Introduction
Private lending wasn't built on complex financial models. It was built on speed, sound judgment, and strong relationships, on solving real problems for real borrowers when banks couldn’t or wouldn’t step in. Over the last decade, this hands-on, flexible market has grown quietly but rapidly, evolving from a $375 billion niche into a multi-trillion-dollar global asset class.
But with growth comes temptation.
As private credit firms try to attract institutional capital, many see securitization as the logical next step. On the surface, the benefits seem obvious, cheaper funding, quicker capital recycling, and broader distribution. On paper, it looks like progress. In practice, it’s something else entirely.
Securitization might create short-term liquidity, but it risks eroding the core strengths that made private lending effective in the first place. It demands standardization in a market built on flexibility. It adds layers of complexity where simplicity once drove success. And it misaligns incentives in ways that resemble the very shortcomings private credit was meant to avoid.
This article explains why, despite its financial upside, securitization might weaken the foundation of private lending. It outlines early warning signs, rising default rates, reduced borrower transparency, and increasing systemic exposure, and proposes a more sustainable path forward. A path preserving what matters most, trust, control, and real-world value.
Private lending was never meant to become Wall Street’s next product. It should remain Main Street’s most effective solution.
Private Lending’s DNA: Customization, Speed, and Risk Alignment
Private lending, often called direct lending, gained popularity as a reliable alternative to traditional banking after the 2008 financial crisis. As regulatory pressure mounted on banks, non-bank lenders stepped in to meet the needs of small and mid-sized businesses, offering capital with greater speed, flexibility, and fewer bureaucratic hurdles. The value proposition was straightforward, private lenders could structure deals around the borrower, rather than forcing the borrower to fit the deal.
This tailored approach, combined with faster decision-making and the ability to handle complex credit profiles, quickly became the industry’s defining characteristic.
The market response was strong. In 2009, private credit assets under management stood at roughly $375 billion. By 2024, that number had grown to over $3 trillion. Institutional investors, in search of higher yields during an extended low-interest-rate environment, moved significant capital into the space. They were attracted not just by returns, but by the additional protection provided by relationship-driven lending and custom deal structures.
What continues to set private credit apart is the alignment of interests. Unlike banks that originate loans to sell them off, private lenders usually keep loans on their own books or within the funds they manage. That kind of ownership keeps lenders close to risk and closer to the borrower. It leads to better understanding, disciplined deals, and smarter credit decisions.
At its core, private lending has always been about context, knowing the borrower, understanding their business, and structuring capital to support genuine outcomes.
Why Securitization Sounds Good, on Paper
As private credit continues growing, so does pressure to scale. Many lenders have found securitization an attractive option. At its heart, securitization involves pooling individual loans and converting them into securities backed by cash flow from those loans. These securities, typically divided into groups with varying risk and return levels, are sold to institutional investors. This allows lenders to transfer risk, free up capital, and originate more deals.
Long used in mortgage finance and corporate CLOs, securitization is now gaining ground in private credit. In 2023 alone, more than $27 billion in private credit CLOs were issued by 28 managers, accounting for over 20 percent of all new CLO issuance. For non-bank lenders without access to deposit funding, securitization offers compelling advantages, liquidity, increased funding efficiency, and access to a wider investor base.
It also appeals to institutions searching for yield. Rated securities backed by diversified loan pools provide exposure to private credit without the complexity of managing loan origination or servicing. Built-in protections like senior-subordinate structures and overcollateralization make these securities especially appealing to risk-sensitive investors.
But beneath the appealing surface is a significant trade-off. Securitization relies heavily on standardization, eligibility criteria, template-based documentation, and uniform underwriting. And this directly opposes what makes private lending valuable in the first place. As more private loans are packaged and sold, lenders risk losing the critical edge that built this market, personalized decision-making and borrower-specific solutions grounded in real-world context.
The Reality, How Securitization Undermines Private Lending’s Edge
Although securitization offers scale and liquidity, it often undermines the very qualities that make private lending effective. The most obvious sacrifice is customization. Private credit succeeds because it adapts to each borrower’s needs, whether flexible covenants, creative collateral structures, or quick closings. Securitization, however, demands uniformity. Loans must meet standardized criteria to be pooled, rated, and sold. Judgment gives way to checklists, and flexible strategy is replaced by rigid structures. For borrowers with unique financial situations or specialized needs, this shift becomes more limiting than empowering.
Complexity is another hidden cost. Securitized deals introduce multiple layers, including tranches, waterfalls, and credit enhancements, that make risk assessment harder. Research shows loans included in more complicated securitizations often perform worse than those in simpler structures, indicating that opacity complicates risk management. Investors may chase yield without fully understanding what supports it, particularly as private credit CLOs become commonplace.
Even more concerning is the potential shift in lender behavior. When loans are originated primarily for selling, credit standards may slip. This originate-to-distribute approach played a major role in the 2008 financial crisis, when lenders prioritized volume over quality, knowing the risk would ultimately be passed on. Similar trends are emerging in private credit, especially among platforms that focus more on loan volume than loan quality. As originators distance themselves from loan outcomes, the market grows increasingly fragile, and accountability erodes.
Securitization Isn’t a Safety Valve, It’s a Risk Amplifier
Supporters of securitization often pitch it as a simple way to ease capital constraints, helping private lenders offload risk, recycle capital, and originate more loans without overly stressing their balance sheets. In reality, securitization doesn't remove risk, it shifts risk, often in ways that are harder to track or manage. As securitized private credit expands, so does the potential for instability, especially when credit quality starts declining or liquidity tightens.
Recent data indicates fragility is already emerging. Fitch Ratings reported that the U.S. private credit default rate rose to 5.7% in February 2025, with sectors like healthcare climbing above 7.5%. Proskauer’s Private Credit Default Index showed a 2.42% default rate for Q1 2025, slightly down from the previous quarter but still high compared to historical averages. Additionally, the International Monetary Fund highlighted that over 40% of private credit borrowers ended 2024 with negative cash flow, many relying heavily on payment-in-kind (PIK) features and financial restructuring just to stay afloat. These measures might delay, but rarely fix, underlying financial strain.
Banks' exposure to private credit is also growing quickly, reaching nearly $95 billion in committed lending to private credit vehicles by the end of 2024. If liquidity dries up or asset performance suddenly worsens, mass withdrawals on these credit lines could ripple into the regulated banking system. What began as an off-balance-sheet strategy could soon turn into a direct channel for systemic risk.
Instead of adding stability, widespread securitization has introduced a hidden layer of risk that's tougher to recognize, slower to respond to, and potentially more harmful when things go wrong.
Private Lending Should Scale Like a Business, Not a Bond Machine
Operational Scale, Not Financial Engineering
Real scale in private lending doesn't come from bundling loans into securities. It comes from building solid operational systems able to repeat sound credit decisions consistently at higher volume. Achieving this requires investment in technology, disciplined processes, and reliable underwriting. It’s more than simply hiring capital markets experts or adopting rating-agency templates. Securitization might give the appearance of growth, but it often disguises financial repackaging as genuine operational progress.
Customization is a Feature, Not a Flaw
Customization isn’t a barrier in private credit, it’s the main attraction. Borrowers select private lenders precisely because they offer what traditional banks can't, faster execution, innovative structuring, and adaptable terms. Removing these strengths just to fit loans into securitized frameworks defeats the purpose. It also opens opportunities for competitors to step in and offer genuinely customized solutions.
Discipline Before Distribution
Building a lending business correctly means protecting credit quality even as volume rises. This involves keeping some exposure to loan outcomes, strengthening servicing capabilities, and avoiding the temptation to push every loan into a large securitized pool. Top-performing lenders today successfully originate loans at scale while still retaining ownership. They stay involved in results instead of entirely handing them off.
A Strategic Fork in the Road
As private credit matures, lenders face a critical choice. They can build resilient lending businesses with aligned interests, or chase volume through securitization at the expense of what sets them apart. One path scales carefully and sustainably. The other grows rapidly but risks eventual breakdown.
A Better Path Forward, Transparent, Purpose-Built Capital Channels
Private lenders don't have to avoid capital markets altogether, but they should be careful about how they interact with them. Securitization should be treated as a tool, not a core strategy. A better way forward involves thoughtfully realigning capital. This includes direct investment approaches, committed credit lines, and selectively securitized loan pools reflecting actual loan quality instead of simple checklists. Rather than chasing scale through complex, opaque financial structures, lenders should prioritize transparency, developing systems that provide clear performance data, detailed borrower-level reporting, and dynamic risk assessments investors can trust.
Hybrid capital models combining retained risk with access to secondary markets offer balanced solutions. In these setups, lenders preserve disciplined underwriting practices while accessing liquidity without losing responsibility for loan outcomes. Technology is central to making this approach practical. Platforms incorporating AI-driven forecasting, real-time cash-flow tracking, and automated servicing workflows are better positioned to grow efficiently without compromising credit standards.
Regulators are already showing increased interest. From the Federal Reserve to the IMF, calls for stronger oversight and enhanced transparency in private credit markets are growing louder. The most resilient lenders won’t resist scrutiny, they’ll embrace it by designing capital structures that emphasize lasting strength rather than short-term distribution gains.
Conclusion
Private lending earned its place by doing what banks couldn’t. It moves quickly, thinks creatively, and finances deals outside rigid templates. Its strength lies in careful judgment, context, and strong borrower relationships, not in layered financial structures or complicated rating frameworks. While securitization might seem appealing for achieving scale, it comes with considerable hidden costs. It dilutes customization, obscures risk, and creates incentives similar to past financial crises.
With defaults rising and the market becoming more interconnected, the industry stands at a crucial crossroads. One direction emphasizes packaging loans to satisfy capital market demands, prioritizing speed and distribution over borrower outcomes. The other route reconnects with private credit's original purpose, solving complex borrower challenges with tailored capital solutions and growing responsibly through smarter systems and closer alignment, not standardized, cookie-cutter approaches.
Private lending doesn't need to imitate Wall Street to thrive. It simply needs to remain true to the values and strategies that made it valuable in the first place. In a market increasingly chasing complexity, clarity and conviction could become private lending’s strongest advantages.
