Private Credit: What critics are missing and what founders need to know

Baron And other ports it has He doubted The SEC’s approach is that private markets, including credit, outperform public markets in terms of size and opacity. Moody’s Highlight Concerns about the expansion of private credit in the retail sector, they warned that leverage and retail-focused funds could lead to systemic risks. Financial Times It has been marked and deeper pressures beneath soft credit spreads, including higher in-kind loan structures that may mask borrower stress. And modern Viral video They portrayed the industry as murky, risky, and designed to enrich insiders.

Some of these criticisms raise legitimate concerns. Rapid growth has brought challenges: more flexible agreements, liquidity mismatches in some retail vehicles, and more competition for high-quality opportunities. Ignoring these risks would be short-sighted.

While some of these concerns are worthy of consideration – especially as the industry grows in size and complexity – many criticisms confuse distinct models, ignore how risk is actually managed, and ignore the role that private debt plays in supporting companies with limited access to traditional finance. The narrative often focuses on headlines and assumptions, rather than on structure, incentives, and outcomes.

Let’s set the record straight.

What private credit actually is

Private debt, in essence, is lending by non-bank institutions directly to private companies. These loans are typically structured, negotiated and customized, and are often high-quality secured loans that rank first in repayment priority. In other words, this is not a risky style. It is structured financing based on cash flow, enterprise value and downside protection.

Nor is it new. What has changed is the role that private debt now plays in the capital pile. As banks pulled back after the 2008 financial crisis, private lenders stepped up to fill this gap, especially for companies with strong fundamentals navigating acquisitions, expansions, or other transitions.

Criticism 1: “It’s too risky and vague.”

This view confuses structure and behavior. It is true that private credit falls outside the scope of traditional banking regulation, but that does not mean that it operates in the shadows. Many private debt instruments are listed on a stock exchange or institutionally backed. They prepare audited financial reports, maintain strict internal controls, and operate under legal and fiduciary obligations.

Parts of the market have already adopted more flexible standards: dilutive loans, aggressive structures, or funds that promise liquidity when the underlying assets are illiquid. These choices can cause problems if left unchecked.

Risk profiles vary. Some lenders seek higher returns with more aggressive terms. Others prioritize capital preservation and conservative underwriting. The industry is diverse and should be judged accordingly.

Criticism 2: “Not tested under real regression.”

It is true that the US economy has avoided a severe and prolonged recession, and some fear that such a test would reveal poor underwriting or overly optimistic assumptions.

While performance varies by company, many lenders that focus on high-profile secured credit, particularly in recurring revenue sectors such as software and healthcare, have weathered this period with low credit losses. This is empirical evidence that private debt, when properly structured, can withstand economic pressures.

Criticism 3: “Companies are defaulting.”

Naturally, some companies default. This happens in all forms of credit. Defaults may increase further in an economic downturn or in a longer-term higher interest rate environment, especially when competition drives weaker terms or crowds out lenders in riskier sectors. But the presence of defaults is not a judgment on the asset class, but rather a reflection of how risks are allocated and managed.

The relevant question here is whether private sector debt defaults are increasing at the systemic level, and whether lenders are equipped to deal with these situations constructively. The answer so far seems to be no and yes. Defaults remain relatively low in senior secured portfolios, and experienced lenders often work through the challenges with borrowers, not against them.

Fourth criticism: “It enriches financiers at the expense of others.”

It is fair to ask whether any financial trend distorts incentives or overcompensates one group. In private debt, an incentive misalignment can arise if managers prioritize asset growth at all costs, sometimes leading them to pursue lower spreads or riskier trades.

However, it is also important to ask: What is the alternative?

Many companies turn to private debt to avoid over-reliance on diluted equity or inflexible bank financing. For founders, it can maintain ownership. For stock investors, this can help avoid forced writedowns. For employees, it may keep the company intact long enough to achieve the best results (whether it is an IPO or M&A). When private debt is well regulated, it aligns incentives, not undermines them.

The view from the founder’s seat

The true test of any financing instrument is how it shapes the results for companies and their leaders. In the case of private credit, it has played a key role for companies undergoing major transformations such as acquisitions, growth initiatives or turnarounds.

Think of a founder or management team navigating an acquisition or expansion. Rather than relying solely on diluted equity or rigid bank financing, private debt can offer structured solutions that maintain operational control, support long-term planning, and align incentives among stakeholders. Unlike general market debt, these loans can be designed to reflect the realities of a business’s growth curve, with covenants and amortization schedules negotiated to meet the needs of the business.

In many cases, private debt helps maintain continuity by keeping teams safe, strategies on track, and equity value from prematurely eroding. It is not a guarantee of success, but when used strategically, it can create space for sustainable value creation without imposing a one-size-fits-all approach.

Regulation and transparency: what is really needed

Critics are right to raise questions about censorship. Transparency is important, as is investor protection. But not all organization is good organization, and not all ambiguity is negligence.

Rather than applying blanket scrutiny, it is better to encourage standards, such as common reporting frameworks, clearer financing structures, and limited company diligence. Many companies already work this way. The goal should be to scale up and scale best practices, not to stifle the credit that helps real businesses grow.

The bigger picture

Private debt increases because it meets a need. Not every company is ready for the public markets. Not every founder wants, or can afford, another round of dilutive equity. In this environment, private debt provides a bridge to sustainability, scale-up, and stronger future valuations.

It’s not perfect, and no asset class is. The risks are real and deserve attention. But the bigger question is how the industry manages that risk, and whether lenders are incentivized to prioritize durability over growth itself.

What is needed now is not more anger, but more understanding of how capital actually works, who it serves, and how to make it work better.

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