Steve Eisman, the American investor and portfolio manager who famously bet against collateralized debt obligations prior to the 2008 subprime mortgage crisis and was featured in “The Big Short” book and film, has recently raised concerns about another ballooning market. This time, Eisman has pointed out rising leverage in the $3 trillion private credit market that could potentially have major economic repercussions at some point down the line.
Many investors likely have little or no knowledge about the private credit market, but the same could be said of the mortgage-backed securities market before it nearly took down the entire global economy during the 2008 financial crisis.
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Eisman and short seller Muddy Waters Research have both highlighted alleged securitization issues at SoFi Technologies Inc. (ticker: SOFI), but SoFi is just one of many financial companies that may be taking on too much risk with potentially devastating consequences.
In light of Eisman and Muddy Waters’ recent commentary, here are some things investors should know about the private credit market and how it could impact the average investor:
— What is the private credit market?
— Warning signs in the private credit market.
— Is there a redemption crisis?
— Why should the average investor care about private credit?
What Is the Private Credit Market?
The private credit market is a market in which non-bank lenders provide debt financing by directly negotiating with a borrower. These borrowers are often small-to-midsized businesses, and the lenders are typically hedge funds
, asset managers or private equity firms. Borrowers often pursue private credit as an alternative when traditional bank financing is unavailable or too restrictive. Following the financial crisis in 2008, banks have tightened lending restrictions to reduce balance sheet risk, and private equity lenders have stepped in to meet that demand.
Private credit lenders create loans, pool them into securitizations and then sell the debt to investors. Private credit investing differs from private equity investing in that private equity investors take ownership stakes in private companies. Private credit investing simply involves lending money with fixed repayment terms. Private credit investors aren’t necessarily concerned about how successful the companies they lend to become as long as investors get their interest payments and are repaid their principal.
Unlike traditional corporate bonds that trade on public exchanges, private credit securities are not publicly traded and their market is relatively illiquid, meaning it can be difficult for sellers to find buyers. However, the appeal of private credit from an investing perspective is that many of these securities pay higher interest rates than traditional corporate bonds.
Morgan Stanley estimates the private credit market grew from $2 trillion in 2020 to $3 trillion by 2025 and predicts it will continue to grow to $5 trillion by 2029. For perspective, the mortgage-related securities market peaked at about $9.5 trillion prior to the 2008 financial crisis.
Warning Signs in the Private Credit Market
Private credit lenders like SoFi charge borrowers higher interest rates than they pay investors who buy their securitizations, and the spread between those two rates is the lender’s profit margin on the two transactions. However, asset-backed securities have a protective mechanism for investors called the cumulative net loss (CNL) trigger. When the total percentage of defaulted loans within a security reaches a certain predefined threshold, the trigger changes the way money generated from the loans is repaid. In essence, the CNL trigger prioritizes repayment to investors over lenders like SoFi.
Essentially, Eisman pointed out that certain SoFi private credit securities have already breached their CNL trigger and said it’s likely other securities will do so in the near future.
Eisman also criticized the cyclical nature of the private credit business.
“In one part of the business, private equity buys companies, and in another part of the business, private equity lends money to itself to buy those companies,” he said.
SoFi shares are down more than 39% year to date, but it is far from the only private credit lender. Alternative asset managers such as Apollo Global Management Inc. (APO), Blackstone Inc. (BX), Ares Management Corp. (ARES), KKR & Co. Inc. (KKR) and Carlyle Group Inc. (CG) are all major players in private credit lending.
In recent weeks, Apollo Global, Ares, BlackRock and Morgan Stanley all implemented caps on investor withdrawals from private credit funds that limit outflows to 5% of net assets per quarter. These restrictions came in response to investors seeking to withdraw roughly $13 billion from over a dozen funds so far in the first quarter. More than $4.6 billion in investor capital is reportedly trapped in these funds thanks to the withdrawal caps.
Timothy Chubb, chief investment officer at Girard, says the recent developments in the private credit market are a legitimate concern that is worth monitoring.
“Private credit raised an enormous amount of capital in a short window during one of the most favorable credit environments in modern history — low rates, rising asset values and intense pressure to put money to work and make these loans,” Chubb says.
“That deployment pressure can work against underwriting discipline.”
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Is There a Private Credit Redemption Crisis?
The good news for private credit investors and lenders is that so far, a full-blown crisis hasn’t happened. There have been no major institutional failures and no spreading contagion within the industry.
However, one major concern is that the proliferation of AI technology throughout the economy in coming years will lead to a wave of corporate bankruptcies, particularly among smaller businesses. If these businesses start defaulting en masse, CNL triggers could start getting tripped left and right. If private credit lenders start failing, investors could get spooked and more selling pressure could snowball into a full-blown panic.
During the regional banking crisis in 2023, the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) stepped in and guaranteed bank customers’ deposits at the banks that failed. The Fed also stepped in and purchased hundreds of billions of dollars worth of MBS during the 2008 financial crisis. However, it’s uncertain how the government would respond if private credit market liquidity dries up completely.
The subprime mortgage market was a consumer credit issue, and mortgage market chaos directly threatened American homeowners. On the surface, the private credit market is mostly leveraged buyouts of businesses and is contained within the corporate world. In addition, the private credit market largely operates outside of the traditional banking system, suggesting there wouldn’t be a direct systemic risk to the financial system if the entire private credit market collapsed.
Phil Bauer, senior vice president and portfolio specialist at Calamos Investments, says he sees little evidence the recent surge in withdrawals will spiral into a full-blown, systemic crisis.
“At a specific fund level, you could see funds — especially those with high leverage — have trouble meeting their redemption commitments if the recent negative shift in sentiment continues, but that should remain largely idiosyncratic,” Bauer says.
“Private credit assets are still predominantly (~85%+) held in locked-up closed-end vehicles owned by institutional investors — pension funds, endowments, insurers, sovereign wealth funds — who have long time horizons and are much less prone to panic selling.”
Bauer also says leverage levels on many of these funds are capped by rule, so they have very different leverage profiles than banks or legacy hedge funds.
Why Should the Average Investor Care About Private Credit?
Investors may be wondering why any of these convoluted issues with a handful of companies that they don’t directly invest in even matters. One of the biggest lessons investors have learned from past banking crises is that the financial sector is often more interconnected than it may seem. For example, traditional banks may not be the ones extending private credit directly to small businesses. But banks are lending to the private credit lenders. As of mid-2025, Moody’s estimated U.S. banks had made $1.2 trillion in loans to non-depository financial institutions. About $300 billion of those loans went to private credit providers.
In addition to risks to the traditional banking industry, average Americans may have more direct exposure to the private credit market than they realize.
“Private credit matters to everyday investors because investment allocations are made to this asset class in retirement portfolios, insurance products and wealth platforms,” says Jon Summers, head of U.S. product development at Waystone.
“The performance of private credit can directly impact long-term investment strategies,” Summers says.
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Private Credit 101: What Is It and Why Is There a Redemption Crisis? originally appeared on usnews.com