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Private credit’s growth reflects an evolution in credit intermediation, rather than a rise in systemic risk. While borrower fundamentals matter, bank and insurer exposures appear manageable.
Private Credit and Preferreds: What the Headlines Get Wrong
Private credit has grown rapidly over the past decade, filling a gap left by increasingly regulated banks. Recently, investor scrutiny of this asset class has intensified as concerns about AI-driven disruption compete with headlines around “gated” redemption requests. While we share some concerns about segments of the borrower base, we do not view private credit risks as systemic in nature. For traditional financial institutions—the primary issuers of preferreds—we believe exposures, though rising, remain manageable relative to overall balance sheets.
Rise of Private Credit Lending
Private credit—non-bank lending to private companies—has existed for decades, but its modern expansion was catalyzed by post–Global Financial Crisis regulation. Regulatory guidance limiting bank loan underwriting at higher leverage levels (at or above 6x debt to EBITDA), along with annual stress tests, increased the capital costs of riskier lending. As a result, banks pulled back from certain segments, particularly middle-market companies and private equity–backed, leveraged borrowers.
Private capital stepped in to fill that gap. Today, private credit exceeds $1 trillion in assets[1] and is an increasingly important component of the broader financial ecosystem. It includes private investment funds, business development companies (BDCs), and institutional investors, such as pension funds and insurance companies. Whether through direct lending or structured products, a key feature of these vehicles is that the underlying credit risk is borne by investors.
Private Credit Direct Lending Growth: Assets Under Management
* As of June 30, 2024
Source: Federal Reserve Board, “Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications, Accessible Data.”
Private Credit Direct Lending Growth: Assets Under Management
Structural Differences from Banking
Unlike banks, which are funded by short-term liabilities and can face liquidity pressures, private credit vehicles are typically backed by long-term, committed capital. This better aligns funding with the illiquid nature of the assets, enabling lending to borrowers that may not fit within traditional bank constraints.
Recent attention on fund-level “gates” has raised concerns about liquidity. However, these features are not flaws; they are integral to the structure. By limiting redemptions, they help prevent forced asset sales, which in turn helps long-term investors.
For preferred investors, the rise of private credit reflects less of an increase in aggregate financial leverage and more of a shift in where that leverage resides. Lending has migrated from public markets and bank balance sheets into private channels—reducing direct exposure for deposit-funded institutions while transferring risk to investors.
Bank and Insurance Exposure: Putting It in Context
Despite these distinctions, private credit is not entirely isolated from the traditional financial system or the investment-grade (IG) corporate market. Banks and insurance companies maintain both direct and indirect exposure, an area of increased investor focus.
Within IG credit, BDCs account for approximately $60 billion of unsecured debt—less than 1% of the U.S. IG corporate bond market.2 While the sector carries an average rating of BBB, spreads have widened over the past year to levels more typical of BB-rated issuers. The preferred securities market has little direct exposure to private credit, though insurance hybrids underperformed in March, particularly among institutions more closely linked to alternative asset managers.
For banks, the focus has centered on lending to non-depository financial institutions (NDFIs)—a category that includes private equity funds, private credit funds, and other financial intermediaries. Now roughly 12% of total bank lending, this category has nearly doubled over the past decade.3 Exposure, however, is not uniform. Intermediaries include mortgage lenders, broker-dealers, asset-backed securities issuers, and finance companies. According to the FDIC, loans to business credit intermediaries—where lending to private credit funds and BDCs would reside—account for just under 25% of total NDFI exposure.
Bank Lending by Credit Segment
Source: Bloomberg, Federal Reserve, ”Assets and Liabilities of Commercial Banks in the United States” - H.8.
Bank Lending by Credit Segment
Bank Lending Growth to NDFIs Outpaces Other Segments
(As of 3/31/2026)
Source: Bloomberg, Federal Reserve, ”Assets and Liabilities of Commercial Banks in the United States - H.8”
Bank Lending Growth to NDFIs Outpaces Other Segments
(As of 3/31/2026)
Structural Features Further Mitigate Risk
Bank loans to business credit intermediaries are often structured as revolving credit facilities secured by diversified loan pools. These facilities typically benefit from conservative advance rates, performance covenants, short durations, and strong collateral protections. Historically, losses have been minimal, aside from a handful of isolated fraud cases.
Exposures also vary significantly by institution, and banks have been increasing disclosure in recent years. Regulatory filings have incorporated NDFI exposure since 2010, and annual stress tests include scenarios with meaningful loss assumptions—often in the high single digits—for this category.
Insurance companies are another key area of focus for preferred investors, given their growing role as long-term investors in private credit. Recent spread widening in life insurance hybrid securities reflects increased investor sensitivity, particularly for firms with close ties to alternative asset managers. One metric receiving attention is the ratio of privately rated assets—often used as a proxy for private credit exposure—to statutory surplus. Across life insurers, this ratio averages roughly 1.5x, though dispersion across companies is significant.
Insurers access private credit through multiple channels. Some participate directly in lending, while others invest in BDC debt or equity. More commonly, exposure comes through secured vehicles, including structured products linked to private credit or “feeder funds”—tranched investments used to fund GP commitments. In many cases, this exposure differs meaningfully from direct middle-market lending.
While risks vary across insurance credits, we believe some concerns are overstated. For preferred investors, the key is identifying issuers with strong business operations, capital bases, and investment portfolios that may provide resilience through a credit cycle.
Conclusion
The growth of private credit reflects an evolution in credit intermediation, not an unchecked expansion of risk. This is not to suggest risks are absent from the preferred securities market—borrower fundamentals remain critical and dispersion across lenders may increase.
However, viewed in aggregate, we believe exposures within banks and insurance companies remain manageable. In our view, private credit is best understood not as a source of systemic fragility, but as a reallocation of risk to those most willing—and able—to bear it.
1 Federal Reserve Board, May 23, 2025, “Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications, Accessible Data.”
2 Based on holdings in Bloomberg U.S. Corporate Investment Grade Index (LUACTRUU), as of March 31, 2026.
3 Bloomberg, Federal Reserve, ”Assets and Liabilities of Commercial Banks in the United States” - H.8.
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Risk Considerations
Diversification does not eliminate the risk of loss.
All investments involve risk including the possible loss of principal. There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events.
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