Is a bubble brewing in private credit? Wealth managers weigh in

Private credit refers to loans made directly by private equity firms and investment managers, as opposed to banks. And financial advisors have been banking on private credit's growth by adding more of it to client portfolios.

So much so that some prominent market-watchers are wondering if the surge in private credit has stretched into dangerous territory.

Individual investors pumped almost $50 billion into private credit vehicles in the first half of 2025, putting it on pace to top the record inflow of $83.4 billion last year, according to investment bank RA Stanger. This year’s haul elevated the sector to about $2 trillion in assets in total, putting it in the same league as high-yield bonds and leveraged loans.

It also put the asset class in the crosshairs of JPMorgan Chase CEO Jamie Dimon, who recently called its growth a "recipe for a financial crisis."

Don Calcagni, chief investment officer of Mercer Advisors, for one, believes that any time Jamie Dimon speaks about a potential danger in the capital markets, investors would be wise to pay attention.

“I think Dimon’s assessment is an accurate observation of where private credit is today, and how we got to this place. We believe there are both opportunities and risks in private credit that must be watched very closely,” Calcagni said.

Calcagni sees the opportunities coming from the higher yields and floating rates offered by some private credit offerings. These characteristics could pay off if long-term interest rates were to rise in the future, which is a possibility when anti-dollar and inflationary policies come out of Washington. In his view, if the economy experiences higher inflation and interest rates in the future, private credit could be a way to hedge against those forces.

Meanwhile, Rick Wedell, president and chief investment officer at RFG Advisory, believes one could argue there is a private-credit bubble driven by demand for higher yields from investors and a looser regulatory environment that applies to these types of products. That said, he also feels one also could argue the rapid expansion of private credit is driven by the failure of traditional banking to address the needs of small and medium sized businesses.

“Frequently, for firms that are too large for their local bank branch to handle, the only option for them to secure financing is through the private credit markets, and the larger investment bank public offerings have effectively ceded this market over time to the private lenders,” Wedell said.

Wedell’s single largest piece of advice with respect to the private credit market is that investors in the space need to be exceedingly careful in making sure that you understand all of the attendant risk factors and liquidity constraints associated with the loans that are being made and the managers chosen.

“This is not, for the most part, simply something that can replace other forms of fixed-income exposure. It has a different liquidity profile and a different risk profile. As a result, investors need to approach the space with the same level of due diligence and care that they would approach any other form of illiquid, private investment with – do your homework, know your manager, know the risks, and model out the potential impacts to your overall portfolio accordingly,” Wedell said.

Elsewhere, Matt Malone, head of investment management at Opto Investments, said opportunities still exist in the “less-traveled segments of the market,” specifically, smaller companies that still have significant capital needs but attract less institutional money. These businesses are harder to underwrite, the check sizes are smaller, and the strategies tend to be more capacity-constrained, creating a supply–demand imbalance in favor of investors.

“Managers who specialize here can capture real alpha, whereas much of the larger-cap private credit market looks more like beta,” Malone said, adding that RIAs should start by recognizing that private credit is not “monolithic.”

Put private credit in a portfolio

If private credit does have a role to play in portfolios, but Calcagni thinks it should be a fairly small one within a broader fixed-income allocation. Then, within private credit, an investor could own different private credit funds that own many hundreds of underlying loans in his opinion.

“In addition to broad diversification, deep manager due diligence is crucial. You need to really understand how individual funds are structured. In private markets, the gap between the best and worst managers is much larger than the gaps between the best and worst managers in public markets,” Calcagni said.

And recognizing some of Dimon’s concerns, Calcagni also stresses the need to understand the funds’ abilities to provide liquidity if needed.

“If you do those things – broad diversification, proper sizing of the allocation, and deep manager due diligence, which is how we’ve approached it – then the impact of any serious hit to the asset class should be muted on the broader portfolio,” Calcagni said.

It comes down to trade-offs, according to Malone, who believes RIAs don’t need to pick a one size fits all approach. Instead, they can mix private credit strategies depending on the risk/return and liquidity profile their clients require.

Malone points out that the large-cap, sponsor-backed direct lending space is “where most capital is flowing today.” As a result, he believes it’s become crowded and, in many ways, commoditized. And for advisors looking for differentiated returns, he feels this end of the market is unlikely to deliver.

“That doesn’t mean it’s bad —for certain clients, it can provide efficient exposure and reliable income—but it’s not where alpha lives. Advisors who are simply allocating here because it’s the easiest or most familiar option risk missing the real opportunity,” Malone said.