Private Credit, Balance Sheets and Financial Stability

Private credit has become an increasingly important source of financing for businesses, raising questions about its implications for financial stability. We examine these questions using comprehensive fund- and asset-level data on private credit funds, the dominant form of private credit intermediation. Five broad facts emerge from the data. First, private credit funds are highly capitalized, with equity typically accounting for 65–80 percent of total assets, compared with about 10 percent for U.S. banks. Second, the remaining financing consists primarily of modest bank borrowing, often through subscription lines of credit. Third, private credit funds engage in little maturity transformation: fund lives generally span 8–12 years, while the underlying loans typically mature within 2–4 years. Fourth, private credit portfolios are diversified across industries, geographies, and credit strategies. Fifth, equity investors have earned average net annualized returns of about 10 percent after fees, while substantial equity cushions have historically absorbed losses before debt creditors became exposed. Taken together, these findings suggest that private credit funds differ in important ways from traditional deposit-funded banks and do not currently replicate the balance-sheet structures that have historically generated systemic fragility in banking. We conclude by discussing potential vulnerabilities related to liquidity provision and retail participation, information frictions and risks of valuation contagion, and the transmission of losses through investor balance sheets.