Private credit — lending by investment funds rather than banks — has exploded into one of Wall Street's largest and most profitable businesses. New York firms are financing buyouts and companies that once relied on banks or public markets.

The fictional manager Stonebridge Credit has raised billions to lend directly to mid-sized companies, offering speed and flexibility that banks struggle to match. Its executives argue the shift makes the system safer by moving risk away from deposit-taking institutions.

Regulators aren't so sure. The rapid growth has occurred largely outside their view, and skeptics warn that a downturn could expose losses in a market that has never been truly tested. For now, the money keeps flowing.