Tariffs are creating new pressure across global markets. Inflation, weaker consumer demand, and strained cash flows are testing borrowers and lenders. These conditions make private credit and tariffs a critical issue for investors who want to protect net worth.

A recent S&P Global Ratings report warns that middle-market distress could rise sharply. Even sectors once seen as insulated now face weaker conditions.

Tariffs reshape private credit risk

Credit markets are already responding. Traditional banks are reducing exposure to riskier borrowers. Regulators are increasing scrutiny. Some hedge funds now bet against private credit because higher rates and slow growth could expose weaknesses.

Arif Bhalwani, CEO of Third Eye Capital, sees a turning point. Volatility will separate disciplined lenders from firms that chased high yields.

Private credit can support borrowers

Private credit has become a major part of corporate finance. It often steps in when banks cannot or will not lend.

Some structures now draw criticism. These include payment-in-kind (PIK) interest and stretched leverage. However, Bhalwani says PIK interest is “a tool, not a ticking time bomb.” He explains that “when structured thoughtfully, (PIK) aligns capital efficiency with borrower cash preservation, and often signals a lender actively managing through cycles, not masking distress.”

The challenge is familiar. Lenders must help businesses through temporary disruption without adding inflexible debt. Many stressed borrowers still have sound models. Input costs, uncertain demand, and limited funding have placed them under pressure.

Discipline matters more than yield

Private credit is shifting from opportunistic to essential. Lenders with experience and restructuring infrastructure are in demand. The question is whether enough firms can manage that complexity.

The S&P report does not predict widespread failure. Instead, it says fundamentals now matter more than ever. Underwriting standards, deal structures, and lender behavior are under review.

For firms such as Third Eye Capital, bespoke lending creates both risk and opportunity. Bhalwani argues that private credit is not a monolith. It should not be judged by its weakest performers.

Tariff risks test resilience

Still, borrower distress remains the key test. Private credit must adapt in practice, not only lend in theory.

Tariffs are one part of a wider equation. As trade tensions grow, aftershocks can move through supply chains, balance sheets, and investor portfolios. Therefore, resilience will depend on asset quality, flexibility, and judgment.

In the months ahead, investors and regulators will watch the asset class closely. The middle market’s stress could reshape private credit. Whether the sector grows stronger or more fractured will depend on how lenders handle uncertainty.