Personal Credit: A Hot Market

The defaults highlight concerns about private debt. Lawmakers and regulators are taking notice.

Two recent corporate defaults have heightened market concerns about the scrutiny of borrowers’ risks by private-credit funds, leading to calls for tighter monitoring and better underwriting standards for lightly regulated lenders.

One of these defaults, by software-as-a-service provider Medallia, caused private-equity firm Thoma Bravo and co-investors to lose $5.1 billion of equity in April, when the private-equity firm began considering whether to hand Medallia over to its lenders, who could restructure the company. The same month, dental services provider Affordable Care defaulted on a $1.4 billion private-credit loan used to support private-equity firm Harvest Partners’ nearly $2.7 billion purchase of the company in 2021.

Macroeconomic pressures, as well as rising liquidity concerns and leverage risks of private debt, are testing its resilience. Investors requested $20.8 billion of redemptions in the first quarter, in some cases exceeding the 5% cap set by firms including Apollo Global Management, Ares Management, Blackstone, Blue Owl Capital and KKR. Concerns over private debt are now raising concerns in Washington, D.C., as the Trump administration moves forward with a plan to allow private assets to be held in retirement accounts.

Sen. Jack Reed (D-R.I.), a member of the Senate Banking Committee, sent a letter to Treasury Secretary Scott Besant in March urging him to “rapidly review the increasing risks in the credit markets and assess whether these risks may be systemic.”

Maria Lumiotti, associate professor of accounting at the Naveen Jindal School of Management at the University of Texas, said because investors are pulling out of private-credit funds, a larger share of their financing is coming from commercial banks, and after the 2008 financial crisis, they are more strictly regulated. “If you want to avoid systemic risk, banks should be more involved and work with private-credit funds in monitoring their positions,” he said. “They have to request more data and more diligence.”

Retirement savings at risk?

Two issues are raising regulators’ concerns over private-credit underwriting standards. The first is President Donald Trump’s August 2025 executive order directing the Securities and Exchange Commission (SEC) to work with the Department of Labor to find ways to allow alternative investments, including private credits, in 401(k) retirement accounts. This raises questions about how default risk could affect annuities and life insurance pools. Nearly one-third of the assets of North American life insurers are now tied up in private debt, according to an October report from the International Monetary Fund.

SEC’s responsibility to fulfill [investor demand for exposure to private markets] Expanding the way with appropriate investor protections — both openness and rigor — is possible, SEC Chairman Paul Atkins said at an industry roundtable in March, but he did not specify what protections would be “appropriate.” Instead, he reiterated the administration’s position that “Private markets have earned their place as a pillar of capital formation. Expanding access to them without weakening protections is an ongoing act of calibration that we are committed to getting right.”

But in a sign of broadening federal oversight of private lending, Besant told a conference in Dallas last month that Treasury would get involved in the regulatory process when private-credit assets are moved to regulated financial institutions, even though it has no formal oversight of nonbank lending. According to Reuters, referring to the inclusion of private debt in investment accounts, Besant said the administration would not allow American workers’ savings and investment accounts to become a “dumping ground” for “rotten” assets.

In early April, the Treasury announced that it had convened two months of meetings with U.S. and foreign insurance regulators to discuss recent developments in the private-credit markets, including “emerging risks, risk management practices, and the outlook for the sector.”

The second concern attracting regulators’ attention is the growing risk of sudden defaults posed by the estimated $1 trillion in private-credit assets in insurance pools. The National Association of Insurance Commissioners (NAIC), which advises state regulators, adopted new insurance company reporting requirements on March 5; NAIC President Scott White said increasing transparency of how insurers manage their portfolios is a key priority for state regulators this year.

Not everyone is convinced.

“A small private-credit fund that is trying to establish itself may have lax underwriting.”

-Gregory Nini, Drexel University

JPMorgan Chase CEO Jamie Dimon warned in a letter to investors in April that weakening underwriting standards would likely lead to larger-than-expected losses on all leveraged loans, and he began listing the sector’s problems. “Credit standards are weakening modestly across the board,” he said, “that is, more aggressive and positive assumptions about future performance (called add-backs), weaker contracts, greater use of PIK (payment-in-kind; not paying interest in cash but earning it), more aggressive private ratings (especially at insurance companies), and more arbitrage (not always a good sign). Furthermore, overall, private credit does not have a lot of transparency or rigorous evaluation of the ‘mark’ of their loans – making it more likely that people will sell if they think the environment will deteriorate – even if the actual losses realized are barely changed.

several areas of concern

As Dimon noted, critics have identified several major areas of concern about private credit underwriting standards. Here are some of the key concerns that are likely to be examined by regulators:

payment types: This funding mechanism for borrowers who cannot make required interest payments adds interest to the principal balance, thereby increasing the outstanding loan. While PIK enables a distressed company to avoid bankruptcy, the lender may retain the distressed company on its books as a performing loan, providing a potentially misleading picture of the health of its portfolio.

maintenance agreement: These are lending terms that require the borrowing company to meet a series of financial tests at required intervals, such as reporting quarterly earnings before interest, taxes, depreciation and amortization (EBITDA). Maintenance contracts act as an early warning device, alerting lenders when the borrower is in trouble. CR3 Partners, a consulting firm, said about 90% of private-credit loans are “covenant-lite,” eliminating many warning signs.

insufficient due diligence: Due to increased competition for business, some private-credit companies may reduce the time they spend conducting thorough due diligence on a borrower. “I think Apollo’s reputation is at stake and they’re not going to risk the Apollo brand by doing a lot of crazy things,” said Gregory Nini, a finance professor at the LeBow College of Business at Drexel University. “But a small, new private-credit fund trying to establish itself might be a little lax in its underwriting at first. That’s probably a legitimate risk.”

swollen scars: How private-credit funds value their assets, known as marks, is an area of ​​growing controversy. For privately held funds, managers have discretion over how much they value an asset and when to disclose it. Last year, the publicly traded S&P BDC index declined 13.9%, while privately held business-development companies rose 8% to 10% over the same period.

“The market signal is clear: either the health of the portfolio has deteriorated, or valuations have inflated and are hiding risks,” wrote Sonali Basak, managing director and chief investment strategist. Aaron Schwartz, vice president of research and education; And Peter Repetto, vice president and investment strategist at fintech firm iCapital, said in a March report.

It’s never easy to sort out meaningful signals from static, no matter the context, but in the case of personal loans the unease is palpable.

“Everyone says, ‘Oh, the world is underleveraged,'” former Goldman Sachs CEO Lloyd Blankfein recently remarked, summarizing the state of private debt. “That’s exactly what everyone said in the mortgage crisis, until you suddenly realize there was a lot of mortgage risk in Iceland. It smells like that kind of moment again. I don’t feel like a storm, but the horses are starting to moo in the barn.”

This article is published in the June 2026 issue Global Finance Journal.