Private Debt’s Critical Role Amid Structural Shifts and Recent Failures

Concerns about the rapid growth of private debt markets have intensified following several high-profile failures, yet the broader structural context tells a more nuanced story. As Egan-Jones Ratings Company notes, “private debt fills a critical void” in today’s funding landscape, particularly as banks face mounting constraints.

For thousands of years, private debt has served as a primary source of financing for businesses, but the dynamics of that role have shifted. According to the commentary, the watershed moment in modern banking fragility was the collapse of Silicon Valley Bank, where “supposedly risk-free assets turned out to be anything but risk-free.” The key structural change was not the presence of asset-liability mismatch—it was the speed at which depositors could flee. “Via the web, funds could be shifted in seconds rather than days or weeks,” exposing banks to unprecedented run risks and forcing regulators to pressure institutions into shortening loan maturities.

Yet business needs have not shrunk to match these new banking limitations. Many small and medium-sized enterprises rely on longer-term financing to fund growth and expansion. As the commentary highlights, small businesses—defined as those with 249 or fewer employees—“contributed 55 percent of the total net job creation from 2013 to 2023.” These firms cannot operate on two-year loan cycles simply because banks have become more cautious.

Into this gap step private lenders, who benefit from match funding, minimal community risk, and greater flexibility. Unlike banks, private lenders do not depend on runnable deposits and can therefore offer terms tailored to borrower needs. And unlike banks, they do not expose the government—and ultimately taxpayers—to systemic risk.

First Brands, by contrast, faltered not because of weak end-markets but because of internal overextension. The commentary states bluntly that its difficulties stemmed from “over-expansion … and the supposed masking of debt via off-balance sheet borrowing.” As with many rollups, the company failed to integrate systems and operations efficiently, while past legal troubles of its principals added further complications.

Retailer challenges also persist. Saks Global (“SKS”), parent of Saks Fifth Avenue and Neiman Marcus, has not entered bankruptcy but faces shifting consumer patterns that have hurt performance. According to the commentary, “Saks’ sales [fell] 16% and Neiman Marcus’ sales [fell] 10% in the quarter that ended in June.” The shift toward casual wear, remote work, and online retailing has been relentless, and private lenders must navigate these pressures with caution.

Despite these setbacks, Egan-Jones reminds investors to maintain perspective. “With any type of investment, there are likely to be some failures; even at the ‘AAA’ levels there is a probability of default.” What matters is not the absence of risk but the thoughtful management of it. Demanding risk-free portfolios would, as the commentary warns, “deprive asset owners of a reasonable rate of return and deprive the country of the leading source of job and GDP growth.”

The firm also underscores its three-decade track record in evaluating both public and private debt. “We have helped the market by providing early warnings for Enron, WorldCom, Lehman Brothers, and others,” Egan-Jones notes, referencing its history of identifying deteriorating credit quality ahead of major crises. Today, the agency has become a leader in private debt ratings, having assessed “over 3,000 private debt deals” in 2024 alone.

Private debt will continue to be essential in a financial system where traditional banks face structural constraints. Yet the recent failures serve as a reminder that vigilance, due diligence, and conservative structuring remain indispensable. As the commentary concludes, “Private debt fills a critical need in the market… Nonetheless, vigilance is required particularly as it is subject to growing pains.”