Regulators grappling with the risks of private credit may be missing a key piece of the puzzle: a potentially huge layer of debt the industry generally doesn't disclose.

This borrowing, known as fund-level debt, helps private lenders manage cashflows and, in some cases, juice the returns on good deals. It can also magnify investors' losses on bad bets and could even create risks for banks in a severe downturn, industry analysts say.

Private-credit funds generally don't make their accounts public, so nobody knows precisely how much the industry is borrowing via this type of debt, which includes subscription lines of credit, net-asset-value loans and leveraged feeder funds.

That means policymakers and Wall Street analysts have a blind spot as they assess the risks of a private-credit meltdown, analysts say.

"It is a private market, and firms don't have to disclose this information," making it hard to gauge the aggregate debt outstanding, said Lisa Kwasnowski, associate managing director for U.S. structured finance ratings, funds for Morningstar DBRS.

Kwasnowski said this type of borrowing is unlikely to threaten the banking system because it has low default rates. She said collateralized loan obligations have a similar risk profile, and they have performed well during downturns.

Regulators generally play down the risk, while throwing up their hands at the challenge of measuring private credit fund-level borrowing.

The Financial Stability Board, an international group that monitors the financial system, wrote in May that bank lending to private credit appeared to be modest, though "transparency challenges" make it hard to say. Federal Reserve researchers wrote last year that "the lack of transparency" around private-credit borrowing "makes it difficult to assess the implications for systemic vulnerabilities."

The U.S. Securities and Exchange Commission tried to make firms disclose this type of leverage, but in 2024 a federal-court decision struck down the rule.

Academic researchers have taken a crack at estimating it. It appears to total an additional $500 billion to $600 billion on top of the estimated $1.5 trillion U.S. private-credit market, including business-development companies, according to Tomasz Piskorski, a finance professor at Columbia Business School, based on his analysis of fund-level data.

Piskorski said this debt raises the risk of loss for investors, though he sees little danger it could spark a banking crisis. While "credit quality is absolutely deteriorating" and the industry suffers from lack of transparency, banks "are relatively well protected," Piskorski said.

"There would have to be a catastrophic credit event for there to be significant losses for the banks lending to these private-credit funds," he said.

This year, bankruptcies of private credit-backed borrowers and turmoil in the software sector-to which private lenders are heavily exposed-have sparked fears of a broader meltdown.

Private-credit vehicles have seen a wave of redemptions, and default rates reached a record 6.1% in the U.S. for the 12 months ended in July, according to Fitch Ratings.

Analyses of how bad the problem is generally omit private-credit fund-level leverage, which takes three main forms.

The largest is subscription lines of credit, which are bridge loans used to manage cash flows or-more controversially-artificially boost a fund's paper profits. Piskorski estimates U.S. private-credit subscription-line debt at around $300 billion to $400 billion, including BDCs.

Other forms of fund-level debt are NAV loans, which are backed by a fund's assets, and leveraged feeder funds, which let managers make bigger loans.

Fund-finance loans have historically suffered few losses, said Greg Fayvilevich, global head of Fitch Ratings' fund and asset management group. Defaults on subscription-line debt are almost unheard of, and for typical NAV loans, more than half a fund's investments would have to sour before the lender takes a loss, he said.

"It's hard to see how this becomes a systemic issue unless you have massive defaults across the industry, far beyond what we have seen historically," Fayvilevich said.

This leverage can still hurt investors, though. William Cox, chief rating officer for credit rater KBRA, said there is a growing gap between high-performing and struggling private-credit funds. Leverage compounds problems for funds that get into trouble, Cox added.

Because private-credit risks are growing, regulators need to make sure retail investors-that is, ordinary people who enter these funds-don't bear the brunt of the pain, Piskorski said.

At the moment, the Trump administration is trying to make it easier for regular people to invest in private credit and other private markets.

Piskorski said Main Street investors may need more protection.

"We need to make sure retail folks don't end up financing the lemons," he said.