Key Takeaways
- • The Center for American Progress explains that private credit consists of loans to private, non-public companies made by nonbank financial firms, and that nontraded business development companies (BDCs) are the vehicles now selling these risks to ordinary investors.
- • The article says the Trump administration has proposed a rule that would provide a liability safe harbor for retirement plan fiduciaries offering private credit and other nonpublicly traded investments to plan participants.
- • The Financial Stability Board estimates the global private credit market at $1.5 trillion to $2 trillion as of end-2024, and the Federal Reserve says riskier privately held company debt makes up about 10 percent of U.S. nonfinancial business debt.
- • Nontraded BDCs, which can redeem up to 5 percent of net asset value per quarter in many cases, face liquidity and valuation risks that were amplified by a surge in redemption requests tied to AI-related doubts about tech borrowers.
- • The article frames the issue as a regulatory question, arguing that Congress and regulators should address shadow banking risks that linked to the 2007-09 financial crisis.
Summary
The Center for American Progress publishes this piece as the first in a series on private credit, arguing that investor jitters over risky private credit loans and a proposed federal rule warrant closer regulatory attention. According to the article, the international Financial Stability Board has raised concerns about transparency in private credit funds and the risks these nonbank institutions pose to the financial system. Against that backdrop, the Trump administration has proposed a regulation that, if finalized, would make it easier for retirement plan managers to offer plan participants high-risk investments, including private credit, by providing a liability safe harbor for plan fiduciaries. The article contends this approach overlooks shadow banking, which it says contributed to the 2007-09 global financial crisis.
The article defines private credit as any loan made to a private company by a financial firm that is not a traditional bank. Private credit funds pool capital from pension funds, insurers, sovereign wealth funds and high-net-worth individuals, and managers deploy that capital into loans. Some of these funds are structured as business development companies (BDCs), a vehicle Congress created in 1980. The article distinguishes three types: private BDCs, which are limited to accredited investors with limited exceptions, publicly traded BDCs, which are highly liquid, and nontraded BDCs, which regularly sell shares to ordinary investors under state suitability standards but cannot be easily sold. Nontraded BDC lending began in 2009 and grew sharply from 2022 as interest rates rose, and such funds now collectively manage hundreds of billions of dollars in loans.
The article identifies three principal risks for nontraded BDCs: price risk, since the absence of daily trading limits price discovery; liquidity risk, since many are semiliquid and may permit redemptions of up to 5 percent of net asset value per quarter; and default risk, since borrowers are often heavily indebted and due diligence is performed by asset managers rather than banks. The article notes a dramatic surge in redemption requests this year tied to doubts about tech companies facing competition from AI-driven products. It also states that in late 2025 and early 2026, some BDC-funded companies defaulted and faced fraud allegations from the SEC and the U.S. Attorney's Office for the Southern District of New York, raising questions about BDC due diligence.
The article places these concerns within broader systemic risk. It cites Federal Reserve data showing riskier privately held company debt, including private credit, accounts for about 10 percent of total U.S. nonfinancial business debt and is still growing. The author identifies risks to retirement savers in employer plans, to policyholders whose annuities are administered by insurers investing in private credit, and to the financial system when debt is hidden from regulators. The article says these issues will be analyzed in part two of the series.
The article defines private credit as any loan made to a private company by a financial firm that is not a traditional bank. Private credit funds pool capital from pension funds, insurers, sovereign wealth funds and high-net-worth individuals, and managers deploy that capital into loans. Some of these funds are structured as business development companies (BDCs), a vehicle Congress created in 1980. The article distinguishes three types: private BDCs, which are limited to accredited investors with limited exceptions, publicly traded BDCs, which are highly liquid, and nontraded BDCs, which regularly sell shares to ordinary investors under state suitability standards but cannot be easily sold. Nontraded BDC lending began in 2009 and grew sharply from 2022 as interest rates rose, and such funds now collectively manage hundreds of billions of dollars in loans.
The article identifies three principal risks for nontraded BDCs: price risk, since the absence of daily trading limits price discovery; liquidity risk, since many are semiliquid and may permit redemptions of up to 5 percent of net asset value per quarter; and default risk, since borrowers are often heavily indebted and due diligence is performed by asset managers rather than banks. The article notes a dramatic surge in redemption requests this year tied to doubts about tech companies facing competition from AI-driven products. It also states that in late 2025 and early 2026, some BDC-funded companies defaulted and faced fraud allegations from the SEC and the U.S. Attorney's Office for the Southern District of New York, raising questions about BDC due diligence.
The article places these concerns within broader systemic risk. It cites Federal Reserve data showing riskier privately held company debt, including private credit, accounts for about 10 percent of total U.S. nonfinancial business debt and is still growing. The author identifies risks to retirement savers in employer plans, to policyholders whose annuities are administered by insurers investing in private credit, and to the financial system when debt is hidden from regulators. The article says these issues will be analyzed in part two of the series.
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