High leverage among borrowers in private credit markets increases the risk of default during economic downturns. These borrowers often have limited access to traditional financing and rely on private credit due to their riskier profiles. In times of economic stress, such as rising interest rates or declining revenues, their ability to service debt diminishes, leading to an elevated risk of default.

B is incorrect. While private credit could contribute to systemic risk, it is less interconnected with other financial sectors compared to traditional banking or public debt markets.

C is incorrect. Valuation uncertainties are a concern in private credit but are secondary to the primary risk of borrower defaults, especially in leveraged transactions.

D is incorrect. Regulatory scrutiny is increasing in private credit, but it is not the direct result of high leverage; rather, it stems from the market’s opacity and rapid growth.