Private credit is the boogeyman of the current financial cycle. If you listen to some analysts, you'd think we're sitting on a ticking time bomb of shadow banking that's destined to blow up the entire global economy. They point to the massive growth in non-bank lending—now a trillion-dollar asset class—and scream about 2008. But Howard Marks, the co-founder of Oaktree Capital Management, thinks those people are looking at the wrong map.
I've followed Marks's memos for years. He’s the guy who usually warns everyone when things are getting too bubbly. So, when he says there isn't a systemic problem with private credit, it’s worth putting down the pitchforks and actually listening. He isn't saying there won't be losses. He's saying the losses won't break the world.
The fundamental difference between banks and private lenders
The fear of a "systemic" crisis usually stems from how banks operate. Banks are fragile because they rely on a mismatch. They take short-term deposits—money you can withdraw tomorrow—and turn them into long-term loans. When everyone wants their money back at once, the bank collapses. That’s a classic run.
Private credit doesn't work that way.
When you invest in a private credit fund, your money is locked up. You can't just call up Oaktree or Apollo and demand your cash on a Tuesday afternoon because you saw a scary headline on CNBC. The capital is "closed-end." This means the lenders aren't forced to sell assets at fire-sale prices just to meet redemptions.
This structural stability is the "secret sauce" people miss. In 2008, the system broke because banks were forced to dump assets into a market with no buyers. Private credit funds can just sit tight. They can work with the borrower, restructure the debt, or take the keys to the company. It’s messy for the investors in that specific fund, but it doesn't trigger a domino effect across the street.
Why the quality of collateral actually matters
A lot of the noise lately focuses on the "lower quality" of companies tapping the private market. Critics argue that because these aren't investment-grade giants, they’ll all default the moment the economy hit a snag.
Marks counters this with a pretty simple observation: private credit is almost always senior secured debt.
In the capital stack, these lenders are first in line. If a company fails, the private credit provider gets paid before the equity holders and before the junior debt holders. They also have "covenants"—rules that let the lender step in the moment a company’s financial health starts to slip.
Most of these loans are used for middle-market companies owned by private equity firms. These "sponsors" have a lot of skin in the game. If a company struggles, the private equity firm often writes another check to keep it afloat because they don't want to lose their entire investment. It’s a layer of protection that didn't exist in the subprime mortgage mess.
Interest rates are a double edged sword
We’ve spent the last couple of years watching rates climb. Since most private credit is floating rate, the interest payments for borrowers have skyrocketed. This is where the stress comes from. If a company was paying 7% and is now paying 12%, their cash flow is getting squeezed.
Marks acknowledges this pressure. We’re definitely going to see more defaults. Some companies simply won't be able to handle the math of 2026.
But here’s the thing. A default in private credit isn't a funeral. It’s a negotiation. Because there’s usually only one or a small group of lenders involved, they can sit down in a room and hammer out a deal. In the public bond market, you have thousands of bondholders who can't agree on what color the sky is, making restructurings a nightmare.
The direct relationship between the lender and the borrower acts as a shock absorber. It keeps the problem contained within the fund and the company, preventing it from leaking into the broader financial system.
The myth of the shadow banking bubble
Is there too much money chasing too few deals? Probably. Yields have tightened, and some lenders are definitely getting sloppy with their terms. That’s just the nature of a cycle.
But calling it a "systemic risk" implies that a failure in private credit would stop the gears of global commerce. Marks argues the opposite. The risk is concentrated among sophisticated institutional investors—pension funds, insurance companies, and sovereign wealth funds. These are groups that can afford to take a hit on a specific vintage of a fund without going bankrupt themselves.
Unlike the 2008 crisis, we aren't seeing massive amounts of hidden leverage layered on top of these loans. We don't have the same "Inception-style" levels of debt-on-debt-on-debt that turned a housing downturn into a global apocalypse.
What you should actually watch for
If you want to worry about something, don't worry about the system. Worry about the "tourist" managers.
Over the last five years, everyone and their cousin started a private credit fund because the fees were great and the returns looked easy. Those are the people who didn't perform proper due diligence. They didn't have the workout teams to handle a default. They bought into the hype without understanding the credit.
When the tide goes out, these managers will be the ones left exposed. Their investors will see poor returns or even losses. But again, that’s a bad investment outcome, not a financial system failure.
Moving forward with a clearer lens
Stop comparing private credit to the 2008 mortgage crisis. It’s a lazy analogy that ignores how the money actually flows. If you're an investor or a business leader, the focus shouldn't be on a systemic collapse that isn't coming. Instead, focus on the specific terms of the deals you're involved in.
- Check the manager's track record. Have they actually managed through a high-interest-rate environment before? Or did they start their fund in 2021?
- Look at the "dry powder." Funds with cash on the sidelines will be the winners here, as they can provide "rescue financing" to good companies in bad spots.
- Audit the covenants. The strength of the legal protections in the loan document matters more than the headline interest rate.
The real story isn't a coming explosion. It's a shift in how the world gets financed. Private credit is stepping into the shoes that banks are too regulated or too scared to wear. It’s a permanent change in the financial architecture. Marks is right to stay calm. The "bomb" is actually just a very complex, very large, but ultimately contained restructuring of how capital moves. Keep your eye on the individual credits, because that's where the real winners and losers will be decided.
