By Miriam Gottfried

Tom and Laurie Hegna bought annuities as part of their retirement planning.

Robert Plowright took out a loan for a home-renovation project.

They didn't know it, but they were on opposite ends of a multitrillion-dollar financial machine that has become the hottest thing on Wall Street, transforming who lends money in the global economy and where the capital comes from.

At the center of this system, known as "private credit," are titans of private equity such as Blackstone, Apollo Global Management and KKR, firms best known for buying and selling companies. They have emerged as major lenders to businesses and are competing head-on with traditional banks, while operating mostly outside the reach of regulators.

Tie-ups with insurance companies are helping private-credit firms bring in the huge pools of money needed to make this business work. A portion of the annuity premiums the Hegnas paid wound up managed by Blackstone. Private-credit firms are constantly scouring for lending deals, often with borrowers that want something banks won't offer. It was an Apollo-owned lender that gave Plowright his loan.

Now, the industry is reaching even deeper into the pockets of everyday Americans to manage money more directly for individual investors. Blackstone said in April it was teaming up with Wellington Management and Vanguard to offer portfolios with a mix of public and private assets. KKR and Capital Group recently launched funds that blend public and private credit.

Apollo and asset manager State Street in April launched a target-date fund that will let 401(k) beneficiaries, who now invest in publicly traded stocks and bonds, allocate 10% of their portfolios to private markets. Empower, the nation's second-largest 401(k) provider, on Wednesday announced a partnership for several investment funds to offer private markets in some retirement plans.

The case for exposing regular investors to private markets -- whether it is private-credit deals or infrastructure projects -- is that they deserve the same access as institutional investors to the vast swaths of the economy that are now in private hands. "We've created a bit of a have and have-nots situation," said Blackstone President Jonathan Gray.

Private credit, its proponents say, allows investors to generate higher long-term returns than bonds without worrying about wild fluctuations in public markets -- the sort of volatility that has been on display since President Trump unveiled his global tariffs and then walked back some of the most draconian measures.

Some finance executives caution that the system hasn't been truly tested. "We never had that come-to-Jesus moment on private credit," said Don Mullen, chief executive of Pretium, which has a business providing residential real-estate loans.

If an economic downturn prompts a wave of loan defaults, existing investors would feel that pain. "If you have deployed capital, that capital is at risk in this new environment," said Ian Charles, managing partner of investment firm Arctos Partners. While investors holding debt will be more protected than equity investors, "there is damage coming."

Since private loans aren't marked with a value in real time the way stocks are priced, investors might not realize right away if their private-credit portfolios are deteriorating. "People should not invest in things they don't understand," said Alicia Munnell, an economist who ran the Center for Retirement Research at Boston College for more than 25 years.

There are reasons to be optimistic that systemic risks could be contained. Unlike bank deposits, money in private investment funds is typically locked up for long periods. In that sense, it is harder for there to be a "run" on funds through a surge of withdrawals. And these firms have every incentive to be careful in evaluating creditworthiness, because they hold loans in their funds, rather than passing risk to others.

Still, if serious problems develop, regulators might have difficulty spotting them before they have metastasized.

Postcrisis boom

The private-credit boom traces back to the 2008 financial crisis. When huge bets on mortgage-backed securities went bad and tanked the markets, regulators pointed the finger at banks and established rules requiring them to hold more capital to make riskier loans. That created an opening for private-equity firms to amp up their lending.

These firms joined the ranks of what were commonly labeled "shadow banks" -- a parallel universe of nonbank financial institutions that perform banklike activities but aren't regulated like banks. "Shadow banking is all grown up, and now it is called private credit," said Marc Pinto, global head of private credit at Moody's Ratings.

Moody's estimates that the private-credit industry will roughly double in size to $3 trillion over the next three years. The firms placing bets on this industry include lending-focused competitors such as Blue Owl Capital and more diversified investment firms such as Brookfield Asset Management. Even firms known for investing in publicly traded stocks and bonds such as BlackRock, Franklin Templeton and T. Rowe Price have moved to get a bigger piece of the action.

Banks, which have been society's primary lenders for centuries, have gradually ceded ground to this parallel credit world. That is especially true in direct lending -- risky loans made to midsize companies, often to finance their takeover by a private-equity firm. Private-credit lenders financed 84% of such buyouts in the U.S. in 2024, up from 61% in 2019, according to PitchBook LCD. Some banks, such as JPMorgan Chase, are trying to reassert their dominance by entering the private-lending marketplace themselves.

Now, private-credit firms are lending to blue-chip businesses and are moving deeper into the vast universe of asset-backed finance, which funds much of the real economy, including mortgages, credit-card loans and auto loans. This lower-risk lending makes up a significant majority of a potential $40 trillion private-credit market, Apollo estimates, though the returns are also lower than in direct lending.

Harnessing capital

Insurance money has supercharged the private-credit business. Insurers invest policyholder premiums with the goal of earning more than they have to pay out. Their regulators require them to put most of their money into forms of debt that are less risky. Private debt fits the bill, and offers higher returns than corporate bonds.

People such as the Hegnas are injecting capital into this system. Tom, a 63-year-old former insurance executive, bought five deferred-income annuities from an American International Group subsidiary between 2014 and 2016. Two will provide income for his wife, Laurie, a fitness instructor, in the event of his death.

In total, the premiums came to about $700,000, and when all the policies are paying out, the Hegnas will be getting more than $5,500 a month from them.

Blackstone wound up with a big slice of the money paid by the Hegnas and other policyholders when it struck a deal in 2021 to manage $100 billion of AIG's life-insurance assets, which have since been spun out into a separate company called Corebridge Financial. Among other things, Blackstone has tapped that capital to do large financings for investment-grade borrowers such as natural-gas pipeline operator EQT.

Flipping houses

Blackstone-rival Apollo pioneered the insurance strategy, launching annuity-provider Athene in 2009. Today, it owns Athene outright and manages $349 billion of assets on its behalf.

The high returns Apollo generates from its credit business enable Athene to offer attractive rates to annuity buyers. It is now the biggest seller of individual annuities in the U.S.

Apollo has made inroads lending to big companies , with multibillion-dollar financings for Intel, Anheuser-Busch InBev and AT&T.

To help generate a wider variety of loans, Apollo owns 16 lenders that finance vehicle fleets and aircraft, and offer home-improvement loans, among other things.

One of those lenders wound up throwing a lifeline to Plowright, a 48-year-old Phoenix-based landscape designer who has a side business flipping houses. In late 2023, he was fixing up a house and asked his banks, Wells Fargo and Discover Financial, for loans. Neither would finance the project. When he was running low on cash, he secured $30,000 in financing to purchase artificial turf for the backyard through Apollo-owned lender Aqua Finance.

Plowright sold the house about three months later for $1.8 million and paid off the loan using the proceeds.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

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May 16, 2025 05:30 ET (09:30 GMT)

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