ROI-Before ‘democratizing’ private credit, let’s see it pass a real test: Marty Fridson

Former U.S. President Ronald Reagan famously said that the nine scariest words in ​the English language are, “I'm from the government, and I'm here to help.” That warning may prove prescient in connection with federal agencies’ efforts to ​open up the private credit market to individual investors’ retirement savings. President Donald Trump launched an ‌initiative ​to do just that in August with an order tellingly titled, “Democratizing Access to Alternative Assets for 401(k) Investors”. The order frames this action as a matter of expanding access: “while more than 90 million Americans participate in employer-sponsored defined-contribution plans, the vast majority of these investors do not have the opportunity to participate … in the potential growth and diversification opportunities associated with alternative asset investments.”

On the face of it, there is some merit in this. An increasingly large percentage ‌of companies are remaining private, and alternative assets do offer the potential for return streams uncorrelated with other assets. However, not long after Trump set the Department of Labor and Securities and Exchange Commission to work “democratizing” private credit, some significant red flags began to appear. First, markets in September were shaken by bankruptcies at two companies that had borrowed a lot through private lenders: subprime auto lender Tricolor Holdings and auto parts manufacturer and distributor First Brands Group. Both corporate failures spawned allegations of fraud, causing observers to question whether more massive losses might hit private credit firms before long.

HIDING IN PLAIN SIGHT First Brands’s collapse was particularly troubling ‌because private credit firms had lent to it despite warning signs that were hiding in plain sight, according to Donald Clarke, president of Asset Based Lending Consultants (ABLC). In 2022, Clarke’s firm was hired to check out First Brands’s financial fitness by a lender considering provision of a $200 million “supply credit facility,” ‌a financial vehicle that essentially allows a company to get paid early on vendor invoices. Alarms went off right away when First Brands’s management refused to let Clarke examine the proposed collateral.

Neither could he get a satisfactory answer to the question of why a company that reported rising revenue and a $53 million annual profit needed a supply credit facility in the first place. It turned out that First Brands was chronically past due on payments to its vendors, who had mostly switched to requiring cash on demand or in advance. Based on such information, the client that had hired ABLC to examine First Brands declined the deal.

Clarke believes that private credit field exams frequently gloss over troubling omens like those ABLC found at First Brands, potentially because, in many ⁠cases, young field examiners ​are simply in over their heads. This speaks to a major potential problem for ⁠would-be retail investors in private credit: the market’s lack of transparency.

Importantly, investors must rely on fund managers’ valuations of the loans in their portfolios. While there is no evidence that private credit firms are seeking to improperly mark loans, that does not mean they will always price them correctly. A number of Business Development Companies (BDCs) at major firms including Goldman Sachs marked loans ⁠to First Brands above 90 cents on the dollar in the last quarterly filing before the company’s bankruptcy, according to Pitchbook. Moreover, just weeks after marking a loan to Renovo Home Partners at par – 100 cents on the dollar – in September, a BlackRock private credit fund wrote it down to zero.

Of course, these are only a few ​loans among the thousands of deals out there, but they don’t inspire confidence. If the preceding does not give pause, one might also consider negative signals emanating from the stock market. Shares of the prominent private lender Blue Owl Capital fell nearly 10% last Tuesday, largely due ⁠to concerns about the firm’s software investments given the potential artificial intelligence disruption. It should be noted that Blue Owl has stated that its tech investments remain strong. However, multiple firms with sizable private credit operations, including Apollo Global Management, Ares Management and Blackstone, have also seen their share prices decline in 2026, with private credit exposure one of multiple potential catalysts.

WILL IT PASS THE TEST? Private credit ⁠in ​its present form originated in the aftermath of the 2008 financial crisis, as regulators tightened rules on bank lending. A significant portion of its growth has come at the expense of the lowest-quality tier segment of the public high-yield bond market, commonly referred to as “junk.” The market has ballooned in recent years. Credit assets under management of the five biggest private lending firms more than doubled between 2020 and 2025, hitting $2 trillion, according to S&P Global Ratings.

Importantly, that timeline means the private credit market has not yet been tested by a deep, prolonged economic downturn, raising concerns about what will happen when ⁠it does. This is reminiscent of apprehensions about the high-yield bond market when it was just getting started and growing rapidly in the 1980s.

That asset class underwent a near-death experience in the 1990-1991 recession. It emerged from the ordeal in a sounder form that better balanced the interests of ⁠issuers and investors. If private credit survives a similar test the next time the U.S. economy ⁠enters a down cycle, then “democratization” of the asset class may become a worthwhile endeavor. For now, caution is recommended. (The views expressed here are those of Marty Fridson, the publisher of Income Securities Advisor. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York.)

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