Five things to know about private credit as risk-related concerns start to surface

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Private credit feels like the kind of financial machinery reserved for billionaires—complex, distant, and largely irrelevant to everyday life. But in recent months, warning signs from this once-obscure corner of finance have begun to echo concerns from past crises, raising questions about whether risks simmering in the background could spill into the broader economy.

Major firms like Blackstone have seen investors withdraw billions from flagship private credit funds, raising concerns about liquidity (how easily an investment can be turned into cash) and valuation (how much an investment is worth) in a market that has quietly swelled to more than $1.8 trillion since the 2008 financial crisis. Once marketed as a steady, predictable source of yield, private credit is now drawing comparisons—fair or not—to past moments when risks built up out of sight.

To help better understand this financial instrument—why it’s suddenly the talk of Wall Street, and how its potential collapse could affect the broader public—Penn Today spoke with Itay Goldstein, a financial crises expert and professor at the Wharton School.

1. Private credit is an alternative to traditional lending

In the wake of the 2008 financial crisis, traditional banks sharply reduced lending due to stricter regulations like stress tests—worst-case scenario checks on their financial health—and higher capital requirements.

“When banks are forced to be more stringent in providing credit, that need for credit doesn’t just disappear—it goes private,” says Goldstein, referencing lending’s shift from heavily regulated banks to investment firms that negotiate loans behind closed doors. The credit moved into the hands of private funds—private equity firms, hedge funds, and asset managers—willing to step into the gap; that’s private credit.

According to Goldstein, these lenders operate in what’s often called the “shadow banking” system, performing many of the same functions as banks but with far less regulatory oversight and fewer disclosure requirements.

2. Main Street is more exposed than people think

Private credit may seem like a playground for billionaires, but it’s increasingly funded by the savings of everyday people.

Over the past decade, major investment firms—companies like Apollo, Blackstone, and KKR—have acquired life insurance companies, using annuity deposits as a stable pool of capital to fund private loans. The permanent capital that was supposed to make the system resilient was the savings of American households.

If these loans default, it’s not just deep-pocketed investors, investment bankers, and the tech startups that received a lion’s share of these loans who lose out; it’s also the pensions and insurance policies that back them. Many mid-sized companies rely on private credit for financing. If that pipeline tightens, businesses could struggle to invest, expand, or even maintain operations.

“This broader exposure means a collapse wouldn’t remain contained within financial markets.” Goldstein says. It could spill outwards—into jobs, economic growth, and household savings. “You’re seeing warnings from institutions like the International Monetary Fund that risks in non-bank lending are building,” he says. “The system has grown very quickly, and parts of it are not well understood.”

3. Private credit is risky

Unlike public markets, where prices update constantly and disclosures are standardized, private credit operates with limited transparency.

Goldstein says these loans are often negotiated privately rather than through public bond markets, meaning the terms, pricing, and risks are disclosed to only a small group of participants rather than the broader investing public.

Valuations are also often model-based rather than market-tested, which means they’re price projections derived from assumptions about a given company’s future performance rather than open-market trades that reveal what investors would actually pay—like valuing a house only on assumptions about future neighborhood improvements rather than recent sales. Because these loans are rarely disclosed, regulators such as the U.S. Securities and Exchange Commission and bank regulators have limited data to assess how much risk is building across the system, as private credit is only indirectly and unevenly regulated.

“This lack of transparency means that if something starts to break, we might not know until it’s too late,” Goldstein says.

4. The collapse of private credit could have dire consequences

There’s a fundamental mismatch at the heart of private credit: long-term assets and short-term promises, Goldstein says.

Funds lend money over years but often allow investors to withdraw capital on a much shorter timeline. That works until too many people want out at once. When liquidity dries up and there aren’t enough funds to meet withdrawal requests, “you can’t just sell these assets quickly without taking a hit,” Goldstein explains. The loans aren’t easily tradable, and buyers may be scarce in stressed conditions, which makes it harder to negotiate a price.

That can trigger a cascade: Funds might limit withdrawals, mark down the value of the assets, or sell the assets at a discount—moves that can further shake investor confidence.

5. People can take steps to protect themselves

While most individual investors and normal people cannot easily bet on private credit’s failure to profit from its collapse the same way large financial institutions can—by shorting specific assets (betting that their value will fall) or using derivatives (contracts that let them bet on or protect against price changes without owning the asset)—what they can do is get informed.

Goldstein recommends that people understand where their exposure might be hiding. Private credit increasingly sits inside everyday financial products—retirement accounts, pension funds, and life insurance policies. These loans are not typically explicitly labeled in account statements, but rather, they could appear as part of broader categories such as “alternative assets,” “direct lending,” or “multi-strategy income funds.”

Investors can review fund disclosures, prospectuses, or portfolio summaries to see whether their savings are allocated to private markets or less liquid assets. Financial advisors or plan administrators can often clarify how much of a portfolio is invested in strategies tied to private lending.

Asking what funds actually hold and paying attention to how returns are generated can help identify risks that don’t show up in a simple balance sheet, Goldstein says. From there, individuals can evaluate whether the level of exposure matches their own risk tolerance and time horizon.

In murky markets like private credit, the danger lies in what people don’t know they own, says Goldstein.

Itay Goldstein is the Joel S. Ehrenkranz Family Professor of Finance and Chairperson of the Finance Department at the Wharton School. He holds a secondary appointment in the Department of Economics at the School of Arts & Sciences.