Wall Street may be panicking about private credit, but insiders can’t see what all the fuss is about.

So who is right?

Investors have been so concerned about the stability of private credit lately that frenzied selling has increased It led to a rise in the VIX “fear” index 35% more than last month. They were dismayed by the collapse of Tricolor Holdings, a sub-prime car lender and dealer, in September, revealing fraud allegations in which the company allegedly pledged the same collateral to multiple banks. Private credit took another hit late last month when First Brands, an auto parts supplier, collapsed and went bankrupt with $10 billion in debt, triggering federal investigations into $2.3 billion in missing funds. Then on October 16, regional banks Zions Bancorporation and Western Alliance Detecting fraud-related lossesstimulate the market defeat it Survey of $100 billion market capitalization of US bank stocks and pushed market volatility to its highest levels in four months.

Major institutions It has been calculated Their damage: JPMorgan took $170 million in losses from Tricolor, UBS disclosed more than $500 million in First Brands exposure, and Jefferies disclosed $715 million in doubtful receivables. Private credit market – which It has grown From $200 billion to $3 trillion globally in fifteen years – it suddenly looked vulnerable.

But the credit analysts and executives they spoke to luck They have differing views on the panic on Wall Street. Many argue that failures are not special credit problems at all. According to them, these cases are traditional bank lending explosions, and the misclassification reveals more about competitive tensions between old-guard banks and private credit disruptors than about true systemic risk. But the question is whether these analysts are right, or whether they are seriously underestimating the cracks in a $3 trillion market that is systemically important to global finance.

Definition problem

“If First Brands had been rated by us, it would not have been considered in any way, constituted or constituted a special credit transaction,” said Bill Cox, chief ratings officer at Kroll Bond Credit Rating Agency, which tracks thousands of private credit loans. “Its principal debt was filled with public and widely syndicated loans.”

This distinction is important. The broadly syndicated loan market – dominated by large commercial banks – operates differently from the direct lending market, which defines private credit. BSL loans are originated by banks, pooled with multiple investors, and traded on public markets with daily pricing. In contrast, private credit loans are two-way transactions between lender and borrower, held to maturity under a “buy and hold” strategy without any secondary market trading.

First Brands’ bankruptcy primarily involved BSL’s “factoring” of debts and receivables, a form of lending where banks purchase a company’s accounts receivable at a discount in the hope of turning a profit later when customers pay their bills in full. Neither activity represents the core direct lending business of companies such as Ares, Apollo, and… Blackstone I built.

“None of them do factoring,” Cox said of the dozens of private credit platforms that set their fixed rates. “We looked at the entire world of CLOs, BDCs, and other facilities for exposure to premier brands. The exposure was minimumhe said, referring to collateralized loan obligations (loan packages sold to other investors) and business development companies (set up as investment bets on distressed or distressed companies).

Brian Garfield, who heads U.S. portfolio valuation at investment banking firm Lincoln International, which conducts more than 6,500 quarterly valuations of private companies, echoed that sentiment, saying: “First Brands (which had largely had BSL facilities) and this is not the direct lending market. I think it’s important to understand that that alone is really important, because there’s this whole mix of things.” That everyone puts in one basket.” luck.

The real situation of private credit

This does not mean that private credit does not face any challenges. Lincoln International’s proprietary data tracking the direct lending market shows that defaults — technical violations of loan terms rather than failure to pay — rose from 2.2% in 2024 to 3.5% currently. Payment in kind (Beck), where distressed borrowers defer cash interest payments, has risen from 6.5% of deals in Q4 2021 to 11% today, with “bad PIKs” (mid-deal repricing) rising from 33% to more than 50% of that total.

“Are there cracks? Yes,” Garfield admitted. “But on average, are we seeing strong underlying EBITDA growth? Yes.” Its data shows EBITDA growth over the past 12 months year-on-year at 6-7% – the highest level since Q1 2021.

A KBRA analysis of about 2,400 middle-market companies representing nearly $1 trillion in debt tells a similar story. Cox’s team expects the default rate to reach 5%, which he acknowledged is “far more than what the industry has seen,” but said is “relatively” low relative to general market comparables, the measure by which valuations of private companies can be derived by comparing companies with other similar companies that are already publicly traded on the stock market.

Why panic?

Since the fundamentals are not dire, analysts point to several factors beyond credit quality to explain investor anxiety, specifically guardrails and less stringent documentation processes.

“If something grows like a weed, it probably is,” said Timur Braziller, who covers regional banks in… Wells FargoFortune said. “Credit availability over the past five years, when you have more than one source competing for the same loan, underwriting may not be as stringent.”

Andrew Milgram, managing partner and chief investment officer at Marblegate Asset Management, an alternative investment firm focused on distressed middle market investments and special situations investments, offered a more pointed critique: The competitive dynamics of unregulated lending inevitably lead to deteriorating standards. He explained: “When banks were providing loans, they were subject to supervision.” “As those loans moved out of the banking system and into an unregulated environment, they began to compete for business by relaxing documentation and relaxing underwriting standards.”

Private credit loans are typically provided by non-bank lenders such as alternative asset managers, private equity firms, and pension funds.

Without the barriers and protections provided by traditional banks, subject to regulators and the federal government, disaster could occur, according to Milgram, who has long been a skeptic of the private credit market.

He added: “Lending has been regulated in societies of all times. In fact, the Code of Hammurabi thought about regulating lenders because every society, everywhere, and in every age has realized that constant and responsible lending is essential to the smooth functioning of the economy.”

Cox sees a different dynamic at work: Competitive tensions between traditional banks and emerging private credit companies have, in his view, led to a rise in misunderstanding of the overall risks of private credit and direct lending. “If your neighbor says it’s your dog that relieves himself in the park, and you know it’s not your dog, that’s very frustrating,” he says, noting that Tricolor and First Brands were primarily bank lending failures, not private credit issues.

However, he acknowledges that there are corners of the private credit market that are more exposed and involved in the “riskier parts of credit” where lenders offer higher-risk loans in the hope of achieving high returns.

Private credit has a reputation for being geared toward smaller, middle-market companies that are highly leveraged and may be unable to secure traditional bank financing. While these companies may offer higher returns to offset risks, they are more vulnerable to financial shocks.

What comes next?

The discussion about private credit risks will not end with these bankruptcies. Braziller expects more cases of fraud to emerge: “Just having more credit, it stands to reason that you would have more of these bad people.” However, he does not see systemic risks to the banking sector.

Tim Hynes, global head of credit research at Debtwire, expects continued pressure but not catastrophe: “Weaker companies are starting to get hit by tariffs and the economic slowdown. We will see an increase in bankruptcies, but no systemic risk.”

Perhaps the real test is transparency. Unlike BSL loans with daily market rates, private credit assessments are less transparent, and are updated quarterly using subjective methodologies. “It’s really ambiguous,” Braziller points out. “It’s really hard to get a good understanding of who the ultimate borrower is.”

As BlackRock doubles down with its $12 billion HPS acquisition, and Dimon warns of cockroaches, the private credit industry faces a credibility test. The question is not whether some loans will default, but rather whether they will default. Rather, it is about whether the industry’s risk management, documentation standards, and evaluation practices can pass the financial stress test.

“Anyone with any meaningful exposure to corporate credit markets, particularly corporate credit markets for leveraged loans, should re-examine their portfolio in excruciating detail at this moment and carefully consider the quality of the underwriting that went into making those loans and the honesty of the reports that support their understanding of business performance,” Milgram said.

For now, analysts who closely follow private credit see warning signs, not the end of the world. But in a market where confusion over definitions obscures risks and competitive tensions drive narratives, distinguishing signal from noise is becoming increasingly critical and difficult.