
- Covenant erosion and PIK as warning signals. By analogy with the leveraged loan market (where 90% of loans dropped interest coverage tests by 2015), Ivashina warns that competitive pressures could erode covenant protections in private credit. The share of PIK loans exercising their option rose from 30% in 2019 to 40% during the pandemic, and was again rising to pandemic-era levels in H2 2024, a potential early-warning signal of portfolio stress.
- Bank–private credit nexus. Roughly 20% of BDC funding comes from bank revolving credit lines, 50% of which are currently drawn.
- Complementarity across markets. The coexistence of leveraged loans, high-yield bonds, and private credit provides stabilizing cross-market refinancing flexibility. In 2023–2024, over $50 billion in loans switched between the leveraged loan market and private credit providers.
The Role of Private Debt in the Financial Ecosystem
Author: Victoria Ivashina
From: Harvard University
Delving deeper into private credit, interconnectedness, and financial stability
In this paper Samim Ghamami, Damien Moore, Antonio Weiss, Martin Wurm, and Mark Zandi ask: as private credit grows rapidly and becomes more interconnected with the broader financial system, does it amplify systemic risk? The authors combine a qualitative market overview with quantitative econometric network analysis to answer this.
The authors used monthly data for 60 large U.S.-domiciled financial institutions from 2004 to 2024, grouped into banks, insurers, BDCs (used as a proxy for private credit), and other Non Banking Financial Institutions (NBFIs).
Findings
- Systemic interconnectedness has grown. The financial system is more tightly co-moving today than pre-GFC and BDCs’ co-movement with system-wide risk factors has increased markedly since COVID-19, remaining elevated post-pandemic.
- Growing risks from opacity and layered leverage. The paper highlights PIK loan proliferation, private credit CLO structures ($100B+ outstanding), semi-liquid evergreen fund structures, and fund-level NAV lending as emerging fragility channels that are all largely opaque to regulators.
Policy recommendations
The authors call for four concrete measures: (1) expanding the regulatory perimeter to include large private credit funds under targeted supervision; (2) mandating standardized reporting from funds and borrowers to close data gaps; (3) addressing hidden leverage and liquidity mismatches, especially in retail-facing evergreen structures; and (4) integrating private credit dynamics into macroprudential frameworks such as countercyclical capital buffers and central bank stress-testing.
Private Credit & Systemic Risk
Authors: Samim Ghamami, Damien Moore, Antonio Weiss, Martin Wurm, Mark Zandi
From: New York University, Moody’s, Harvard University
A word of caution!
In this article Amit Seru argues that the proliferation of private credit funds has created a dangerous regulatory blind spot:
- Liquidity stress is already visible. Recent episodes at Blue Owl Capital ($1.4B in loan sales, withdrawal restrictions) and New Mountain Finance ($477M in loans sold at 94 cents on the dollar) show that valuation opacity and illiquidity are real, not theoretical risks.
- Regulatory fragmentation. Private credit risks are spread across federal bank supervisors, state insurance regulators, and lightly regulated funds, each seeing only a piece of the system. Banks finance private credit through warehouse lines while insurers, that are increasingly Private Equity (PE) owned, hold affiliated credit on their balance sheets. Neither is fully visible to any single regulator.
- Insurance channel. PE-sponsored insurers have become a key funding conduit for private credit, with insurer bank-loan holdings nearly doubling to $123B over five years through 2024. This shifts risks onto balance sheets supervised primarily by state regulators.
- Policy recommendation. The Fed does not need to regulate private credit like a bank, but needs far greater visibility: banks should map and disclose exposures to private credit sponsors; stress tests should incorporate private credit valuation shocks; and the Fed should coordinate more closely with state insurance regulators.
The Blind Spot in Private Credit
By: Amit Seru – Stanford University
