Private credit has rapidly grown into a $2 trillion market, driven by demand for high yields and minimal oversight. 

At the center of this boom is Egan-Jones Ratings, a small firm that issued thousands of generous, fast-track credit ratings in 2024. 

However, recent defaults have exposed cracks in this system, especially as insurers relied heavily on these optimistic ratings to reduce capital reserves. 

A withdrawn NAIC report and high-profile failures like Crown Holdings and Chicken Soup for the Soul have raised concerns that the sector’s growth is built on shaky foundations. 

Without stronger oversight and credible ratings, private credit could pose a serious systemic risk.

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Private credit has quietly become one of the fastest-growing corners of finance. 

This once-niche segment has now become a $2 trillion market, attracting everyone from Wall Street giants to insurance companies and pension funds.

At the center of the surge, there is an unexpected company called Egan-Jones Ratings Co.

This small ratings agency, with just 20 analysts, graded more than 3,000 private credit deals in 2024 alone. 

Its streamlined process and generous grades made it the go-to name for issuers and buyers alike.

But recent defaults are exposing just how fragile this setup might be. Life insurers that bought in based on Egan-Jones’ fast-and-loose assessments are starting to take hits. 

And some of the biggest names in private debt are bracing for fallout.

In a market where speed and yield rule, Egan-Jones offered a tempting combination of ratings in as little as five days, minimal documentation, and low fees.

Unlike credit giants like Moody’s (MCO) or S&P (SPGI), which often spend weeks conducting deep due diligence, Egan-Jones relied heavily on brief management calls and borrower-supplied data. Many of its final ratings consisted of just a single page.

Still, insurers took those ratings at face value. Investment-grade ratings let insurers hold far less capital. 

For instance, a BBB-rated loan needs just $1.5 million in reserves, compared with $9.5 million for a junk-level B loan.

As a result, a flood of capital is flowing into private credit deals that may not be as safe as they appear. 

Last year, we talked about how private credit might be riskier than it sounds and recent events back that claim. 

Earlier this year, the National Association of Insurance Commissioners (“NAIC”) circulated a report warning that ratings from firms like Egan-Jones were consistently more generous than internal insurance assessments, by as much as six notches. 

The report was quickly withdrawn but not before sparking internal concern across the industry. And then the defaults started.

Crown Holdings LLC, a business owned by real estate investor Moshe Silber, received a BBB rating for several loans just weeks before collapsing in a fraud scandal. 

Chicken Soup for the Soul Entertainment, the parent of Redbox, filed for bankruptcy within months of an Egan-Jones investment-grade nod.

These aren’t isolated incidents. They’re warning signs.

Private credit isn’t inherently bad. In many cases, it fills a gap left by retreating banks and provides crucial financing to mid-size firms.

But when growth is powered by questionable ratings, minimal oversight, and perverse incentives, it creates a powder keg.

Egan-Jones isn’t the only ratings shop in the game. But its rapid rise and recent stumbles underscore how easily risk can hide in plain sight. 

The appeal of higher returns in a high-rate world has made many investors overlook the foundation beneath those gains.

As defaults climb and scrutiny grows, this entire sector could be due for a reckoning.

Private credit may be the newest darling of yield-starved markets. But unless the ratings backbone becomes more credible and transparent, it could become the next big source of systemic risk.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research