Key Takeaways
- • Harvard Law Professor Jared Ellias, co-author with Elisabeth de Fontenay of Duke Law School of "The Credit Markets Go Dark" (Yale Law Journal), argues private credit is the most important change in corporate debt since the emergence of the syndicated loan market.
- • Private debt totals more than $1.5 trillion in the U.S., and investment funds offering private credit collectively manage more than $1 trillion, according to Ellias.
- • Companies have shifted from bank financing toward private credit since the 2008 financial crisis, with borrowers paying higher rates in exchange for speed and fewer bureaucratic hurdles.
- • Reduced disclosure in private credit means regulators and investors have less visibility into corporate health, a loss Ellias describes as the world becoming "more impoverished in terms of information."
- • The downturn impact is untested: private credit lenders' control over loss recognition and board replacement rights could lead to extended "zombie" firms or aggressive ownership, and the outcome remains unknown.
Summary
Harvard Law School professor Jared Ellias, the Scott C. Collins Professor of Law, argues that private credit represents perhaps the most significant change in corporate debt since the emergence of the syndicated loan markets, with mixed implications for markets and the economy. His paper with Elisabeth de Fontenay of Duke Law School was selected by faculty as one of Corporate Practice Commentator's top ten articles of the year and received the American College of Commercial Finance Lawyers' Gilmore Award for superior writing in corporate law.
Ellias says that following the 2008 financial crisis, regulators pressed banks to take fewer risks, leaving mid-market firms with fewer lending options. Large asset managers, including Blackstone Private Credit Fund, Apollo, Ares, and Blue Owl, have filled that gap with funds that can write large loans quickly. While private credit itself is not new, Ellias argues its scale and scope are. Borrowers pay more for the capital, but gain speed, and banks are increasingly lending to private credit firms themselves.
The shift carries information costs. Because regulated banks are doing less corporate lending, regulators have less visibility, and many large borrowers whose debt no longer trades no longer provide disclosures to lender groups. Ellias also notes that private credit lenders often hold board replacement rights, a "board flip" right, and are more willing to take ownership of assets and place directors than traditional banks.
Ellias says the shift appears permanent but has not been tested in a downturn. He warns that private credit funds' control over when they recognize losses could produce zombie firms, and that Chapter 11 proceedings could require more judicial disclosure when private lenders hold most of a company's debt. He adds that the regulatory response depends on whether private credit gains share in the middle market or becomes a major creditor to larger companies, and that it remains unclear whether lenders will prove more willing to take ownership or to delay reckoning.
Ellias says that following the 2008 financial crisis, regulators pressed banks to take fewer risks, leaving mid-market firms with fewer lending options. Large asset managers, including Blackstone Private Credit Fund, Apollo, Ares, and Blue Owl, have filled that gap with funds that can write large loans quickly. While private credit itself is not new, Ellias argues its scale and scope are. Borrowers pay more for the capital, but gain speed, and banks are increasingly lending to private credit firms themselves.
The shift carries information costs. Because regulated banks are doing less corporate lending, regulators have less visibility, and many large borrowers whose debt no longer trades no longer provide disclosures to lender groups. Ellias also notes that private credit lenders often hold board replacement rights, a "board flip" right, and are more willing to take ownership of assets and place directors than traditional banks.
Ellias says the shift appears permanent but has not been tested in a downturn. He warns that private credit funds' control over when they recognize losses could produce zombie firms, and that Chapter 11 proceedings could require more judicial disclosure when private lenders hold most of a company's debt. He adds that the regulatory response depends on whether private credit gains share in the middle market or becomes a major creditor to larger companies, and that it remains unclear whether lenders will prove more willing to take ownership or to delay reckoning.
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