Tackling Risk Effectively in Today’s Private Credit Market
Private Credit: A Growing Market With Rising Risks
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November 14, 2025
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The private credit market has grown dramatically since the financial crisis in 2007-2009, minting new wealth and opportunities along the way. According to Goldman Sachs, the private credit market had about $2.1 trillion in assets under management as of May 2025,1 with pension funds, sovereign wealth funds and insurers all looking to invest in the space. According to the U.S. Federal Reserve, around $300 billion2 of this debt is owned by public and private pension funds.
Private credit serves the positive role of providing liquidity to higher risk debtors in a post-Great Recession era that has seen tighter regulation around lending. However, because these deals are private and do not always carry the same transparency as traditional loans, that liquidity can come with risk, including uncertainty around valuations and the potential for fraud. With so much at stake, and with private credit risks often larger and harder to identify than ordinary credit risks, additional measures are worth considering. The stewards of organizations engaged in private lending should adopt a risk-based approach that helps steer their companies towards success while avoiding financial and regulatory consequences.
How To React
So, what can senior executives do to rapidly identify potential warning signs so that they can diagnose and mitigate financial risks on both the debtor and creditor sides? It will be necessary to develop a comprehensive solution framework by ensuring that your team has aligned expertise across data analysis, borrowing and consumer finance in order to identify early warning signs. To that end, below are some proactive steps your organization can take to mitigate private credit portfolio risk:
- Review your own processes for managing and vetting private credit facilities: Understanding if you have the right team and processes to identify and react to portfolio risk is crucial. Defined escalation protocols identified by compliance or field exam teams can go a long way toward sound process governance, as can periodic fraud risk assessments. Due diligence typically occurs at multiple points throughout the warehouse lending process, for instance, and adding quality control measures for the underlying collateral files could provide further security against substantial financial losses.
- Evaluate the debtor business model and its operations, and focus on macroeconomic indicators: While it is easy to be focused on high returns and consistent performance of specific facilities, it is critical to step back and look holistically at the business, and at a variety of their credit facilities — not just yours.
- Analyze and identify how businesses are using their cash: Analyze and track funds related to a private credit facility to understand exactly how the debtor business is utilizing that cash. Additionally, analyze entity-wide cash flows to ensure you understand not only a debtor’s liquidity position at a point in time, but also how funds are being generated and utilized longer-term. Every portfolio should be reviewed as if it were brand new.
- Trust, but verify: Don’t hesitate to conduct thorough diligence on both new and existing private credit facilities. While it can seem onerous, debtors should understand the need for detailed diligence by creditors and be open to providing transparency across their broader organizations. Consider examining collateral through multiple lenses. Scrutinize debtor financial activity to identify other, similar-type facilities for potentially duplicate-pledged assets, and where possible, confirm assets bases with other private credit lenders of the same debtor.
- Leverage existing information already available to you and other creditors: Conduct walkthroughs of your own processes for vetting, auditing and monitoring private credit facilities to identify data over time. A fresh set of eyes on processes and data can identify red flags that could be inadvertently passed over by individuals overseeing private credit facilities. Rotating reviewers can help surface issues for teams that have been close to a long-term client.
The Way Forward
With so many complex factors to analyze, organizations may find themselves with a daunting task. But finding the right balance of backward-looking portfolio reviews and forward-looking risk mitigation tactics will be critical. The good news is that robust, real-world experience, applied with a healthy dose of caution and a commitment to holistic due diligence, will go a long way in ensuring fruitful and transparent partnerships with trustworthy borrowers.
Footnotes:
1: “Private credit’s outlook amid rising volatility,” Goldman Sachs (May 2, 2025).
2: Fang Cai and Sharjil Haque, “Private Credit: Characteristics and Risks,” (February 26, 2024).
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Published
November 14, 2025
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