The growth of private credit has been remarkably fast. Direct lenders have displaced banks and broadly syndicated lenders in much of the mid-market sector, promising borrowers speed and flexibility while offering investors high returns.

The asset class is now facing its first meaningful stress test. Investors have requested billions of dollars in redemptions from semi-liquid funds. Public business development companies (“BDCs”) have traded at persistent discounts to net asset value Questions about software exposure, payment-in-kind interest, and valuation practices have made headlines. Regulators and plaintiffs’ lawyers have begun to take notice.

The temptation is to interpret these developments as a familiar banking story: a mismatch between short-term obligations and long-term assets exposed to fire sale risk. If that were the right diagnosis, the policy response would be a familiar mix of prudential limits covering liquidity, leverage, and concentration.

Yet private credit is not synonymous with banking. Its investors are not depositors, and its recent strains are better understood as problems of liquidity and information rather than evidence of systemic fragility. Rather than bank regulation, the better response is to develop market infrastructure that allows private credit loans to trade more easily and be priced more credibly.

The distinction starts with the investors’ claims. Bank depositors expect par repayment on demand and have little reason to scrutinize the bank’s illiquid assets unless failure looms. When this bargain appears endangered, bank runs emerge and fire-sale risk rises. By contrast, the returns of private-credit investors depend on the performance of underlying loans, and they knowingly accept investment risk in exchange for higher yield. This is clear for public BDC shareholders and for investors in private closed-end funds. It is also true, though less obviously, for investors in interval funds, tender offer funds, and non-traded BDCs. These vehicles can impose gates and limit redemptions. A quarterly opportunity to redeem a small fraction of one’s stake is not a demand deposit. By restraining runs, the need for fire sales is also lessened. External solutions like net asset value (“NAV”) financing and continuation vehicles can also generate liquidity.

At the same time, valuation uncertainty complicates investors’ decisions. Loans are bespoke, illiquid, and typically held to maturity. There is no continuous market price. Valuation therefore depends on management’s judgment about borrower health, refinancing prospects, restructuring paths, and recovery values. Even sophisticated lenders can reasonably disagree.

The Blue Owl Capital Corporation II episode illustrates the point. In fall 2025, Blue Owl proposed merging a non-traded BDC into a publicly traded affiliate. Because the public shares traded below NAV, the exchange would have given non-traded investors liquidity—but at a steep discount. After criticism, the merger was withdrawn. A subsequent tender offer at an even lower price attracted participation from fewer than 1 percent of shareholders. That outcome does not resemble a run. If investors believed the portfolio was deteriorating rapidly, many would have accepted a discounted exit. Their reluctance instead suggests something more prosaic: uncertainty about true value and unwillingness to crystallize losses at a potentially distorted price.

Conflicts of interest undermine valuation credibility. Managers may influence valuations that determine their fees. They may operate parallel funds and favor the vehicles with richer fee structures or establish continuation vehicles that favor new investors over those who are cashed out. Existing securities law addresses these issues, and SEC enforcement and private litigation can police fraud and self-dealing. The harder question is whether current safeguards are sufficient where investors have limited exit options.

Although leading market participants like Apollo have proposed more frequent valuations as a solution, alone they will not solve the problem. Daily marks do not equate to market prices. A manager can update estimates every day, but unless inputs are observable and trade data is available, the result remains an internal model, not price discovery.

A more durable solution is a deeper secondary market for private-credit loans. It would allow funds to generate liquidity through voluntary sales rather than forced redemptions, NAV financing, or continuation vehicles. It would facilitate portfolio rebalancing and reduce reliance on large cash buffers. Most importantly, it would generate independent price signals that investors, lenders, and regulators could use to evaluate manager marks and identify outliers.

Private credit can draw lessons from the development of the broadly syndicated loan (“BSL”) market. Today, the few private credit secondary transactions are private bilateral deals or closed auctions governed by nondisclosure agreements. This opacity suppresses the price information needed for credible valuation. A more functional secondary market will require more  transferable documentation, common identifiers, consistent reporting standards, workable settlement conventions, and centralized trading-data aggregation and reporting.  The BSL market’s development in the 2000s was aided by the Loan Syndications and Trading Association’s work on documentation, settlement practices, and market conventions. Private credit may also need a neutral market-wide coordinating institution to develop shared infrastructure and credible reporting norms. Robust secondary private credit trading would entail tradeoffs. Illiquidity has promoted stable relationships between borrowers and lenders  and bespoke underwriting standards. –More patient restructuring practices are possible without market pressures. A more liquid market could increase volatility, compress illiquidity premia, and weaken monitoring incentives. It may also destabilize lender groups facing borrower distress.

Private credit’s evolution suggests the prevailing paradigm should also change. It is a multi-trillion-dollar system financing thousands of companies through vehicles with very different liquidity terms. At that scale, the benefits of better price discovery and more flexible liquidity are likely to outweigh the costs.

The current strains in private credit are not a reason to treat investors as depositors. They are a signal that the market is still maturing. Targeted regulatory attention to conflicts may be warranted. But the most effective long-term response to valuation uncertainty and liquidity pressure is not heavier regulation—it is the gradual construction of a robust secondary market for private credit loans.

Robert Miller is an associate professor at the University of South Dakota Law School. This post is based on his recent article, “The Market Solution to Private Credit’s Stress,” available here.