Private credit critics are wrong to label the industry a systemic threat, according to new research from Stanford and Columbia. A study examining roughly 1,300 private credit funds and nearly 9,000 underlying loans spanning 25 years found these funds are built nothing like the institutions that triggered past financial crises. The asset class has much stronger capital foundations than traditional banks.

Before the 2008 crisis, the largest financial institutions carried leverage as high as 30-to-1. Post-crisis reforms limited banks to roughly 8-to-1 leverage. Private credit funds sit on a substantially stronger foundation with leverage of roughly 1.25-to-1, meaning 65 to 80 cents of every dollar of assets is funded by equity rather than debt. The Federal Reserve modeled what would happen if private credit funds forced full drawdowns during a crisis—big lenders remained well capitalised.

Some funds are limiting quarterly payouts to about 5 per cent of assets due to withdrawal pressure, but these gates exist precisely to prevent forced asset sales at discount prices. The system is working as designed. While legitimate questions about transparency remain, the differences between private credit funds and the culprits of the last financial crisis are more instructive than their similarities.