# Private credit crossed $2T. 
Legacy underwriting hasn't crossed the 1990s.

**Published by:** [Pareto](https://paragraph.com/@pareto/)
**Published on:** 2026-07-31
**Categories:** pareto, m11credit, underwriting, privatecredit, defi, tradfi, credit, lending, onchain, institutional, creditvault, loan
**URL:** https://paragraph.com/@pareto/private-credit-legacy-underwriting

## Content

$2 trillion. Thousands of deals. Billions in institutional capital deployed every year. And a significant chunk of it is underwritten with the same rigor - and the same tools - as in the 1990s. In traditional private credit, the consequences are now visible in rising default rates, regulatory warnings, and gated withdrawals. The good news: institutional-grade underwriting built for the next era of private credit already exists. TL;DR Private credit crossed $2T in 15 years - faster than almost any asset class in history - but legacy underwriting practices haven't kept pace The consequences are now visible: rising default rates, regulatory warnings, and gated withdrawals in traditional private credit Good underwriting requires two things working in parallel: institutional credit discipline and the infrastructure to enforce it at scale A live benchmark of what well-underwritten private credit looks like in practice - and what it took to build it 1. The Asset Class That Ate Wall Street Private credit grew from a niche corner of finance to a $2T market in roughly 15 years. By 2025, it has overtaken both the U.S. leveraged-loan and high-yield bond markets in size, and BlackRock projects the asset class will reach $3.5T by 2028 - with no signs of slowing down. Source: IMF Global Financial Stability Report, April 2024 The growth wasn't accidental, three structural forces drove it: Post-2008 bank deleveraging and tighter capital requirements pushed banks away from middle-market lending, leaving a credit vacuum that non-bank lenders rushed to fill Institutional capital - pension funds, sovereign wealth funds, family offices - sought yield unavailable in public markets Private credit offered illiquidity premiums with contractual protections that other asset classes couldn't match As capital flooded in, underwriting standards didn't scale with it. At $2T and still growing, that gap has become the defining risk of the asset class. 2. Built for the 1990s. Billed in 2024 The IMF flagged in 2024 that pressure to deploy capital was leading to deteriorating underwriting standards and weakened covenants. The FSB warned that private credit had never been stress-tested in a prolonged downcycle. Much of the industry kept deploying. Then rates rose sharply - and stayed there. Deals underwritten in 2021-2022 assuming near-zero rates met a very different reality: Private credit default rates climbed from 1.41% in Q3 2023 to 2.71% by 2025 Thrasio, an e-commerce roll-up aggregator, filed for bankruptcy in February 2024 Blue Owl, an alternative asset manager, gated withdrawals from a retail credit vehicle in early 2026 As Hugh Leask, CNBC, put it - private credit's "zero-loss fantasy" was coming to an end. Legacy underwriting built for a slower, smaller market was always going to struggle when conditions changed. 3. Underwrite It Right. Then Manage It Right. Getting private credit right requires two things working in parallel: the discipline to make sound credit decisions, and the infrastructure to execute, monitor, and enforce them throughout the full loan cycle. The first part is M11 Credit's domain. Founded in 2021, M11 brings fixed income opportunities to capital allocators. The team has backgrounds in corporate banking, capital markets and risk management and has experience in both off-chain and on-chain deal structuring. Underwriting & Credit Due Diligence Risk assessment: M11 conducts thorough credit due diligence on counterparties and evaluates proposed collateral against strict quality standards Risk mitigation: established clear guidelines for collateral ratios, margin call thresholds, and grace periods to maintain financial stability Ongoing Monitoring & Reporting Dynamic surveillance: the team periodically evaluates each counterparty’s financial and operational health, dynamically adjusting collateral levels and credit assessments to match changing market conditions Performance tracking: periodic performance reports, highlighting key metrics and risks to enable proactive management Legal & Documentation Deal execution: M11 dedicates expert resources to drafting comprehensive legal documentation, ensuring compliance and facilitating smooth transactions Pareto provides the onchain infrastructure layer that makes M11's credit process scalable and transparent: Automated settlement and interest distribution, replacing manual coordination with programmable, auditable execution Onchain transparency of capital flows, giving lenders real-time visibility into vault activity, balances, and transaction history Compliant onboarding infrastructure via KYB/KYC integration, ensuring all participants meet institutional requirements Configurable Credit Vault framework, enabling curators like M11 Credit to set and enforce facility-specific risk parameters onchain Reporting rails that allow lenders to independently verify position status, accruals, and payment history at any time Offchain credit judgment and onchain infrastructure working in tandem - each reinforcing the other. 4. Institutional Underwriting for the Onchain Age The FalconX Credit Vault on Pareto is a live example of what this model looks like in practice. Curated by M11 Credit, the vault is heading towards $150m in TVL - making it one of the largest single-borrower onchain credit facilities globally: M11 Credit written into the legal documentation as curator, with authority to initiate cure periods and enforcement actions on behalf of lenders Onchain settlement, interest distribution, and real-time auditability via Pareto's onchain infrastructure Master Loan Agreement with clear lender protections and covenants Compliant onboarding for all participants via KYB/KYC integration Moreover, vault tokens (AA_FalconXUSDC) are composable as collateral in Morpho and Gauntlet markets. Token Terminal 📊 @tokenterminal @paretocredit's FalconX Credit Vault TVL is up ~110% YTD, reaching a new ATH of ~$130M. @gauntlet_xyz enables CV holders to lever their positions by using CV tokens as collateral to borrow USDC on @Morpho & acquire additional CV exposure within predefined risk parameters. 25 5:50 PM • May 27, 2026 In order to achieve the necessary legal protections, FalconX operates a bankruptcy-remote Special Purpose Vehicle (SPV) that functions as the borrower from the Credit Vault on Pareto. The SPV is designed to lend funds to trading firms and hedge funds, utilizing FalconX’s sophisticated (overcollateralized) lending framework and risk assessment engine to ensure robust risk management. These PB Loans held within the SPV's portfolio act as collateral, offering a layer of security for the capital deposits made by liquidity providers. M11 Credit underwrote FalconX’ risk engine that operates within a well-defined framework that draws on established and proven practices in TradFi. Next to that, the team underwrote and leveraged FalconX’s algorithmic models to manage exposure across multiple exchanges dynamically and imposed limits on exposure to any single exchange. In its capacity as Collateral Agent of the Credit Vault on Pareto, M11 Credit imposes strict covenants on the financial health of the SPV as well as eligible collateral, information disclosure requirements. On top of the above - and to create alignment with liquidity providers - FalconX provides a first loss equity tranche to SPV. 5. Private Credit Has Matured. Underwriting Should Too Private credit has earned its place as a major asset class. The infrastructure managing it - underwriting, monitoring, enforcement - needs to match that status. With the market projected to reach $3.5T by 2028, regulators increasingly vocal about underwriting standards, and institutional capital accelerating its move onchain, the gap between legacy credit practices and what the market actually demands will only widen. That gap can be closed by institutional credit managers like M11 Credit who bring genuine underwriting discipline - and infrastructure providers like Pareto to make that discipline scalable and transparent. If you're looking for institutional-grade underwriting services, contact M11 Credit: https://www.m11credit.com/contact Institutional lenders, borrowers, and corporate entities interested in expanding their offering into onchain private credit, contact Pareto: https://pareto.credit/#contact This article was created in collaboration with M11 Credit. Not investment advice. Always do your own research. About M11 Credit Founded in 2021, M11 Credit brings fixed income opportunities to capital allocators and credit solutions to established (crypto-native) companies and DeFi protocols. By leveraging our longstanding and deep industry relationships we provide insights in up-to-date pricing and collateralization trends through existing lending activity. Our team of dedicated professionals has expertise in both off-chain and on-chain deal structuring and implementation of comprehensive covenants that go beyond standard industry documentation. M11 Credit is part of the M11 Group, a global blockchain and crypto-native investment firm. Website | X | LinkedIn About Pareto Pareto is a private credit marketplace that connects institutional lenders and borrowers, providing scalable, yield-generating opportunities and enabling institutional capital to move onchain. Tailored for asset managers, digital asset funds, fintechs, and other professional investors, Pareto offers seamless access to regulatory-compliant alternative credit products, alongside whitelabel infrastructure that enables partners to launch branded credit products onchain. Credit Vaults are the core primitive: they eliminate utilization-based inefficiencies, reduce operational overhead, and improve capital efficiency for both lenders and borrowers. Website | App | X | LinkedIn | Discord | Telegram | Blog

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