Growth and Risks for Private Credit Funds

Despite ongoing macroeconomic uncertainty, private credit funds are expected to continue expanding. The demand drivers supporting private credit today have already contributed to substantial growth in recent years. The US private credit market has the potential to become a $5 trillion market by 2029, with over $400 billion in dry powder available for deployment. However, private credit funds come with a few risks that investors should consider, including liquidity, valuation transparency, underwriting, and refinancing. In addition, there are unique tax and audit considerations for private credit funds.

Key takeaways:

• Private credit funds are expected to continue their robust growth due to the current private equity liquidity constraints, including limited partner capital remaining tied up and a slowdown in exits.
• An extension of private credit funds, private credit secondaries have increased in popularity as a way for limited partners (LPs) and general partners (GPs) to get liquidity off the table.
• Despite growth, private credit funds also have inherent and emerging risks around liquidity, valuation transparency, underwriting, and refinancing.
• Private credit funds carry unique audit and tax considerations that managers need to take into account.

Private Credit’s Growth Fueled by Private Equity’s Liquidity Constraints

Demand for private credit remains strong as delayed private equity exits and reduced lending activity by traditional banks have increased the need for alternative financing solutions. Private credit has acted as the financing bridge, making deals possible for general partners (GPs) who have faced increased pressure from limited partners (LPs) to deliver distributions, driving more assets to market after more than three years of subdued M&A activity and limited liquidity. It has also served as a source of capital for sponsors pursuing acquisitions, refinancings, and secondary transactions.

Secondaries

An extension of private credit funds, secondaries, transactions where investors buy and sell existing fund interests or loan portfolios in the private credit market before maturity, have become an increasingly popular vehicle to meet liquidity demands. This rapidly expanding market is projected to surpass $80 billion by 2030, transforming into a core portfolio-management tool.

There are two types of private credit secondaries transactions:

• LP-led transactions: Existing LPs sell their stakes in a private credit fund to secondary buyers to free up capital or rebalance their portfolios.
• GP-led transactions: GPs transfer seasoned loan portfolios out of an older fund into a continuation fund, allowing current investors to cash out while giving new or existing investors more time to hold the assets.

Where the Risks Are Accumulating

Despite private credit’s robust growth, there are certain risks that investors need to keep in mind.  

Liquidity Risk

Private credit loans are illiquid and difficult to sell quickly. Private credit interval funds, in particular, have experienced significant redemptions early this year, testing liquidity management and investor confidence. While rising defaults remain primarily concentrated in smaller, more leveraged issuers, the mismatch between redemption expectations and the illiquid nature of the assets remains a focus area.

Valuation Transparency

Valuations are frequently cited as opaque in the private credit market, with the possibility for the asset class to accumulate vulnerabilities beneath the surface. Unlike publicly traded debt, private credit assets lack observable market prices, so funds rely on internal models and comparable transactions to mark holdings, often only quarterly, giving managers discretion over how quickly deteriorating credit quality gets reflected. Because many vehicles offer periodic liquidity while holding illiquid, hard-to-value loans, this opacity raises the risk that reported net asset value understates real stress until a default or sale forces repricing. Regulators have flagged this as a systemic concern, warning that widespread valuation lags could trigger disorderly repricing or redemption pressure once losses are recognized.

Underwriting Risk

Private credit funds face underwriting risk primarily because they lend directly to borrowers—often middle-market companies—without the continuous pricing signals and liquidity of public markets. Since these loans typically can’t be sold quickly if the quality of credit deteriorates, the initial underwriting decision carries outsized weight, and lenders must accurately assess cash flow durability, EBITDA reliability, leverage relative to enterprise value, and covenant strength. Rapid growth in the asset class has also raised concerns that competition for deals is pushing some lenders toward higher leverage and looser terms.

Refinancing Risk

There is refinancing risk in private credit when a borrower’s loan matures, and the company can’t repay or refinance it on acceptable terms, whether due to weakened performance, tighter credit markets, or higher rates. Because private credit borrowers are typically smaller companies without access to public capital markets, they have fewer refinancing options than larger issuers, especially if their EBITDA has declined since origination. This risk can be amplified by the floating-rate structure common in private credit, where an extended high-rate environment can erode the cushion needed to refinance at maturity. When refinancing fails, lenders may face extensions or restructurings that delay principal recovery and pressure fund returns.

Unique Tax Considerations

Private credit funds come with several unique tax considerations that distinguish them from traditional private equity strategies, largely because their returns are generated primarily through ordinary income rather than capital gains. This creates a meaningful tax-rate differential for taxable investors, since interest income is generally taxed at higher ordinary income rates rather than preferential long-term capital gains rates.

In addition, funds lending into US operating businesses must navigate withholding tax exposure for non-U.S. investors and unrelated business taxable income (UBTI) concerns for tax-exempt investors, which often drives the use of blocker corporations or specific fund structuring to insulate these investor classes. Original issue discount (OID) rules can further complicate matters when loans include features like payment-in-kind (PIK) interest, deferred fees, or discounted purchase prices, since OID must generally be accrued and taxed annually even though the cash isn’t received until later. Additionally, funds originating loans directly, rather than purchasing them in the secondary market, may face state-level licensing and tax nexus considerations, and cross-border lending structures require careful attention to treaty benefits and permanent establishment risk.

Unique Audit Considerations

Auditing private credit funds presents distinct challenges, largely centered on valuation, since these loans are typically illiquid and lack observable market prices, requiring auditors to rigorously test management’s models, discount rates, and comparable transaction assumptions rather than simply verifying against a market quote.

Credit quality assessment is equally critical: auditors must evaluate whether loans are appropriately classified as performing, watch-list, or impaired, and whether borrower financial data and industry conditions reasonably support valuation metrics. Income recognition adds complexity when loans include payment-in-kind (PIK) interest, original issue discount, or deferred fees, since auditors need to confirm these non-cash accruals are calculated correctly and that PIK income isn’t overstating fund performance if the underlying borrower is under stress.

Auditors also scrutinize loan documentation and collateral to confirm that liens are properly perfected and that the fund’s position in the capital structure is accurately reflected, and to test for any related-party or affiliated transactions common in sponsor-backed direct lending deals. Finally, given the growth of NAV-based lending and fund-level leverage, auditors increasingly assess compliance with debt covenants and the appropriateness of leverage disclosures, since misstatement here can materially affect the fund's reported net asset value.

The Bottom Line

With exit environments for private equity remaining challenging and hold periods lengthening, private equity sponsors have turned to private credit for bridge financing and continuation structures, sustaining deal flow even during a subdued M&A market.

In addition, while artificial intelligence (AI) presents an opportunity for private credit funds to sharpen underwriting through faster, more granular analysis of borrower cash flows and covenant compliance, it also introduces risk if models trained on limited historical data misjudge credit quality in unfamiliar market conditions or if overreliance on automated scoring erodes the judgment-driven diligence that has traditionally set private credit apart from public markets.

With 2026 just past its midpoint, the question remains whether private credit can remain a strong source of liquidity, or whether prolonged exit constraints will increase pressure across the private credit ecosystem and test the asset class.

EisnerAmper’s private credit team helps funds navigate the complexities to meet their specific goals. Contact our team below.