Private Credit Market Stabilizes Amid Hidden Systemic Risks

The private credit market entered 2025 on relatively steady footing, with default rates dipping slightly to 2.42% in the first quarter, according to Proskauer’s Private Credit Default Index. Yet beneath this veneer of stability lurk systemic vulnerabilities tied to geopolitical tensions, bank-nonbank interdependencies, and rising leverage. For investors, the data reveals a paradox: while private credit funds demonstrate resilience, the broader financial ecosystem faces mounting stress that could test their durability.

Q1 Performance: A Glimmer of Stability

Proskauer’s data shows that defaults among private credit borrowers fell modestly in Q1, driven by improved performance in lower EBITDA cohorts. Companies with annual EBITDA below $25 million saw defaults drop to 1.4%, down from 1.8% in late 2024. Middle-market firms ($25–$50 million EBITDA) also saw marginal improvement, with defaults easing to 4.3%. However, high EBITDA borrowers (≥$50 million) remained unchanged, suggesting that larger firms may be grappling with their own challenges.

This stability is partly due to disciplined underwriting, as noted by Proskauer’s Stephen A. Boyko. Carlyle Group’s results underscore this trend. Its Global Credit segment, managing $199 billion in assets, reported $14.2 billion in inflows and distributable earnings rising 17% year-over-year to $311 million.

Systemic Risks: The Bank-Nonbank Tangle

Beneath the surface, however, systemic risks are intensifying. S&P Global Ratings warns that U.S. banks extended $1 trillion in loans to nonbanks—firms like private equity funds and fintechs—by late 2024, with $770 billion in unfunded commitments. This interdependence poses a contagion risk: if nonbanks face liquidity crunches, their reliance on bank financing could amplify systemic instability.

The April 2025 U.S. tariffs announcement, which triggered a global sell-off in equities and Treasuries, highlights how geopolitical shocks can destabilize credit markets. Smaller, riskier borrowers reliant on private credit may struggle under trade policy uncertainty, mirroring the liquidity crises of 2020 and 2023.

Structural Weaknesses: Leverage and Transparency Gaps

Structural flaws further complicate the outlook. Brendan Browne of S&P notes rising leverage in private credit funds, fueled by bank facilities such as subscription-line loans. While this has supported deployment—Carlyle deployed $11.1 billion in Q1—debt-heavy structures could falter if asset valuations drop. Meanwhile, transparency gaps persist: banks’ exposures to nonbanks’ collateral (e.g., leveraged loans) remain poorly disclosed, complicating risk assessment.

Q2 Outlook: Navigating Crosscurrents

Geopolitical risks dominate Q2. Carlyle’s CEO Harvey Schwartz flagged U.S.-China trade tensions as a key concern, while Denis Rudnev of S&P warns that interest rate volatility could test sponsors’ willingness to support stressed borrowers. The April tariffs’ impact on global supply chains may force private credit funds to absorb write-downs or delay exits, straining liquidity.

Conclusion: A Delicate Balancing Act

The private credit market’s Q1 performance reflects resilience—defaults are low, and Carlyle’s results highlight robust demand. Yet systemic risks loom large: $1 trillion in bank-nonbank loans, geopolitical instability, and structural transparency gaps could destabilize even disciplined funds. Investors should remain cautious.

The data underscores the need for vigilance: while defaults at 2.42% suggest relative health, the $770 billion in unfunded bank commitments and Carlyle’s 48% fee-related earnings margin reveal both opportunity and fragility. As trade conflicts and macroeconomic headwinds intensify, the private credit sector’s ability to withstand stress will hinge on its capacity to navigate these crosscurrents—without triggering the very crises its structure was designed to avoid.

In short, private credit remains a growth engine for investors, but its success in 2025 will depend on whether systemic risks can be contained before they spill over into a broader financial crisis.