Déjà vu of 2008? fears grow over private credit risks

Ha Hyun-ockThe author is an editorial writer at the JoongAng Ilbo.“Something unexpected always happens during credit cycles, and it can grow into a larger financial crisis. The foolishness we saw in 2008, when investors chased returns while ignoring risk, is beginning to reappear.”Jamie Dimon, chief executive officer of JPMorgan Chase, made that remark at an investor event in New York on Feb. 23. Dimon is often described on Wall Street as an early warning system. What his radar recently detected was the rapid expansion of private credit.The CEO of JPMorgan Chase, Jamie Dimon, attends the 56th annual World Economic Forum meeting in Davos, Switzerland, January 21, 2026. [REUTERS/YONHAP]Private credit refers to financing provided by Non-Depository Financial Institutions such as private equity firms or asset managers. These institutions raise funds from institutional investors and lend to or invest in lower-rated small and midsize companies. Returns are distributed to investors through dividends or interest payments.In recent years the market expanded further as asset managers raised funds from wealthy individuals through vehicles such as Business Development Companies, which allow individuals to invest in private credit funds.According to Preqin, a firm that analyzes alternative investment markets, global assets under management in private credit reached $2.3 trillion last year. That figure has nearly doubled from $1.2 trillion in 2020. Of the total, the United States accounts for an estimated $1.8 trillion.The company logo and trading information for BlackRock is displayed on a screen on the floor of the New York Stock Exchange in New York, U.S., March 30, 2017. [REUTERS/YONHAP]Dimon has sounded alarms about private credit before. During an earnings call last October he warned that if one cockroach — meaning a bad loan — appears, there are probably more hiding out of sight. His comment followed the bankruptcies of Tricolor, a subprime auto lender, and First Brands, an automotive parts supplier that had raised funds through private credit markets.At the time the shock did not last long. But as Dimon suggested, cracks in the private credit market have begun to surface again. As concerns about loan quality spread, investors have begun pulling money from private credit funds. Bank shares linked to the market have also declined, increasing volatility in financial markets.The latest trigger came from U.S. asset manager Blue Owl Capital. On Feb. 19, the firm announced that it would end quarterly redemptions for its unlisted business development company OBDC II. Previously investors could request redemption of up to 5 percent of their fund shares each quarter. The firm now says it will return cash only when assets are sold or liquidity becomes available.Other funds have also limited withdrawals. On March 11, the U.S. private credit investment firm Cliffwater capped first-quarter redemptions at 7 percent for its $33 billion private credit fund. That meant rejecting roughly half of redemption requests, which amounted to 14 percent of the fund’s shares. Earlier this month HPS Investment Partners, a subsidiary of BlackRock, also capped quarterly withdrawals at 5 percent for its $26 billion private credit fund.The risk extends beyond withdrawals themselves. A larger concern is the potential for private credit stress to spread across the financial system. Moody’s has identified “contagion from private credit stress” as a tail risk for 2026 — a low probability but high impact event. The worry is that the rapidly growing private credit market, which expanded largely outside regulatory oversight, could transmit shocks through complex financial linkages.The rise of private credit is partly the result of what some analysts call the outsourcing of credit supply. After the global financial crisis stricter capital regulations made banks more cautious about lending to higher-risk companies. Private credit emerged as an alternative channel.Instead of the traditional model in which banks lend directly to companies, a new structure took shape: banks provide financing to non-depository financial institutions, which then lend to companies.According to the Korea Center for International Finance, U.S. banks had $314 billion in loans to private credit institutions as of the third quarter of last year. That represents about 26 percent of total lending by non-depository financial institutions, which stands at roughly $1.2 trillion. In effect banks remain a major funding source for private credit.Analysts warn that this structure creates what is known as double leverage. Lee Young-ju, an analyst at Hana Securities, said banks often extend credit lines to funds that then lend to companies. If borrowing companies default, the stress can spread simultaneously to both the funds and the banks.Insurance companies may also face growing exposure. According to JPMorgan, U.S. life insurers increased their holdings of private credit and privately issued debt from $460.4 billion in 2018 to $950.9 billion by the end of 2024. In search of higher yields many insurers expanded their lending assets.Some critics say U.S. insurers also engaged in so-called ratings shopping to obtain higher credit ratings for private credit assets. That could create an illusion of safety while masking underlying risk.Another difficulty is assessing the real level of risk in private credit. Loan conditions and collateral structures are often opaque, while asset valuations depend largely on models developed by asset managers. Liquidity mismatches are also a concern, as recent redemption restrictions illustrate. If withdrawals accelerate, funds may be forced into fire sales of assets, potentially triggering wider financial distress.The logo of German software company SAP is pictured at the company's headquarters on the sidelines of the company's annual financial statement in Walldorf, Germany, on January 29, 2019. Shares in the German software giant SAP suffered their biggest one-day drop in five years on January 29, after disappointing earnings, extending a months-long slide driven by fears that AI could disrupt its business. [AFP/YONHAP]There are also concerns about what some analysts call shadow defaults. According to the U.S. law firm Proskauer Rose, the default rate in private credit reached 2.46 percent in the fourth quarter of last year.A related issue is the rising use of payment-in-kind options, which allow borrowers to postpone interest payments by adding them to the principal or issuing additional debt. According to Lincoln International, the share of private credit loans using such structures increased from 7 percent at the end of 2021 to 10.6 percent by the third quarter of last year.Sector concentration is another concern. Many private credit loans are directed toward software companies, which analysts say could be vulnerable to disruption from rapid advances in artificial intelligence.UBS Group recently warned that if AI-driven changes accelerate in corporate environments, default rates in private credit markets could climb as high as 15 percent.For some observers the situation evokes memories of the 2008 global financial crisis triggered by the subprime mortgage collapse. Michael Hartnett, chief investment strategist at Bank of America, recently said that current asset market trends resemble those of 2007.Former Goldman Sachs CEO Lloyd Blankfein has also warned that private credit may contain hidden risks similar to those once embedded in subprime mortgages. Investors can only hope that the prediction of Jeffrey Gundlach, chief executive of DoubleLine Capital, that the next major financial crisis will originate in private credit proves wrong.This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.