Research report

Is private credit a bubble?

Private credit has grown in both size and breadth, prompting questions around the risks of the asset class and whether it could represent a bubble. We address those concerns in this note.

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May 7, 2024 | 5 minute read

The private credit asset class has grown from a niche corner of institutional investor portfolios to a multitrillion dollar market accessed by a wide variety of investors. This extraordinary growth in both size and breadth has led to questions around risks and whether this market could represent a bubble.

Key takeaways

  • The rapid growth in private credit has increasingly and understandably raised questions around its risks.
  • The lack of rise in private sector indebtedness over the past decade contrasts starkly with past episodes and defies the notion that private credit is fueling a bubble.
  • The sensationalized concerns around private credit present in today’s media fail to hold up under scrutiny. In our view, the private credit risks to which investors should be most attuned are the ones present in broader credit markets.

At their core, financial bubbles involve a willingness of investors to finance assets at values that, with the benefit of hindsight, were well beyond their fundamental value. Credit often plays a crucial role in the formation of a bubble, as lending facilitates the turnover of assets and ultimately, the explosion in value. Given recent concerns that the rapid growth of the private debt asset class (and specifically, private corporate credit) could represent a systemic concern, we apply learnings from past credit-fueled bubbles and apply them to the current landscape. In addition, we directly address the three most common questions we receive regarding private credit and its growth.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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Alan Flannigan

Alan Flannigan, CIPM, CAIA

Associate, Investment Research

Andrew Korz, CFA

Executive Director, Investment Research

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