Private Credit: Echoes of 2008?

For those old enough to remember, the financial crisis of 2008 caught many completely flat-footed, walloping and destroying portfolios in its wake, morphing quickly from a US centric crisis to a global one. The so-called weapons of such mass destruction then were mortgage-backed securities and their leveraged derivative securities. The relatively new private credit market has several hallmarks of the pre-financial crisis era that are now flashing cautionary pre-crisis signals.

So what is the private credit market? It is the largely US-centric debt market analogue of private equity markets, where PE giants have raised vehicles that make loans to mid-market companies that cannot access fixed-income markets directly. Large institutional investors, particularly insurance companies, have invested in these vehicles, as have high-net-worth and increasingly retail investors.

On the face of it, this seems a rather innocuous and beneficial activity, allowing mid-market companies to access funds where they may otherwise have to pay extremely high rates. Digging beneath the surface, it is anything but.

First, the market has grown about fifteen-odd-fold since 2010, when economies first began to recover after the credit crisis, and is estimated to be around $3 trillion in size, about the same size as the pre-crisis MBS sub-prime credit market. One of the lessons of the 2008 crisis was that markets that grow really fast—as did mortgage-backed securities in the run-up to the crisis— tend to see their regulation and supervision lag, allowing for excesses to develop.

Consider next the loans made by the private credit vehicles. These are low-documentation, covenant-lite, customised loans that can vary in seniority from senior secured loans to junior capital loans. Since these are private loans, there is no requirement to provide disclosure about exposures, terms, security, interest rates, etc. Neither is there a requirement for these loans or issuer to be rated. It is almost impossible to evaluate defaults and recovery rates. All of this sounds eerily similar to the lax mortgage origination standards during the credit crisis, where loans were approved without adequate documentation, with lax loan assessment standards and undesirable features such as low teaser rates and NINJA loans.

Next consider leverage. Prior to the credit crisis, institutions leveraged up their holdings of such assets to have debt-equity ratios in double digits. Many of these vehicles have used significant leverage, borrowing against their private credit portfolios from banks to invest in more private credit. Increasing leverage points to drifting towards an environment similar to the pre-2008 crisis environment.

Now consider the perverse incentives behind the 2008 credit crisis. Loan originators had enormous incentives to lend money quickly to home buyers, as these loans needed to be on-sold to investment banks. Originators therefore had no need to scrutinize the credit quality of the loan. Investment banks in turn paid rating agencies to assess portfolios of these loans. Credit rating agencies received fat fees for this and were happy to use the investment bank's models rather than conduct their own due diligence. Since investment banks then repackaged these loans into exotic leveraged securities, their incentives were to keep deal flow going without looking at the deteriorating credit profile of loans. Final investors, attracted by the high ratings and relatively high yields, continued to plough money into these securities. This entire house of cards rested on one belief, that house prices in the US could not fall together.

Similar incentives appear to be arising in the private credit market. First, many of the vehicles are established by big private equity sponsors – think Blackstone, Apollo, Ares and Carlyle. These private equity players have existing equity funds that have large investments in mid-market companies. These PE sponsors are now likely enabling levered private credit loans to the same companies from their own private credit funds, levering up their balance sheets even more to effect acquisitions and buyouts of other companies — also likely owned by the same private equity sponsor — to enable exits for prior equity funds that have limited life spans.

This elaborate exit route has probably been engineered as IPO exits — the more traditional method — have dried up since 2021. Unsurprisingly then, the biggest growth in private credit has occurred since 2021. Further, large investments into these private credit entities have come from insurance companies, that themselves are owned by the very same private equity sponsors. Private equity appears to be embedded deeply across the capital structure of the mid-market firms they invest in-as owners, managers and creditors -  raising serious questions of conflict of interest and the rationale behind the lending decisions of private credit. Since the equity investments are also private, there is little data to understand the intricacies of these operations for external observers, but all of this financial engineering depends on rising values of PE sponsors’ equity holdings.

The cracks in this edifice have begun to show. In 2025, some defaults — First Brands, Tricolor — prompted Jamie Dimon of JPMorgan to remark that there were therefore likely many more “cockroaches” around. More recently, retail investors looking for exits from private credit entities have been gated — essentially prevented from withdrawing capital. Blue Owl, one of the sponsors of private credit vehicles, announced a sale of a part of its portfolio at close to 99.5 cents on the dollar. While this was intended to demonstrate that the portfolios were fairly valued, the likely situation is that the best quality loans were cherry-picked for sale, leaving the worst loans in the private credit portfolio that remained. This will likely spur even more demands to exit the vehicles. More recently, Blackstone has also gated withdrawals from its private credit vehicles, and vehicles from other sponsors are also facing redemption pressures. Another recent default - MFS - in the UK had been issued loans by several private credit vehicles. These events have led to shares of PE sponsors falling about 50% over the past year. Recently, this initial stress in private credit appears to be spilling over into publicly traded credit indices.

The parallels between private credit in 2026 and MBS in 2008 seem evident, and therefore alarming. It may not (yet) be a doomsday scenario. Firstly, deposit-taking banks were at the center of the 2008 crisis. This time they are players at the periphery, largely restricted to providing leverage to private credit. They are far better capitalised than they were in 2008. Given the size of sponsors' equity investments, leverage is nowhere near as high as it was in 2008. Finally, a lot of unease stems from the lack of transparency in the private equity-private credit nexus. Under the hood, things may not be as bad yet.

What is clear is that there are risks that bear close monitoring for investors everywhere. Private credit is heavily involved in the AI data-centre boom, financing construction, chip purchases, leases, and so on. Any negative change in sentiment regarding these could add to the risks detailed above, as indeed could the possibly stagflationary impact of a drawn-out Middle Eastern conflict. It will pay to keep eyes wide open.