Business
Private credit: what critics miss and what founders need to know
A wave of skepticism is crashing over private credit.
Barron’s and other outlets have questioned the SEC’s approach as private markets, including credit, eclipse public markets in size and opacity. Moody’s highlighted concerns about private credit’s expansion into retail and cautioned that leverage and retail-focused funds could introduce systemic risks. The Financial Times flagged deeper pressures beneath calm credit spreads, including rising payment-in-kind loan structures that may be masking borrower stress. And a recent viral video painted the industry as opaque, risky, and engineered to enrich insiders.
Some of these critiques raise valid concerns. Rapid growth has brought challenges: looser covenants, liquidity mismatches in certain retail vehicles, and more competition for high-quality opportunities. And ignoring these risks would be shortsighted.
While some of these concerns are worth examining – especially as the industry grows in scale and complexity – many critiques conflate distinct models, overlook how risk is actually managed, and ignore the role private debt plays in supporting companies with limited access to traditional financing. The narrative too often focuses on headlines and hypotheticals, rather than on structure, incentives, and outcomes.
Let’s set the record straight.
What private credit actually is
Private debt is, at its core, lending by non-bank institutions directly to private companies. These loans are typically structured, negotiated, and customized, often as senior secured loans that rank first in repayment priority. In other words, this is not venture-style risk-taking. It’s structured finance built on cash flow, enterprise value, and downside protection.
It’s also not new. What’s changed is the role private debt now plays in the capital stack. As banks pulled back after the 2008 financial crisis, private lenders stepped into the gap, particularly for companies with strong fundamentals navigating acquisitions, expansions, or other transitional stages.
Criticism 1: “It’s risky and opaque.”
This view confuses structure with behavior. Yes, private credit sits outside traditional bank regulation, but that doesn’t mean it operates in the shadows. Many private debt vehicles are publicly listed or institutionally backed. They report audited financials, maintain rigorous internal controls, and operate under legal and fiduciary obligations.
Parts of the market have indeed embraced looser standards: covenant-lite loans, aggressive structures, or funds that promise liquidity where underlying assets are illiquid. These choices can create problems if left unchecked.
Risk profiles vary. Some lenders chase higher yields with more aggressive terms. Others prioritize capital preservation and conservative underwriting. The industry is diverse, and it should be judged accordingly.
Criticism 2: “It hasn’t been tested in a real downturn.”
It is true that the US economy has avoided a severe, extended recession, and some worry that such a test could expose weak underwriting or overly optimistic assumptions.
While performance varies by firm, many lenders focused on senior secured credit, particularly in recurring-revenue sectors like software and healthcare, have weathered this period with low credit losses. That’s empirical evidence that private debt, when properly structured, can withstand economic pressure.
Criticism 3: “Companies are defaulting.”
Of course, some companies default. That happens across all forms of credit. Defaults may increase further in an economic downturn or a higher-for-longer rate environment, especially where competition has driven weaker terms or crowded lenders into riskier sectors. But the existence of defaults is not a verdict on the asset class—it’s a reflection of how risk is distributed and managed.
The relevant question is whether defaults in private debt are increasing at a systemic level, and whether lenders are equipped to handle them constructively. The answer, so far, appears to be both no and yes. Defaults remain relatively low in senior secured portfolios, and experienced lenders often work through challenges with their borrowers, not against them.
Criticism 4: “It’s enriching financiers at the expense of others.”
It’s fair to question whether any financial trend is distorting incentives or overcompensating one group. In private debt, incentive misalignment can arise if managers prioritize asset growth at all costs, which sometimes leads to chasing thinner spreads or riskier deals.
Yet, it’s also important to ask: what’s the alternative?
Many companies turn to private debt to avoid overreliance on dilutive equity or inflexible bank financing. For founders, it can preserve ownership. For equity investors, it can help avoid forced markdowns. And for employees, it may keep the company intact long enough to achieve the best outcome (whether an IPO or M&A). When structured well, private debt aligns incentives, not undermines them.
The view from the founder’s seat
The real test of any financing tool is how it shapes outcomes for businesses and their leaders. In the case of private credit, it has served a key role for companies experiencing significant transitions such as acquisitions, growth initiatives, or turnarounds.
Consider a founder or management team navigating a buyout or expansion. Rather than relying solely on dilutive equity or rigid bank financing, private debt can offer structured solutions that preserve operational control, support long-term planning, and align incentives across stakeholders. Unlike public market debt, these loans can be tailored to reflect the realities of a business’s growth curve, with covenants and amortization schedules negotiated to meet company needs.
In many cases, private debt helps maintain continuity by keeping teams intact, strategies on track, and equity value from being prematurely eroded. It’s not a guarantee of success, but when used strategically, it can create space for sustainable value creation without forcing a one-size-fits-all approach.
Regulation and transparency: What’s actually needed
Critics are right to raise questions about oversight. Transparency matters, and so does investor protection. But not all regulation is good regulation, and not all opacity is negligence.
Rather than apply blanket scrutiny, it’s more productive to encourage standards, such as common reporting frameworks, clearer fund structures, and informed LP diligence. Many firms already operate this way. The goal should be to elevate and scale best practices, not stifle the credit that’s helping real businesses grow.
The bigger picture
Private debt is growing because its meeting a need. Not every company is ready for public markets. Not every founder wants, or can afford, another dilutive equity round. In this environment, private debt offers a bridge to sustainability, to scale, to stronger future valuations.
It’s not perfect, and no asset class is. The risks are real and deserve attention. But the bigger question is how the industry manages them, and whether lenders are incentivized to prioritize durability over growth for its own sake.
What’s needed now isn’t more outrage, it’s more understanding of how capital actually works, of who it serves, and of how to make it work better.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
