Private credit risks: What investors need to know

Lori Wilking, Senior Director of Equity Research – Ameriprise Financial 

June 15, 2026

Investor interest in private credit has grown rapidly over the past decade and a half, becoming a meaningful part of modern finance. However, the asset class has come under increased scrutiny, contributing to heightened volatility among financial stocks at the start of 2026. 

Here’s how these developments could shape the outlook for investors. 

What is private credit? 

In simple terms, private credit are loans made by nonbank lenders directly to businesses rather than through traditional banks or public bond markets. Also referred to as “private debt” or “direct lending,” it’s a growing segment within the alternative investment asset class. 

The appeal of private credit is straightforward. Borrowers often gain access to faster, more flexible financing, while investors are drawn to the potential for higher income. The trade-off is that these investments tend to be less liquid, harder to value and tied to companies that are often smaller with somewhat weaker credit quality. Those same features can increase market stress when investor sentiment shifts or when questions emerge around credit quality.  

The rise of the private credit market 

The private credit market began to rapidly expand after the 2007-08 Financial Crisis as tighter bank regulation created room for alternative lenders. At the same time, a low-interest-rate environment pushed investors to seek higher yields beyond traditional fixed income, driving strong demand for private credit strategies. 

Throughout the 2010s and early 2020s, private credit evolved into a more established asset class, supported by growing allocations from institutional investors and the expansion of direct lending platforms. Momentum accelerated following the COVID-19 pandemic, as demand for flexible financing increased and banks remained more selective. 

Enthusiasm for private credit continued to be strong through 2025, with traditional asset managers, investment banks and insurance companies increasing their exposure. Broader investor access also supported growth, including a 2025 presidential executive order allowing alternative investments in 401(k) plans, which further boosted interest in private credit. 

Why investor anxiety around private credit is heightened 

By the end of 2025, concerns began to grow around underwriting discipline, loan valuations and sector exposure, especially in software. Software has historically been an attractive sector for private credit lenders due to its historically strong margins, recurring revenue and cash flow profile. However, recent advances in artificial intelligence raised questions about the durability of some software business models, prompting investors to reassess the value and risk of loans tied to that sector.  

The most visible sign of strain came when several private credit funds faced elevated redemption requests, meaning that more investors wanted their money back simultaneously. Because private credit assets are not easily sold, many funds cap withdrawals each quarter. Those limits are part of the product design, but the rise in redemption activity reminded investors that private market products can behave very differently from publicly traded investments during periods of stress.  

Could private credit woes pressure financial stocks further? 

These recent developments have raised broader questions about whether pressure in private credit could spill into the traditional banking system. Banks do have exposure to nonbank financial institutions, including firms connected to private credit, but that exposure is generally indirect and structured differently from the mortgage-related risks seen during the Financial Crisis. Further, large U.S. banks also have stronger capital positions than they held previously, which may help absorb potential stress if credit conditions weaken. 

During their Q1 2026 earnings conference calls, banks provided more disclosure about their exposure to private credit firms and expressed confidence in their lending relationship and risk management practice, which we believe helped alleviate investors’ concerns. We believe better-than-expected earnings, these increased disclosures and relatively upbeat outlooks helped banks rally in April.  

In our view, a timely resolution in Iran, continued strength in capital markets activity and a potential improvement in consumer confidence could provide a catalyst for a performance rebound in financial stocks for the second half of 2026.  

Bottom line 

While private credit investments offer potential, they come with unique risks, including limited liquidity and valuation challenges. Recent market stress highlights the importance of understanding these risks and their potential ripple effects on stocks. For long-term investors, this underscores the value of diversification and a disciplined approach to evaluating investment opportunities. 

Make sense of market movements 

Your Ameriprise financial advisor can help you understand how market changes may impact your portfolio, evaluate risks and opportunities (including whether alternative investments like private credit may be appropriate) and keep you focused on your long-term goals as conditions evolve.