Investment funds deploying “private credit” investment strategies—primarily in the form of senior secured lending to companies—managed only $400 million in 2000, yet reached $1.5 trillion in 2023.

In The Credit Markets Go Dark, we describe how private credit funds are reshaping corporate governance and corporate finance and offer new data capturing its meteoric rise.

The ownership, governance and financing of corporate America look radically different today than they did only a few decades ago, due to conflicting trends in the ownership of corporate equity on the one hand and corporate debt on the other.

On the equity side, two key features define the landscape, namely: (1) companies are increasingly choosing to remain private; and (2) the equity of both public and private companies is increasingly concentrated in the hands of powerful investment funds. Accordingly, one could describe the major trends in corporate equity ownership as privatization—the large-scale exit of companies from the public regulatory scheme and from information-rich markets—and concentration of ownership.

Within the world of corporate debt, however, opposite trends have been at work, which we refer to collectively as democratization. To generalize, firms both large and small historically borrowed on a secured basis from banks. (Large firms also borrowed on an unsecured basis from investors in the public bond markets.) With this form of secured lending, banks were in the business of lending their own money—either internal funds or customer deposits—to corporations. The 1990s saw secured lending evolve dramatically.  Banks’ role shifted from originating loans to identifying corporations that needed capital and finding non-bank investors to supply it, building what became known a” With the development of syndicated lending, secured debt began to resemble the world of public equity: a liquid market dominated by wholly passive investors, in which firm and market information is reflected continuously in trading prices.

To state it differently, while the trend in corporate equity has been one in which public companies go private and shared ownership is increasingly concentrated and confined to a smaller number of asset managers, the trend in corporate debt has been a democratizing one, in which large numbers of dispersed, passive investors supply the capital, and companies are disciplined by the trading markets, rather than by active, expert intermediaries such as banks.  Corporate debt ownership has thus been dispersing at the same time that corporate equity has been concentrating.

In this Article, we provide a comprehensive account of a startling and important trend: beginning in the 2010s, the same trends of privatization and concentration associated with corporate equity have begun to re-shape the world of corporate debt.  The driver of this ongoing shift is a new investment strategy referred to as “private credit.”  While “private credit” does not have a strict, dictionary definition, we define private credit loans as commercial loans that are arranged and originated not by banks, but primarily by private investment funds. Among other important features, private credit loans are not generally traded and are held to maturity by the private investment fund that makes the loan.  Collectively, private credit funds originate a major and accelerating share of all commercial loans.  Individually, private credit funds are often able to originate a given company’s entire outstanding debt singlehandedly, rather than hold a small piece of the company’s debt along with many other creditors. This has radically transformed firms’ capital structure: such companies face a single lender, instead of an extraordinarily complex web of different types and tranches of debt, each funded by large numbers of passive (and often warring) creditors.

The rise of private credit has many drivers. Borrowers are choosing private credit loans over alternatives because private credit funds can deploy capital quickly, flexibly and with greater confidentiality and certainty than is possible in public debt markets.1 Institutional investors are pouring money into private credit funds to earn handsome returns, partly from investing in illiquid assets, to obtain priority in bankruptcy through secured debt and contractual protections that go far beyond what has become typical in syndicated loan deals, and to protect themselves from the “creditor-on-creditor violence” that has become a feature of the public and quasi-public debt markets. For their part, asset managers are drawn to sponsoring private credit funds for the opportunities to earn high compensation, to deploy capital with minimal regulatory constraints, and, in some cases, to profit from size while building gigantic funds.

Although many commentators have remarked on its meteoric growth, we argue that the impact of private credit has, if anything, been understated. Private credit should instead be understood as heralding a sharp reversal in the democratization of debt, which will have transformative impacts on corporate governance and corporate finance along three dimensions.

First, as private credit rapidly overtakes traditional bank syndication for loans to large corporations, and reaches an ever-wider array of smaller firms, we should anticipate a world in which the entire capital structure—both the equity and the debt—of many or most American firms is held almost exclusively by investment funds. This means that the preferences, biases and limitations of fund managers will take the same outsized importance in the debt markets as in the equity markets. Even the largest companies now have the option to forgo underwritten debt offerings to large syndicates or dispersed bondholders and instead have their entire debt arranged and funded by a single private credit fund, in record time.

Second, with the addition and expansion of private credit, we move to a world in which information about firms, investors, and transactions grows increasingly scarce. Among U.S. companies that take on outside capital, the modal firm may very soon be one that is owned by a private equity fund and financed by a private credit fund. Such firms exist in a near vacuum of information and regulation, relative to their counterparts that access the public or quasi-public markets. On the one hand, this lack of scrutiny by regulators, trading markets, and the public may promote economic activity by granting firms extraordinary flexibility in both their operations and governance. On the other, it raises the potential for large-scale misallocation of capital and illiquidity.  In the old equilibrium, the debt of large companies traded actively— either in the loan market or the bond market—providing early signals of when companies were in trouble and giving investors and regulators visibility into challenged companies or industries.  Now, many firms and even entire industries will seek capital instead from private credit funds, meaning that only certain asset managers will have visibility into the economy that would previously have been widely shared. Among other concerns, this may lead to an increase in sudden, market-wide shocks, as financial distress only becomes visible when firms file for bankruptcy or collapse.

Third, the process of restructuring corporate debt will look very different from the market-based practices that have dominated corporate financial distress in the prior world of democratized debt.  Over the course of the 2000s, investors in quasi-public debt embraced specialized roles, with an industry of expert investors emerging who specialized in buying distressed debt and helping firms reorganize. Bankruptcy judges embraced a more passive, procedural role that relied on “market checks” and the presence of sophisticated investors to guide firms through Chapter 11 processes.  In a world where debt no longer trades, the core assumption that enabled this ecosystem and set of legal procedures to develop will come unraveled, and the biases and idiosyncrasies of private investment funds (and their sponsors) will dominate the landscape of financial distress.  We argue that bankruptcy judges may need to assert a more muscular role in administering bankruptcy law as markets fade as a safety valve to promote efficient asset re-allocation.

This article explores the consequences of this re-emergence of a form of relationship-based lending that promises to have profound consequences for the future of corporate governance and corporate finance.

The full paper, which is forthcoming in the Yale Law Journal, is available for download here.