Private credit has expanded with remarkable speed over the past two decades. The number of private credit debt funds grew from fewer than 30 in the early 2000s to nearly 1,000 by 2023. Over the same period, assets undermanagement surged from less than $10 billion to more than $1 trillion.
As lending has migrated away from traditional banks toward private credit funds, pundits and policymakers have increasingly questioned whether the shift introduces systemic risks. Headlines often frame private credit as part of a “shadow banking” system that could, in theory, recreate the vulnerabilities of traditional banks without regulatory guardrails.
From the outside, the concern appears straightforward. For instance, if private credit funds have significant exposure to sectors like software—where AI could potentially disrupt business models and cash flows—a wave of defaults could cascade through lenders, spill into the banking system, and risking a broad financial crisis like the banking crisis of 2023.
But this narrative isn’t strongly supported by empirical evidence, says Tomasz Piskorski, the Edward S. Gordon Professor of Real Estate at Columbia Business School. “There's been a lot of doom and gloom in the media, but it’s important to look at the data and see what’s really happening,” he says.
Piskorski and his colleagues, Gregor Matvos of the Kellogg School of Management at Northwestern University and Amit Seru of the Stanford Graduate School of Business, analyzed proprietary data from MSCI. “For the first time, we can really let the data speak on what the true risks are in private credit,” Piskorski says.
Their findings suggest that private credit may pose less systemic risk than is often assumed in public discourse—but that doesn’t mean it poses no risks at all.
A Fundamentally Different Balance Sheet
Piskorski and his team found that private credit funds and banks share little in common when it comes to the balance-sheet structures that make banks fragile.
Traditional banks are often highly leveraged—about 90% debt funded on average. Meanwhile, private credit funds are largely equity funded, with equity comprising an average of 65% of their capital structure, and debt comprising just 35%.
This means that linkages between banks and private equity firms are more limited than commonly assumed. What’s more, bank creditors are typically senior in the capital structure, which means losses in private credit portfolios tend to be absorbed by institutional equity investors first before affecting bank lenders. “You have to burn through all this equity cash before the bank creditors are impaired,” Piskorski says.
Another key distinction lies in maturity structure. Banks fund long-term loans with short-term liability, namely deposits. This maturity mismatch makes them susceptible to bank runs. If depositors withdraw funds en masse, banks are forced to liquidate assets, potentially triggering insolvency.
By contrast, private credit funds operate with fund lifecycles of eight to 12 years, while underlying loans often mature in three to five years. As a result, cash flow from loans returns to the fund before investor capital needs to be distributed. In most cases, equity investors cannot redeem their capital early, which further reduces the risk of a sudden run on liquidity.
What’s more, private equity funds tend to be widely diversified geographically and across sectors, including information technology, health care, real estate, industrials, and consumer markets. This helps limit exposure to shocks to any single industry—including software.
Low Systemic Risk Doesn’t Mean No Risk at All
While the researchers found little evidence of systemic risks, other risks remain, and it’s important for potential investors and borrowers to be vigilant.
Opacity is an ongoing issue. Private credit funds operate with limited regulatory oversight and less transparency than is required of public companies. If investors lose confidence in valuation accuracy or reporting quality, they may become more selective about investing in the future. Over time, this could constrain private funds’ ability to raise equity, and it could have downstream effects on credit availability.
At the borrower level, companies reliant on private credit financing may face challenges if capital markets tighten or investor confidence weakens. “It could be useful to think about diversifying your funding sources and making sure your company can survive if you are not able to borrow from private credit in the future as much as you have,” Piskorski says.
That could mean establishing relationships with traditional lenders as precautionary measures for companies whose loans are maturing in the next couple of years.
If private credit firms do sustain losses, institutional investors will bear the brunt. This makes fund selection critical. “If you’re an institutional investor, you might want to scrutinize your investment strategy in private credit, taking into account that these are illiquid investments,” Piskorski says. “It’s never a bad idea to take an extra interest in what kind of private credit funds you’re invested in.”
