The Tighter the Hold Private Credit, Portfolio Company Lending, and the Structural Case for Closely Held Debt
By Michael S. Baker | Michael S. Baker, P.C. / NYBusiness.Law
Private credit has grown from roughly $375 billion in assets under management in 2008 to a global market now exceeding $3.5 trillion, with projections across major analysts ranging from $4.5 trillion to $5 trillion by the end of the decade. Over the same period, commercial bank lending grew at roughly 3 percent annually. Private credit grew at 14.5 percent. The regulatory constraints that created that gap are now being unwound, and understanding what private credit actually is, how it compares to the broadly syndicated loan market it has displaced, and whether it provides structurally superior protections for lenders, requires a closer examination than the headline numbers alone support.
The global financial crisis of 2007 to 2009 did not merely interrupt the traditional lending system. It restructured the incentives that held it together. Basel III and Dodd-Frank imposed capital requirements that made holding leveraged loans economically unattractive for banks and added compliance costs that disproportionately affected regional lenders in the middle market. The 2013 Interagency Guidance on Leveraged Lending pushed banks away from transactions exceeding six times EBITDA. The combined effect was a structural retreat that private credit firms, built around the permanence of that retreat, occupied efficiently.
The largest private equity firms accelerated the transformation by building credit businesses of their own. Blackstone acquired GSO Capital Partners and built what became an $82.7 billion private credit vehicle. Apollo constructed proprietary origination platforms that today represent $749 billion of its $938 billion in total AUM. KKR launched its capital markets unit in 2006. Carlyle's credit segment, at more than $211 billion, is now its largest business. The result is a market in which the equity sponsor and the debt provider are often, at some remove, related parties, a structure that can produce a more patient lender and that also introduces fiduciary complexity that independent lenders do not face.
The instrument that most clearly embodies the structural logic of private credit is the unitranche facility, which collapses the traditional senior and subordinated tranche structure into a single credit agreement, a single agent, and a blended interest rate. What began as a sub-$50 million middle-market tool after 2008 is now regularly used in transactions exceeding $1 billion and, in some cases, exceeding $3 billion. The Agreement Among Lenders governing the internal economics of the lender group remains confidential from the borrower and its treatment in bankruptcy has not been comprehensively tested across a full credit cycle.
The central question this article examines: does a tightly held private debt instrument, monitored by a small lender group with direct borrower access and financial maintenance covenants, provide structurally superior safeguards compared to a widely distributed syndicated credit? The evidence suggests that it does, and the reasons extend across five structural dimensions.
Early warning. A private credit lender holding a maintenance covenant receives regular financial reporting directly from the borrower. When EBITDA moves toward the covenant threshold, the lender can engage before a breach occurs. In the broadly syndicated market, when covenant-lite loans are involved, the lender's first formal signal of deterioration may be a missed payment. By 2024, approximately 40 percent of upper-middle-market private credit deals were covenant-lite. The syndicated market crossed 90 percent cov-lite penetration more than a decade ago. The middle market, where most unitranche facilities for companies with EBITDA below $50 million still carry at least one maintenance covenant, remains meaningfully different.
Restructuring speed. A unitranche with three or four lender participants can agree on an amendment, a maturity extension, or a PIK toggle in weeks. Amending a broadly distributed credit agreement requires rounding up consent across dozens of institutional holders with heterogeneous interests, many of whom may have purchased the loan at a discount. That coordination failure explains why liability management exercises have become the dominant restructuring tool in the syndicated market. The Fifth Circuit's 2024 ruling in the Serta Simmons matter confirmed that open-market purchase provisions could not serve as a mechanism for subordinating non-participating lenders without notice.
The EBITDA problem. There is a counterintuitive dimension to the information advantage that concentrated lenders hold. More lenders does not produce more accurate financial reporting. The broadly syndicated loan market, populated by hundreds of holders with no direct management access and no maintenance covenant requiring periodic testing, has proven a permissive environment for aggressive EBITDA adjustment. Studies of the leveraged loan market have found that adjusted EBITDA figures can overstate true run-rate cash earnings by 20 to 40 percent in the years following a transaction. A dispersed lender group has no practical mechanism to challenge those figures once embedded. A private credit lender sitting in quarterly reporting calls with management does. The tightly held credit generates a more accurate picture of what the borrower actually earns.
Concentration and accountability. A private credit lender holding a $200 million position in a single borrower is meaningfully exposed to that borrower's performance in a way that a syndicated lender holding $5 million in a distributed credit is not. That concentration creates accountability. It also creates risk. The same small group that can agree quickly on a constructive amendment can decide, with equal speed, to refuse. A three-lender unitranche group can move from amendment request to liability management exercise in weeks, with no coordination friction to slow the process. The tighter the hold works as a safeguard when lender and borrower interests converge. When they diverge, the same structural feature that enables early intervention also enables early aggression. The author has written separately on LME mechanics and their effectiveness as an alternative to formal restructuring.
On December 5, 2025, the OCC and FDIC formally withdrew from the 2013 Interagency Guidance on Leveraged Lending, describing it as overly restrictive and noting that it had pushed leveraged lending outside of the regulatory perimeter. The Federal Reserve has not yet followed, but the direction of travel is clear. One consultancy estimated the broader deregulatory shift could unlock approximately $2.6 trillion in additional bank lending capacity. Banks re-entering leveraged lending will likely focus first on large-cap and upper-middle-market transactions where their syndication infrastructure provides a distribution advantage. The core middle market, where private credit's structural protections are most intact, is less likely to see immediate bank competition at scale.
The regulatory picture cuts in multiple directions. The SEC and CFTC adopted Form PF amendments in February 2024 to enhance FSOC monitoring of private fund advisers, with the compliance date now extended to October 2026. A 2025 Executive Order opened 401(k) plans to alternative assets including private credit, raising suitability and liquidity questions the existing framework has not resolved. Several large platforms restricted withdrawals in early 2025 when retail investors sought liquidity that long-duration loan portfolios were not designed to provide. The asset-liability mismatch embedded in semi-liquid private credit vehicles has surfaced the structural tension that regulators had flagged when those products were designed.
Private credit's trailing twelve-month default rate as of mid-2025 was approximately 1.45 percent, compared to 3.37 percent for broadly syndicated loans. The Proskauer Private Credit Default Index, using the broadest available definition of default including financial covenant breaches, reported 1.84 percent for the third quarter of 2025. When restricted to payment defaults and distressed exchanges, the implied rate was approximately 1.2 percent. By mid-2025, 86 to 87 percent of direct lending assets were senior-lien, compared to 41 percent at the time of the global financial crisis. The improved performance reflects the migration up the capital structure, the retention of maintenance covenants in the middle market, and the shift toward larger borrowers. The asset class has not yet been tested by a severe and prolonged contraction.
The stress signals of 2025 and early 2026 do not amount to a contraction in the structural sense, but they are the first genuine test the asset class has faced at its current scale. Publicly traded BDCs have declined roughly 16 percent over the trailing year, driven by AI-disruption concerns concentrated in software exposure. Private credit portfolios carry approximately 21 percent direct software exposure, rising to 40 percent when broader technology and business services are included. The question for each affected credit is not whether AI will disrupt software broadly but whether the specific borrower's product is deeply embedded in its customers' operations or easily displaced, and that is precisely the kind of ongoing monitoring judgment that a concentrated lender group is better positioned to make than a dispersed syndicate.
The key analytical distinction is not between private and syndicated credit as broad categories, but between closely held and diffusely held debt, wherever it sits on the credit spectrum. A unitranche held by three lenders with maintenance covenants and ongoing board visibility is a structurally different instrument than a covenant-lite term loan B distributed to 200 institutional accounts trading in the secondary market. The former provides the information, the access, and the decision-making concentration to manage credit risk actively. The latter provides liquidity and price discovery while trading away the tools that allow proactive intervention.
At the upper end, jumbo private credit transactions are converging toward the syndicated market they displaced. In the core middle market, the features that defined private credit at the outset remain more intact than the headlines suggest. The rescission of the leveraged lending guidance changes the competitive landscape by returning banks to the market. It does not change the structural mechanics that make closely held debt a more effective monitoring instrument than a widely distributed one. Whether discipline survives scale is the question the next cycle will answer.
About the Author
Michael S. Baker is an author, musician, composer, filmmaker, and corporate attorney and strategist at Michael S. Baker, P.C. (d/b/a NYBusiness.Law) in New York. His practice spans leveraged finance, corporate transactions, mergers and acquisitions, commercial litigation, restructuring, and artificial intelligence governance and compliance. He has represented lenders across the credit spectrum, from institutional direct lenders and BDCs to bank syndicate participants, as well as borrowers, private equity sponsors, and operating companies. Baker began his career in the bank finance and bankruptcy practice of Shearman & Sterling LLP (now A&O Shearman LLP) and later as partner and co-head of Leveraged Finance at Paul Hastings LLP. His practice spans the history of the institutional leveraged loan market, including the dot-com crisis and multiple subsequent credit cycles. More information at michaelsimonbaker.com.
This article is intended for informational and educational purposes only and does not constitute legal or financial advice. Copyright 2026 Michael S. Baker, P.C.