I’m going to put my head on the block today and say I’m really worried about the financial stability risks around private credit. Last week’s financial market jitters around Jefferies Financial Group’s private credit exposures has me particularly het up about the stability and liquidity of the already fragile global economy.
Private credit is a form of shadow bank (non-bank) lending where funds such as private equity or hedge funds provide loans directly to companies — typically mid-sized or distressed firms. It has far higher yields than conventional bank or bond financing, reflective of its greater risk and lower liquidity.
Private credit evolved as a means to provide structured and syndicated credit options after regulatory crackdowns through the Basel III rules on bank lending due to the global financial crisis of 2008. By pooling private credit funds to extend larger and larger loans, the broadly syndicated loan market has in effect migrated to private credit (as have more exotic structures for extending debt capital).
The private credit market is estimated to be as big as $5-trillion by its market bulls and has been driven in part by increasing investment from institutional investors. Private credit outperformed equities in 2024 and is driving investors to seek exposure to the asset class.
The largest standalone private credit funds are run by Ares and Apollo fund managers, and some deals are as large as $34bn. Apollo has an estimated $800bn in assets under management, at least.
Another development has proliferated in the midst of this expansion: banks have started partnering with private credit funds to participate in the opportunity while circumventing regulatory restrictions on off-balance sheet activity.
About 15 of the largest banks in North America have agreed private credit partnerships. Citigroup and Apollo Fund management announced a $25bn private credit, direct lending programme late in 2024.
It is this variety of joint venture that seems to have caused problems for Jefferies, which found itself exposed to huge losses in the private credit space after the collapse of First Brands Group, a car parts supplier with more than $10bn of debt. Jefferies’ affiliated fund, Point Bonita Capital, purchased almost $1bn of First Brands’ receivables. It seems Jefferies’ own direct exposure is modest by comparison; about $43m in receivables and $2m in bank loan holdings.
However, the broader write-down risk stemming from private credit exposures, including leveraged structures and opaque receivables financing, draw further scrutiny. The global regulator, the Financial Stability Board, has already been monitoring the growth in private credit and shadow banks for the past few years.
While Jefferies has stated that any losses from this exposure are “readily absorbable” and do not threaten the firm’s overall financial condition, the episode highlights the risks inherent in private credit funds: limited transparency, concentrated exposure to distressed borrowers and leverage that can amplify losses.
This event serves as a cautionary signal for the broader private credit market: even large, sophisticated institutions are vulnerable to write-downs when underwriting standards slip or underlying borrowers fail. This risk may also become highly systemic. If it is true that history rhymes, this echoes the first credit derivative write-downs in the 2008 credit crisis.
The problem with private credit is that so much of it lurks under the surface of the financial system — the tip of an iceberg is clear to see in major bank exposures, but the base of the mountain is submerged in complex fund structures in international financial centres with light regulatory regimes.
I don’t think this is going to end well. It is often said forecasting is a fool’s game. That may be so, but it is often the fool who calls out the hard truths hidden in plain sight.
• Dr Masie is a visiting senior fellow at the London School of Economics’ Firoz Lalji Institute for Africa.
