Private credit’s third act: Reconnecting with banks

Vanguard Head of Private Markets Portfolios Ankul Daga and Co-Head of Active High Yield Credit Brian Kim argue that private credit has become an established component of below-investment-grade credit markets, having grown from a small nonbank lending niche in the mid-2000s into a significant source of financing for small and medium-sized companies. Private credit assets have increased nearly 20-fold over roughly 20 years, driven by investor demand for higher-yielding assets and changes in bank regulation.

The authors describe three phases of development. The first followed the global financial crisis, when banks reduced small and middle-market lending and private managers expanded as direct lenders. The second came during the prolonged post-crisis expansion, when low rates drove yield demand and borrowers valued the speed and execution certainty of private lenders. The current third phase is defined by institutionalization, deeper interconnectedness with banks, and the influence of large available capital on pricing, structures and underwriting standards. According to Preqin, global direct-lending assets reached roughly $979 billion by mid-2025, and the broader market totaled around $1.8 trillion, including more than $500 billion of committed but undeployed capital.

Vanguard stresses that private credit is fundamentally credit exposure, sharing drivers such as economic growth, financing conditions and equity performance with leveraged loans and high-yield bonds. Although loans are often senior secured and floating rate, borrowers tend to sit lower on the credit-quality spectrum, and manager selection drives meaningful dispersion in outcomes. The authors cite recent credit events including restructurings and write-downs at borrowers Tricolor and First Brands, as well as pressure tied to revised assumptions for some software-as-a-service business models.

Risk, the authors suggest, is more likely to emerge gradually. PIK interest, which lets borrowers defer cash interest by adding it to principal, averaged about 4.2% pre-pandemic, 7.4% post-pandemic and roughly 8.8% in Q3 2025, a pattern that has historically coincided with cash conservation. Competitive pressure from abundant dry powder may first surface as higher leverage, looser covenants, aggressive EBITDA adjustments and broader flexibility provisions. Banks have re-engaged by lending to private managers through subscription lines and net-asset-value facilities, which Vanguard notes generally offer senior positioning and strong recoveries. The primary systemic concern, per the authors, is the interaction between private credit liquidity needs and bank balance sheets during stress.

Separately, Fei Xu, Vanguard Commodity Strategy Fund Portfolio Manager, and Kevin Khang, Vanguard Senior Global Economist, note that commodities delivered strong headline returns in 2025, though precious metals rose roughly 80% while the rest of the Bloomberg Commodity Index underperformed cash by more than 3%. Oil futures spreads, based on Vanguard calculations of Bloomberg data as of February 9, 2026, suggest near-term tightness alongside a lack of long-term supply concern, which they attribute partly to stockpiling and to geopolitical fragmentation. They suggest commodities, particularly critical minerals, gold and energy, could command more persistent risk premia if these conditions persist.