From the Research Lab: Private Credit and Financial Stability

By Tomasz Piskorski, Edward S. Gordon Professor of Real Estate, Finance Division, Columbia Business School

June 2026

Over the past decade, private credit in the US has grown from a relatively small niche into more than $1.7 trillion market, with the number of funds increasing from a few dozen in the early 2000s to more than 1,000 today. Against this backdrop, a familiar question has reemerged: is this simply banking risk in another form? And could stress in private credit funds spill over into the broader financial system?

The concern is understandable. Financial crises are rarely caused by asset losses alone. Trouble begins when losses collide with fragile funding structures. Traditional banks, for instance, fund long-term, illiquid assets with short-term, runnable liabilities. When confidence falters, that mismatch can turn losses into financial crises, as evidenced by the 2023 regional banking crisis. The key question, then, is whether private credit reproduces the balance-sheet features that make banks fragile.

My research examines this question directly using proprietary fund- and asset-level data covering more than 1,200 private equity debt funds. This segment, closed-end private equity credit funds, accounts for roughly two-thirds of the entire private credit market and represents its dominant institutional form. The breadth of the data allows us to move beyond partial evidence and evaluate the structure of the market as a whole. Looking closely at the data, the answer appears to be no.

First, private credit funds are structured very differently from banks. Most striking is their capitalization. Equity typically accounts for 65 to 80 percent of fund assets—more than six times the level at U.S. banks, where equity represents roughly 10 percent (Figure 1). This means that losses are absorbed primarily by long-term equity investors—limited partners (LPs)—rather than creditors. Where borrowing exists, it tends to take the form of bank credit lines used for liquidity management—bridging capital calls or facilitating transactions—rather than supporting sustained leverage.

Figure 1. Funding of Traditional Banks vs Private Credit Funds

The left-hand side shows how U.S. banks are funded from 2010 to 2024, breaking their balance sheets into equity, insured deposits, uninsured deposits, and other liabilities, each as a share of total assets. The right-hand side shows how the funding structure of private credit funds has evolved over the same period, decomposing financing into equity, credit line borrowing, and other debt, again as shares of total assets. Taken together, the figures show that private credit funds are, on average, more than six times better capitalized than U.S. banks, reflecting their much higher reliance on equity rather than debt. Source: Matvos, Piskorski, and Seru (2026).

Second, private credit funds do little of the maturity transformation that lies at the heart of banking instability. Fund lives typically run 10 to 12 years, while the loans they hold mature sooner (typically around 3-4 years). Cash flows generally arrive before obligations come due, leaving little scope for the refinancing pressure that can trigger runs. This stands in contrast to banks, which rely on short-term, runnable funding to support long-duration assets.

Third, private credit portfolios are diversified across industries, geographies, and credit strategies, with real estate typically accounting for about 10 percent of private credit lending (see Table 1). While these funds remain exposed to aggregate economic conditions, their diversified holding structure reduces vulnerability to localized or asset-specific disruptions.

Table 1: Composition of Private Credit Holdings

This table reports the industry composition of asset-level holdings of private credit funds. The table presents each industry's share of total assets and of total holdings. Financials, Industrials, and Health Care account for nearly half of total assets, while Communication Services and Consumer Discretionary sectors represent a larger share by number of holdings. Real Estate, Information Technology, and Energy also comprise notable portions of the aggregate portfolio, indicating broad sectoral diversification among U.S. private credit fund investments. Source: Matvos, Piskorski, and Seru (2026).

Historical performance data reinforce this picture. Across fully realized funds, average net annualized returns are around 10 percent. Losses do occur, but they are largely contained within the equity layer. Because that equity is not runnable, losses do not force fire sales or propagate through funding markets in the way bank losses can.

Taken together, these features point to a different form of financial intermediation—one in which risk is borne primarily by long-term equity investors, namely limited partners, who are structured to absorb it, rather than by creditors who can withdraw funding at the first sign of trouble.

None of this means private credit is without risk, or that recent redemption pressures should be ignored. In fact, current market developments highlight where vulnerabilities could emerge.

One important channel runs through investors. Private credit funds rely on limited partners as first-loss capital providers. Their high equity capitalization implies that LP capital absorbs most losses before creditors become exposed. However, if losses are widespread or concentrated, institutional investors may rebalance portfolios, reduce new commitments, or draw on liquidity facilities—potentially affecting credit supply and transmitting stress indirectly through the financial system.

Bank linkages are also relevant in this context. While credit lines are typically used as liquidity tools, they could become more important sources of funding during periods of stress. If capital calls slow or asset values decline, funds may rely more heavily on these facilities, increasing the potential for spillovers to the banking sector.

The expansion of semi-liquid and retail-oriented vehicles introduces a different set of dynamics. Unlike traditional closed-end funds, these structures allow for periodic redemptions, making them more sensitive to investor sentiment. Recent episodes in which funds have limited withdrawals illustrate how stress can emerge even in the absence of high leverage or maturity mismatch.

A related concern involves transparency and valuation. Private credit funds rely on internal models rather than observable market transactions. In stressed conditions, this can give rise to what we term valuation contagion—where uncertainty about asset values spills over into fundraising, secondary markets, or affiliated vehicles. Even in the absence of realized losses, doubts about valuation and quality of governance can tighten capital flows and constrain lending. This mechanism has clear parallels to the experience of the non-agency subprime MBS market prior to the Global Financial Crisis. In my work on MBS market, I documented significant misrepresentation of underlying asset quality in that market by major financial intermediaries; when these issues came to light, investor confidence deteriorated sharply, contributing to a breakdown in trading and a broader market shutdown. The episode illustrates how opacity and weak verification can amplify stress, even before realized losses fully materialize.

If valuation uncertainty disrupts capital formation or slows fundraising, private credit funds may scale back lending, particularly to middle-market firms that importantly rely on these channels. In that sense, stress transmitted through valuation rather than funding runs can still affect access to credit and, ultimately, investment, employment, and activity in the real economy.

In summary, the broader point is that financial stability depends less on who provides credit than on how that credit is funded. By that standard, private credit today does not look like a replay of traditional banking fragility. 

References:

Barron's. "Alternative Assets Are Coming for Your 401(k). Do They Deserve the Hype?" April 2, 2026.
https://www.barrons.com/articles/retirement-alternative-assets-private-credit-631b1600

Jiang, Erica Xuewei, Gregor Matvos, Tomasz Piskorski, and Amit Seru. "Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs." Journal of Financial Economics, 2024.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4387676

Marketplace. "Private credit jitters grow — but is it a crisis??" April 2, 2026.
https://www.marketplace.org/story/2026/04/02/how-worried-should-i-be-about-private-credit-jitters

Matvos, Gregor, Tomasz Piskorski, and Amit Seru. "Private Credit, Balance Sheets and Financial Stability." Working Paper, SSRN. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6432221

Piskorski, Tomasz, Amit Seru, and James Witkin. "Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market." Journal of Finance, 2015.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2215422

Piskorski, Tomasz, "Private credit not only won't spark a financial crisis — it may be more stable than your bank" MarketWatch, April 13, 2026.
https://www.marketwatch.com/story/private-credit-is-actually-built-to-survive-the-ghosts-of-the-great-financial-crisis-6eaa35d6

About the Contributor:
Tomasz Piskorski is the Edward S. Gordon Professor of Real Estate in the Finance Division at Columbia Business School. He is also a Research Associate at the National Bureau of Economic Research and serves on the Academic Research Council of the Housing Finance Policy Center at the Urban Institute. Professor Piskorski earned a M.S. in Mathematics from New York University Courant Institute of Mathematical Sciences and a Ph.D. in Economics from New York University Stern School of Business.

Full bio here.