Why regulators are zooming in on private credit

Regulators are paying closer attention to private credit’s risks, interconnections and transparency gaps.

In brief

• Private credit’s rapid growth and deep financial links are increasing regulatory scrutiny worldwide.
• Recent defaults, valuation volatility and redemption pressure have sharpened regulatory concerns over risk management.
• Firms should strengthen data, governance, liquidity and investor transparency in response.

Private credit has grown rapidly over the past two decades, expanding from a relatively niche market to a significant source of financing for corporates globally. As highlighted in our latest report, Private credit in focus: Observations on the FSB's report (pdf), estimates suggest its growth reached US$2.3 trillion by the end of 2025,¹ with forecasts suggesting the market will top US$4 trillion by 2030.² As the sector has grown in scale and importance, regulators have sought to better understand the implications of potential stresses within the market.

A key area of regulatory interest is the increasing interconnectedness of private credit with other parts of the financial sector. As participation in the asset class broadens, regulators are monitoring the potential channels through which stresses in private credit markets could interact with banks, insurers, pension funds, investment funds, and retail investors. 

Regulators move to a proactive stance

The growth of private credit has prompted regulators to move from a watching brief to a more active stance. Recent market developments have increased regulatory attention on areas such as underwriting practices, collateral quality, valuation methodologies, sector concentrations, and liquidity management.

In parallel, regulators are continuing to assess how private credit portfolios may perform under changing economic conditions and whether existing governance, risk management and disclosure practices remain appropriate as the sector matures. 

Regulators have paid particular attention to semi-liquid fund structures that provide periodic redemption opportunities while investing in relatively illiquid assets. Periods of elevated redemption activity have highlighted the importance of robust liquidity management frameworks and clear investor communication regarding the liquidity characteristics and risk profile of such products.

Focus areas: risk management

Regulators have also identified a range of operational and risk management considerations relevant to the sector, including credit risk, liquidity management and valuation practices.

An important and economically beneficial area of private credit growth since the Global Financial Crisis has been lending to smaller companies, many of which are backed by private equity sponsors and may fall outside traditional bank lending appetites. As the market expands, regulators are examining whether risk management frameworks remain appropriate for the nature and complexity of these exposures. Supervisors are also reviewing features such as payment in kind (PIK) interest, where interest is added to the principal rather than paid in cash, to better understand the implications for borrower monitoring and loss recognition.

Valuation practices, particularly model-driven approaches used for less liquid assets, are another area of regulatory focus, as are, liquidity management arrangements in semi-liquid retail funds. Regulators are also monitoring sector concentrations within private credit portfolios, including exposures such as software, where private equity activity has been particularly strong.