Private Credit at a Crossroads
December 13, 2025
Introduction
The private credit market is experiencing what might best be described as an identity crisis. After a decade of positioning itself as the "alternative" to traditional bank lending, faster, more flexible, less constrained by regulation, both markets are increasingly converging.
This post examines four developments from the past week that collectively signal a structural shift in how private credit operates, how it is perceived by regulators, and how sophisticated capital is being allocated within it.
Interconnectedness with the Banking System
Bank of America's latest research suggests that private credit defaults will ease in 2026, yet the firm emphasizes that "fragility persists" across the sector. More notable than the default outlook, however, is the degree of interconnectedness that has developed between private credit and the regulated banking system.
US banks now hold approximately $300 billion in exposure to private credit firms, a figure that has grown substantially over the past five years. This exposure takes multiple forms: subscription credit facilities, NAV loans, warehouse lines, and direct fund investments.
The implication is significant. Private credit can no longer be characterized as operating in parallel to the banking system. The two are now deeply interlinked, raising questions about potential contagion channels during periods of market stress.
Convergence with Public Debt Markets
A second development concerns the structural convergence between private credit and public debt markets. As CNBC observed this week, private credit is "beginning to look like the bond market."
Pricing, terms, and covenant structures are increasingly aligning with those found in broadly syndicated loans and high-yield bonds. The spread premium that private credit historically commanded, compensation for illiquidity, complexity, and bespoke structuring, is compressing as competition intensifies and capital floods into the asset class.
This convergence raises a fundamental question about value proposition. If private credit increasingly resembles public debt in its economic characteristics, yet retains the opacity, illiquidity, and higher fee structures of private markets, what precisely is the investor paying for?
The differentiation between public debt and private credit, once stark, is fading.
Intensifying Regulatory Attention
The third notable development is the acceleration of regulatory scrutiny across multiple jurisdictions.
In Australia, ASIC released a comprehensive catalogue of legal obligations applicable to private credit fund operators, a document that signals the regulator's intent to formalize expectations that were previously implicit or unenforced.
In the United Kingdom, the Bank of England launched its first-ever stress test of private equity and private credit markets, with participation from major managers including Apollo, Blackstone, KKR, and Carlyle.
In the United States, Senators Elizabeth Warren and Jack Reed sent formal correspondence to banking regulators requesting enhanced oversight of bank exposure to private credit, alongside a comprehensive stress-testing framework.
These are not isolated actions. They represent a coordinated international effort to bring private credit within the perimeter of systematic financial supervision—a development that would have seemed improbable even three years ago.
Capital Reallocation Within Private Credit
The fourth observation concerns how sophisticated allocators are repositioning within private credit rather than exiting the asset class entirely.
Three patterns are evident:
Asset class rotation: Managers such as Davidson Kempner are articulating a preference for asset-backed finance over corporate direct lending, citing superior risk-adjusted returns and tangible collateral.
Geographic diversification: Sovereign wealth capital, exemplified by Mubadala's acquisition of Apollo's European direct lending portfolio, is flowing toward non-US markets.
LP base evolution: Asian managers like SeaTown are raising capital from private bank wealth clients rather than relying exclusively on traditional institutional investors.
The capital is not leaving private credit. It is moving within it, away from crowded segments toward areas perceived to offer better risk-return characteristics or structural advantages.
Implications: The Erosion of Competitive Advantage
Private credit's historical competitive advantages were threefold: speed of execution, structural flexibility, and a lighter regulatory burden relative to banks.
The first two advantages have largely dissipated. Execution timelines have normalized. Covenant structures have loosened to match syndicated market terms. What remains is the regulatory differential, and this week's developments suggest that gap is narrowing.
If regulatory convergence continues, the economics of private credit will fundamentally change. Compliance costs will rise. Disclosure requirements will increase. The operational infrastructure required to compete will become more capital-intensive.
An Open Question
This raises a question that will likely define the next phase of private credit's evolution:
If the industry's edge erodes, does the market consolidate around a small number of "mega-managers" with the scale to absorb rising compliance and transaction costs? Or do specialists, e.g. in asset-backed finance, NAV lending, infrastructure debt, and other niches, capture increasing market share by offering genuine differentiation in segments where scale matters less?
The answer will shape capital flows, market structure, and returns for years to come.
What is your perspective? I welcome discussion in the comments.