Private credit funds lend money to companies that often cannot get traditional bank loans. But many of these funds borrow their own money from big banks to make those loans.
That means even though private credit operates outside the traditional banking system, banks are still heavily exposed to it. If more companies start defaulting on those loans, losses could spread back to the banks that financed the funds.
Much of this lending happens through vehicles such as BDCs (Business Development Companies), which lend to smaller businesses, and CLOs (Collateralized Loan Obligations), which bundle corporate loans and sell them to investors.
