Home Features Private Credit: A Hot Market Reaches a Crossroads
Defaults underscore anxiety over private credit. Lawmakers and regulators are taking notice.
Two recent corporate defaults have aggravated market anxiety about private-credit funds’ scrutiny of borrowers’ risks, prompting calls for tighter oversight and better underwriting standards for the lightly regulated lenders.
One of these defaults, by software-as-a-service provider Medallia, reportedly cost private-equity firm Thoma Bravo and co-investors $5.1 billion in lost equity in April, when the private-equity firm began mulling whether to turn Medallia over to its lenders, who may restructure the company. The same month, dental services provider Affordable Care defaulted on a $1.4 billion private-credit loan used to support private-equity firm Harvest Partners’ 2021 purchase of the company for approximately $2.7 billion.
Private credit’s mounting liquidity concerns and leverage risks, along with macroeconomic pressures, are testing its resilience. Investors requested $20.8 billion in redemptions in the first quarter, in some cases exceeding the 5% cap set by firms including Apollo Global Management, Ares Management, Blackstone, Blue Owl Capital, and KKR. Anxiety over private credit is now raising concerns in Washington, D.C., as the Trump administration moves ahead with plans to allow private assets in retirement accounts.
Sen. Jack Reed (D-R.I.), a member of the Senate Banking Committee, sent a letter to Treasury Secretary Scott Bessent in March urging him to make a “prompt review of risk that is building up in the credit markets and to assess whether these risks may become systemic.”
Because investors are pulling out of private‑credit funds, a greater share of their financing is coming from commercial banks, and following the 2008 financial crisis, they are more heavily regulated, said Maria Loumioti, associate professor of accounting at the University of Texas’ Naveen Jindal School of Management. “If you want to avoid a systemic risk, banks should get more involved and work with the private-credit funds in monitoring their positions,” she said. “They have to request more data and more diligence.”
Two issues are raising regulators’ concerns over private-credit underwriting standards. The first is President Donald Trump’s August 2025 executive order directing the Securities and Exchange Commission (SEC) to work with the Department of Labor to find ways to allow alternative investments, including private credit, in 401(k) retirement accounts. That has prompted questions about how default risk could affect annuities and life insurance pools. About one-third of North American life insurers’ assets are now tied up in private credit, according to an October report by the International Monetary Fund.
The SEC’s “obligation is to meet [investor demand for exposure to private markets] with both openness and rigor— expanding pathways with appropriate investor protections,” SEC Chair Paul Atkins said at an industry roundtable in March, but he did not spell out what protections would be “appropriate.” Instead, he reiterated the administration’s position that “private markets have earned their place as a pillar of capital formation. Widening access to them without weakening protection is an ongoing act of calibration that we are committed to getting right.”
But in a sign of widening federal oversight of private credit, Bessent told a conference in Dallas the prior month that when private-credit assets are moved to regulated financial institutions, the Treasury will get involved in the regulatory process, even though it has no formal oversight of nonbank lending. Referring to the inclusion of private credit in investment accounts, Bessent said the administration will not allow American workers’ savings and investment accounts to become a “dumping ground” for “rotten” assets, according to Reuters.
In early April, the Treasury announced that it had convened two months of meetings with U.S. and foreign insurance regulators to discuss recent developments in private-credit markets, including “emerging risks, risk management practices, and outlooks for the sector.”
The second concern attracting regulators’ attention is the growing threat of sudden defaults posed by the estimated $1 trillion in private-credit assets in insurance pools. The National Association of Insurance Commissioners (NAIC), which advises state regulators, adopted new insurance company reporting requirements on March 5; NAIC President Scott White said that increasing transparency as to how insurers manage their portfolios is a key priority for state regulators this year.
“A smaller private-credit fund trying to establish itself may be loose on their underwriting.”
JPMorgan Chase CEO Jamie Dimon warned in an April letter to investors that weakening underwriting standards will likely inflict greater-than-expected losses on all leveraged lending, and he proceeded to catalog the problems…