Could Private Lending Cause a Market Crash?
Investors worry that private debt could trigger a 2008-style crisis. We believe the comparison is flawed: private credit today is far smaller, better underwritten, and structurally different from subprime mortgages. Losses would be manageable.
1. What Is the Issue?
Investors have begun to worry that private debt could cause another financial crisis similar to 2008.
From a historical perspective, private lending was relatively small until 2008, when the financial crisis obliged banks to reduce their balance sheets and risk exposure. At that time, private equity and private debt firms saw an opportunity to gain market share from banks in the lending business, as they were not subject to the same regulatory constraints — particularly with regard to capital requirements. Private lending is indeed financed by the investors in the fund, not by client deposits that must be protected.
Concerns about private debt first emerged in August 2025 when U.S. subprime auto lender Tricolor Holdings defaulted on approximately USD 5 billion in loans. Shortly thereafter, in September 2025, First Brands Group filed for bankruptcy with USD 11 billion in loans. Both defaults involved allegations of fraud, prompting analysts to question the quality of underwriting standards. Then, in the fourth quarter, rapid advances in AI coding capabilities from companies such as Anthropic, OpenAI, and Alphabet's Gemini raised concerns about the viability of software companies and a "software Armageddon" (or "SaaS apocalypse") — the fear that the subscription-per-user software model would be disrupted by AI agents.
Since software companies have been significant borrowers in private debt markets (possibly representing up to 40% of the total loans), investors began to worry about private debt funds, including those managed by major firms such as Blackstone, BlackRock, and KKR. These concerns then spread to banks, given banks' growing exposure to private debt through lending to private credit funds.
The key question for investors is therefore whether there is a risk of a new financial crisis driven by private debt. The underlying concern is that while banks are regulated and subject to supervisory controls, non-bank lenders are largely unregulated and may therefore take on risks that banks cannot.
2. Comparing Subprime Mortgages of 2008 to Non-Bank Lending (Private Debt) in 2026
In 2008, prior to the financial crisis, the total U.S. mortgage market stood at approximately USD 15 trillion (residential and commercial combined). Non-prime mortgages — including subprime and Alt-A loans — accounted for approximately USD 2.5 trillion of this total, representing 20% to 25% of the market. Ultimate credit losses on non-prime mortgages amounted to approximately USD 400–500 billion, implying a loss rate of approximately 20%.
Losses by the banking sector exceeded this amount due to the widespread use of leveraged derivative instruments. It is well established that prior to the 2008 financial crisis, legal documentation on non-prime lending was wholly inadequate — income documents were frequently missing, borrowers' financial standing was rarely verified, and property valuations were not independently confirmed. Many banks were "flipping" loans — originating and immediately selling them to other investors, removing any incentive to maintain underwriting discipline. The average loan-to-value ratio on mortgages in the years leading up to 2008 was approximately 82%, and in many cases significantly higher.
By comparison, the non-bank private lending sector today totals approximately USD 3 trillion — substantially smaller than the non-prime mortgage market of 2008. Most private loans are held to maturity within the funds. The average loan-to-value on non-bank lending is approximately 40%. Legal documentation is generally thorough. Since the originators of the loans are the asset managers themselves, due diligence and lending standards are generally of a high quality. Few would argue that firms such as BlackRock, Blackstone, KKR, and their peers are novices in this field.
Some of the most widely used indices in the non-bank lending sector — the Proskauer Private Credit Default Index, the Cliffwater Direct Lending Index, and the Kroll Bond Rating Agency (KBRA) Direct Lending Index — currently measure default rates at approximately 2.9%.
The table below summarizes the key differences between subprime lending in 2008 and non-bank private credit today:
| Subprime Mortgages (2008) | Non-Bank Private Credit (2026) | |
|---|---|---|
| Total market size (USD) | ~15 trillion | ~3 trillion |
| Non-prime / private credit share (USD) | ~2.5 trillion (20–25%) | ~3 trillion (entire market) |
| Average loan-to-value | 82% (stated); often higher with undisclosed second liens | ~40% |
| Default rate | 20–25% (peak) | <3% (current) |
| Extensive use of derivatives on underlying assets | Yes | No |
| Strategy of loan originator | Originate and sell to third parties | Hold loans to maturity |
| Debtor analysis and legal documentation | Minimal; documents often missing; property values unverified | Thorough review of debtor and collateral; documentation generally complete |
While underwriting standards in non-bank lending have deteriorated over the past few years — debt-to-EBITDA ratios have risen from 3.5x–4.0x to 5.0–5.5x, payment-in-kind interest has risen from 4.2% to 7.4% of total interest income over the past five years, and interest coverage ratios have fallen from 3.2x to approximately 1.5x currently — these standards remain meaningfully better than those prevailing in the subprime mortgage market prior to 2008.
Furthermore, since the highest default rates are concentrated among issuers with EBITDA below USD 25 million, large funds that tend to focus on larger issuers have been less affected than smaller funds or business development companies (BDCs). For example, non-accrual rates at Ares Capital are approximately 1.8%, at Blackstone below 1.0%, and at Blue Owl below 1.5%.
As a consequence, while non-bank private lending may see rising default rates if interest rates increase or the economy weakens, the resulting losses should be manageable and are clearly not of a nature to cause any kind of market crash.
To illustrate: assuming non-bank lending experiences a default rate of 10% on a total book of USD 3 trillion, the amount of loans in default would be USD 300 billion. Assuming a 50% recovery rate, losses could amount to USD 150 billion — equivalent to 5% of the total amount invested in non-bank lending and 0.5% of U.S. GDP. These numbers could not, on their own, cause a market meltdown.
The current challenge in non-bank lending is more one of liquidity than of underlying asset quality. Private lending funds are experiencing pressure similar to a "run on the bank," as investors worry about recovering their capital. In the United States this has been exacerbated by the fact that many investors are retail investors who should never have invested in these illiquid funds, as their time horizon and risk aversion do not match the profile of the underlying assets.
No financial institution can survive an unconstrained run, as demonstrated by the regional banking crises of 2023 that ultimately contributed to the demise of Credit Suisse.
However, in the case of private lending funds, the situation is very different. There can be no "bank run" because all of the funds have placed limits on investor redemptions at 5% per quarter to reduce forced selling pressure. The drop in investor confidence has started to show up in other areas. Notably, last week UBS was required to halt redemptions in one of its European real estate funds, suggesting liquidity stress is spreading beyond private corporate lending.
As in all periods of market stress, there are opportunities. We believe that for long-term investors, there are compelling opportunities both in non-bank lending funds and in the equities of major asset managers (BlackRock, Blackstone, KKR, Blue Owl, Apollo Group, Ares, etc.).