Private credit under the spotlight: what it means for banks and insurers

Private Credit has moved to the forefront of market discussions, often associated with concerns over liquidity, asset quality and underwriting standards, as well as investor behaviour. 

Yet behind the headlines lies a heterogeneous asset class whose risks and dynamics demand further investigation. Importantly, not all Private Credit segments face the same challenges, nor do they carry the same risk profile. Recent scrutiny has focused on redemption risk from so called “semi-liquid” funds, further exacerbated by growing concerns around the asset class exposure to the software sector.

This analysis aims to cut through the noise and restore perspective. It also assesses the specific implications for insurance companies and banks on both sides of the Atlantic given the specific roles they play in the Private Credit value chain.

Executive summary:

• Private Credit is different from Private Debt
• Direct Lending - which fuels the current negative news flow - is a subset of Private Credit.
• Its growth is positively correlated with the private equity funds growth during the low-interest rate decade, and BDCs (Business Development Companies) recent exponential growth, also helped by the expansion of investor base from institutional to individuals.
• This created a need to deploy investors’ capital relatively quickly, rising risk for potentially more questionable underwriting standards. Further, given the Private Credit relatively large exposure to tech/ software companies, there has been growing concern about Artificial Intelligence disruption risk.
• The private aspect of the asset class provides by construction limited visibility to public market, thus making it even more vulnerable to sentiment.
• While headlines are largely sentiment driven for now (rather than actual credit deterioration), they are expected to continue and thus drive additional redemption requests out of certain semi-liquid funds.
• Next step will be higher lending spreads and portfolio mark downs rather than plain defaults, resulting in more market clean up, but also higher capital needs for end investors exposed to the asset class, namely life insurers.
• Banks play a key role as they lend to all players in the Private Credit ecosystem. US banks are more exposed to Private Credit than European banks. Yet, US banks’ exposure to business credit intermediaries (incl. BDC) is moderate at +4% of total loans in average. European banks are exposed to Private Credit funds counterparty risk via Synthetic Risk Transfers (SRT).
• Private Credit may have yet to be tested by a systemic shock comparable to the Global Financial Crisis. This remains a “known unknown”: in a severe downturn, Private Credit assets ultimately owned by the end investor may not behave as models currently assume. This is not necessarily because of the underlying asset (the loan itself), but mainly because of the rise in increasingly sophisticated wrappers which embed leverage themselves, whose ability to withstand stress has not been tested so far. 

Private Debt, Private Credit, Direct Lending: mind the gap

Private Credit is a subset of the Private Debt asset class, a much broader space, which also includes real assets financing such as commercial real estate, infrastructure, among many others.

There is no unique definition for Private Credit.

Certain market participants limit its definition to direct lending to middle-market companies, asset-backed finance, and bespoke lending solutions to Investment Grade companies (Private Placements) Whereas others use a broader definition including any fixed-income security not traded on the public bond market, and not publicly rated (generally bearing a Private Letter Rating - PLR). Certain market participants would also include Broadly Syndicated Loans (BSLs).

Direct lending is the particular segment of Private Credit which makes the current headlines. It means private loans to middle market, Private Equity (PE) sponsored portfolio companies with sub-Investment Grade ratings (PLRs).Direct lending goes a long way back, since the 80s, but it has significantly developed in the aftermath of the global financial crisis when banks, subject to more stringent regulation, partially stepped back from the space, and Alternative Asset Managers (Alt AM) stepped in, by partnering up with the Private Equity sponsors. The decade long low-interest rate environment until 2022 made the asset class even more attractive given returns were increased through additional leverage.

Their “more liquid peers” on the market are the Broadly Syndicated Loans (BSLs), also called leveraged loans or senior loans, and originated as part of private equity deals and invested by institutional investors. During the 2000s this corporate debt was securitised in structured credit vehicles such as CLOs (Collateralized Loan Obligation). Strong institutional investor demand for CLOs and the profits available to banks for structuring them fuelled demand for loans, thus increasing BSLs issuance.

In the Private Credit ecosystem, the relationships between end investors and the borrowing companies are numerous and multifaceted. Insurance companies and banks play a key role as transmission channel to the overall market of any real or perceived risk.

For one, insurers, namely life insurers, are seasoned underwriters of certain types of private debt such as Private Placements, or commercial real estate loans and these portfolios have been successfully tested through cycle. These illiquid, long-term assets have their place in a life insurer’s asset allocation as a natural match for its long term liabilities. As far as Direct Lending is concerned, the Alternative Asset Managers (Alt AM) play now a central part as the middlemen between end investors, of which institutional investors such as insurance companies and pension funds are the most natural recipients for the asset class, and the borrowing companies to the other end. The most direct way for the alternative asset managers to source such loans is by nurturing strong relations with the private equity sponsors.

Many alternative asset managers are vertically integrated, in order to capture both the asset origination capability and the end investment platform. However, the move to private assets is not limited to asset manager-backed insurers (Apollo, Brookfield, Carlyle, Blackstone, KKR). Traditional life insurers are also expanding the asset origination capabilities either by investing in their direct platform or by setting up joint ventures with alternative asset managers.

Finally, banks continue to be at every level of the ecosystem: they are directly involved in broadly syndicated loans, and they are also involved in structuring increasingly complex investment vehicles, and of course, providing leverage to all participants.

Private Credit shift: rapid growth and expansion of semi-liquid funds

Growth in Direct Lending is positively correlated with the private equity funds growth during the low-interest rate decade. Many asset management firms (AMs) have effectively entered the Private Credit market in the aftermath of the global financial crisis, meaning they have not been tested through the cycle. Further, BDCs recent exponential growth, also helped by the expansion of investor base from institutional to individuals has moved AM focus from investing to deploying investors’ capital relatively quickly, rising risk for potentially more questionable underwriting standards.

According to Preqin the Private Credit market including BDCs has reached a global size of around $1.8 trillion at in 2025, with growth overwhelmingly concentrated in North America, which now accounts for the bulk of global assets under management (≈ $1.3 trillion).

Beyond scale, the composition of the investor base has shifted. Private Credit has progressively opened to retail investors, who now represent around 20% of the investor base, particularly through perpetual BDCs and other semi liquid vehicles – which by their design offer periodic liquidity against hard to sell assets.

This introduces a new dynamic: higher sensitivity to investor sentiment and redemption requests. In periods of real or perceived stress, this mismatch between illiquid underlying assets and more frequent liquidity expectations namely from retail investors could amplify negative sentiment, thus fuelling further redemption requests.

In other words, even in absence of asset quality blow up, the design of the semi liquid investment wrappers may create a problem when the fund liabilities run out faster than any assets inflows.

Asset quality under pressure: Software concentration and portfolio markdowns

While we do not anticipate a massive asset quality blow up, signs of pressure do exist beyond most commented defaults of autumn 2025, and the most recent ones, the software maker Medallia and the dental service provider Affordable Care.

It is a fact that private equity backed portfolios exhibit a proportionally larger concentration to the Technology and Software sector, where there is growing concern about AI disruption risk. At a minimum, certain of these companies will see their earnings prospects downwards, thus impacting their equity values and their ability to fund at acceptable conditions over time.

For perspective, while technology sector accounts for only 4–5% of the US High Yield bond market, its share rises to 10–15% in the Broadly Syndicated Loans (BSL) market and reaches between 20–40% in direct lending according to Oaktree Capital, April 2026.

This shift has also coincided with more accommodative lending practices, including increased financing of unprofitable companies through ARR based loan structures (Annual Recurring Revenues) and a broader use of Payment in Kind (PIK)[1] features, blurring the line between flexibility and delayed risk recognition.

¹ Payment-in-Kind (PIK): interest capitalised instead of paid in cash.

With 2028 marking the next maturity wall for private equity portfolio companies, risks are likely to materialise unevenly. In an opaque market where public disclosure is limited, sentiment continues to dominate, making wider spreads and portfolio mark downs a more likely adjustment path in front of additional redemptions, than widespread defaults.

Private Credit: A US centric risk for insurers today; may change in the future

Given their natural allocation to long term, illiquid assets in front of their long-term liabilities, life insurers could be seen as the first in line to be involved in any transmission channel of Private Credit risk to the rest of the financial system.

However, there is a big offsetting factor in favour of insurance companies: if their asset - liability matching is done right, they are not expected to have a liquidity problem. They may just incur additional capital needs should the asset quality of the underlying loans deteriorate, whose real impact on insurer capital is a function of the size of the exposure at individual companies.

Starting with US. On the face of it, US life insurers’ exposure to private debt may be perceived as very large, in excess of $3tn, or close to 37% of industry invested assets. The largest share is “plain vanilla” though, well originated and tested through multiple economic cycles—most notably Private Placements (PP) and Commercial Real Estate (CRE) lending. This relative resilience was illustrated in 2023, when US insurers’ CRE portfolios displayed roughly half the delinquency rate observed in the broader market.

Within private debt, Private Credit is however a non negligeable portion. Around $700bn, or 9% of invested assets, is invested through Private Credit funds, while approximately $422bn (around 5% of invested assets or 67% of insurers equity) consists of privately rated securities (Source: Moody’s survey on rated US insurers 2024). This matters because privately rated (PLR) securities are the closest we can get to estimating the exposure to direct lending. Of note, the size of PLR is significantly higher, around 300% of their equity, for life insurers with strong ties to private equity platforms.

Private Credit does not represent a material risk for European insurers today. In Europe, insurers’ exposure to private debt remains limited, at about +€500bn, corresponding to roughly 5% of invested assets. Moreover, this exposure is concentrated among a small number of countries—mainly Dutch, French and German insurers - and is predominantly composed of traditional private debt instruments such as mortgage loans rather than Private Credit funds (source: EOPIA, 2024).

However, this may change in the future as Solvency 2 rules evolve to encourage insurers (through lower capital charges) to increase their allocation to securitisations – which are by construction the most common wrappers for Private Credit.

All in all, as of today, US life insurers are more exposed to valuation risk in a scenario of market stress than their European peers. While Private Credit has so far avoided widespread defaults, a tightening financial environment is more likely to translate into portfolio mark downs and therefore higher capital requirements for insurers, rather than immediate credit or liquidity events. This may change in the future, as European insurers may increase their allocation, as supported by the Solvency capital regulation.