1.) PE is enabled by easy money. If you look at the PE industry, the entire sector was enabled initially through the rise of junk bonds in the 80s, bonds so "worthless" but cheap issued by high risk companies (everyone was issuing bonds back then) with high reward for the winners - kinda like VC as an investment. In recent history, it was the ZIRP and of late money-printing. Easy money with high returns always pulls out money from more conservative investments like government bonds or blue chip stocks, and into more risk-tolerant sectors like PE and VC.

2.) Underwriting banks issue the debt for the PEs. They get paid handily, both from the constant debt payments PE firms take out of cash flow and from repeat underwriting business as investment bankers for future deals. Banks have their own ways of disposing junk debt that fails, but usually PE debt doesn't fail - the only ones being shafted are the company employees and the company itself. The management of the company, the owners and shareholders of the company, and the PE firm itself all make out of it like bandits.

Nowadays, the traditional bread and butter of PE, such as leveraged buyouts, are mostly gone, with most of the returns coming from other avenues such as Real Estate (like buying up homes in Western cities), Emerging Markets and more passive investments in family/practitioner-owned businesses, like the Healthcare space.