Key Takeaways
- • The Financial Stability Board reports nonbank financial intermediation assets reached $256.8 trillion in 2024, representing 51% of global financial assets across its monitored jurisdictions, with the sector growing 9.4% versus 4.7% for banking.
- • The IMF's October 2026 Global Financial Stability Report warns that contingent funding commitments and rising leverage can intensify pressure in private credit during difficult conditions.
- • The Reserve Bank of Australia's October review describes heightened scrutiny of underwriting, valuations and redemption arrangements following episodes of stress.
- • Investors should distinguish reported valuation stability from a vehicle's actual ability to generate cash when needed, since private loans may be hard to sell quickly and valuation inputs can be less observable.
- • Allocation decisions should match an investment's liquidity terms to the investor's own cash needs, weighing fees, seniority, covenants, concentration and manager experience alongside headline yield.
Summary
Financing is increasingly taking place outside traditional bank balance sheets. According to the Financial Stability Board, nonbank financial intermediation assets reached $256.8 trillion in 2024, or 51% of global financial assets across its monitored jurisdictions. That figure encompasses a broad set of nonbank institutions rather than private credit alone, but it illustrates why investors and regulators are paying growing attention to the segment.
Direct lending can offer borrowers financing tailored to their needs and gives investors exposure that is less available in public bond markets. Less frequent trading, however, does not eliminate underlying economic risk. Loans may be difficult to sell quickly, valuation inputs can be less observable, and borrower performance can deteriorate as financing costs change. Investors should therefore separate an asset's reported valuation stability from its actual capacity to produce cash under stress.
Liquidity is the central concern. The IMF's October 2026 Global Financial Stability Report warns that contingent funding commitments and rising leverage can intensify pressure in private credit during difficult conditions, as some lending vehicles have promised capital to borrowers who may draw on it precisely when other funding sources contract. The Reserve Bank of Australia's October review similarly describes heightened scrutiny of underwriting, valuations and redemption arrangements after episodes of stress. These observations do not make every private-credit strategy equally risky; vehicle structure and asset quality matter.
Private funds are also connected to banks and public markets. Banks may extend credit lines or other services to nonbank lenders, institutional portfolios may hold both public and private assets, and stressed investors may need to sell their most liquid holdings first. The FSB has called for more effective monitoring of nonbank leverage because of its potential to transmit market disruption.
For due diligence, investors can ask how underlying loans are valued, how often independent marks are obtained, whether redemption promises exceed what assets can be sold, and what happens when borrowers draw on unfunded commitments. Fees, seniority, covenant protection, sector concentration and manager experience also shape outcomes. Continued growth may broaden funding options for the real economy, but its durability depends on transparent risk reporting and structures that can withstand a downturn. For sophisticated investors, the central question is whether the compensation for illiquidity is sufficient given the actual terms and risks.
Direct lending can offer borrowers financing tailored to their needs and gives investors exposure that is less available in public bond markets. Less frequent trading, however, does not eliminate underlying economic risk. Loans may be difficult to sell quickly, valuation inputs can be less observable, and borrower performance can deteriorate as financing costs change. Investors should therefore separate an asset's reported valuation stability from its actual capacity to produce cash under stress.
Liquidity is the central concern. The IMF's October 2026 Global Financial Stability Report warns that contingent funding commitments and rising leverage can intensify pressure in private credit during difficult conditions, as some lending vehicles have promised capital to borrowers who may draw on it precisely when other funding sources contract. The Reserve Bank of Australia's October review similarly describes heightened scrutiny of underwriting, valuations and redemption arrangements after episodes of stress. These observations do not make every private-credit strategy equally risky; vehicle structure and asset quality matter.
Private funds are also connected to banks and public markets. Banks may extend credit lines or other services to nonbank lenders, institutional portfolios may hold both public and private assets, and stressed investors may need to sell their most liquid holdings first. The FSB has called for more effective monitoring of nonbank leverage because of its potential to transmit market disruption.
For due diligence, investors can ask how underlying loans are valued, how often independent marks are obtained, whether redemption promises exceed what assets can be sold, and what happens when borrowers draw on unfunded commitments. Fees, seniority, covenant protection, sector concentration and manager experience also shape outcomes. Continued growth may broaden funding options for the real economy, but its durability depends on transparent risk reporting and structures that can withstand a downturn. For sophisticated investors, the central question is whether the compensation for illiquidity is sufficient given the actual terms and risks.
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