Private Credit: The Boom Bites Back

This week, a flagship private‑credit fund called BlackRock TCP Capital said its fourth‑quarter net asset value would fall about 19%, citing issuer‑specific problems across names like Edmentum, Amazon aggregators Razor and SellerX, residential contractor HomeRenew, infrastructure provider Hylan and mobile advertiser InMobi. Its stock dropped roughly 15% on the day and is down more than a third over the past year, as investors have swung from paying premiums to NAV for business‑development companies to demanding double‑digit discounts.

This is the other side of the private‑credit boom: an asset class that promised stable, floating‑rate income now revealing how fragile certain borrowers and structures can be once growth slows, leverage bites and covenants have been diluted. For sponsors and operators, the lesson is not that private credit is “broken,” but that a maturing market, with vehicles ranging from BDCs to semi-liquid funds, amplifies both the upside of speed and flexibility and the downside of over‑leverage, covenant erosion and liquidity mismatches. This article looks at where private credit genuinely works for operators, where it can quietly undermine borrowers, and how to use it without ending up as the next markdown headline.

The ascent of private credit is rooted in long‑term regulatory shifts. Post‑2008 rules such as Dodd‑Frank and Basel III pushed banks away from riskier corporate loans, especially for unrated or middle‑market borrowers. Direct lenders filled that funding gap.

Liquidity shocks in 2022–2023 accelerated the trend. Regional bank stress and hung LBO loans exposed the fragility of deposit‑funded lending, whereas private lenders, funded by committed institutional capital, continued to deploy.

At the same time rising rates turned floating‑rate private loans into high‑yielding assets; pension funds and insurers hungry for duration matched, higher‑yielding investments accelerated allocations. U.S. pension allocations to private debt are growing nearly twice as fast as to private equity.

Assets under management reached about $1.6 trillion in 2023, with forecasts near $3 trillion by 2028.

Borrowers prize private credit for more than capital. Sponsors can negotiate and fund transactions in under two weeks versus six or more for a syndicated deal. They skip ratings, disclosures and roadshows. Structures can be customized, unitranches, delayed‑draw facilities, PIK toggles, providing speed and certainty when public markets are volatile. For operators and PE partners this “farm‑to‑table” financing means control over timing and terms rather than dependence on fickle syndications.

The classic use case is sponsor‑led buyouts. Speed and certainty are critical in take‑privates or auctions. Deals such as Coupa Software in 2022 and Flexera in 2025 closed on schedule because direct lenders could commit billions quickly and discreetly.

Private credit also excels in complex or bespoke situations, carve‑outs, story credits or companies with unconventional cash flows, that fall outside traditional underwriting. Direct lenders can craft flexible covenant packages and tie repayment terms to growth metrics instead of fixed EBITDA targets.

For operating partners, this flexibility lets capital be tailored to nuanced plans, such as ramping a salesforce or executing add‑on M&A, without being constrained by standard amortization schedules. In refinancing and recapitalization scenarios private credit provides speed and creativity: sponsors facing maturity walls can refinance quickly or extract a dividend as part of a recap. During stress, direct lenders are often the only capital available, providing rescue financing or DIP loans that keep businesses afloat.

The same flexibility that attracts borrowers can backfire.

Over‑leveraging remains a common pitfall. In sectors such as healthcare roll‑ups, debt multiples above 6× EBITDA combined with aggressive adjustments have pushed default rates to around 7% in 2024, the highest in private credit. More insidiously, unconventional terms may encourage borrowers to finance expenses that should never have been debt‑funded, like speculative R&D or highly cyclical growth, leading to fragile balance sheets.

Covenant erosion is another risk. Historically private loans included tight maintenance covenants providing early warning. By 2025 about half of large private loans lacked any financial covenants. Wider cushions and generous add‑backs further dilute protections. For sponsors and CFOs this can create a false sense of security; the absence of default doesn’t mean performance is strong, it often just delays the moment of reckoning.

Liquidity mismatches can also bite. Some semi‑liquid or retail‑facing private credit vehicles have struggled during redemption waves. A late‑2025 case saw a large manager cancel a planned fund merger amid outflows, showing that illiquid loans combined with short‑term investor capital can force asset sales at the wrong time. Borrowers relying on such lenders risk seeing terms tighten if their lender faces its own liquidity squeeze.

At QuantFi, we act as the outsourced finance team for private‑credit borrowers, from deciding whether to borrow to negotiating structure and living with the deal over time. Rather than fixate on headline yield, we underwrite how resilient a company’s cash flows and capital structure are when growth slows, margins compress, or rates move against you.

For each opportunity, we score the financing across three dimensions: alignment of use‑of‑proceeds with the real plan for the business, downside coverage and covenant protection, and the flexibility of the structure if things don’t go to script.

We also build dashboards that track liquidity, covenant headroom, and key compliance triggers in close to real time, giving CFOs and operating partners a single place to see when a “helpful” structure is starting to leak risk back onto the company. If you want to understand how this lens would apply to your portfolio or a specific deal, we’re happy to talk.