Private Credit Market Insights

Notional defaults (red) remain low, even as bankruptcy filings (yellow) have picked up. ➡️ This is not a classical credit cycle. Bond default rates dollar-weighted have stayed MUTED, far below prior stress episodes, reflecting ample liquidity, refinancing capacity, and strong issuer differentiation. ➡️ Bankruptcy filing numbers in contrast have RISEN, concentrated among smaller, weaker firms, reflecting the K-shaped dynamic seen across the economy, consumers, and equity margin trends, and pointing to idiosyncratic stress rather than systemic deterioration, in our view. ➡️ In our 2026 Global Outlook, we write about how an environment of greater DISPERSION makes manager selection, due diligence, workout capabilities and track records even more crucial. It gives established lenders with strong documentation and proven expertise an edge.

With equity volatility creeping up in August, attention is shifting to credit markets given equity volatility is a key component of credit spread valuation models. While the VIX index has moved up to 17% from a low of 13% in July, credit spreads are little changed and have yet to respond to the rise in equity volatility. The valuation challenge for credit would become bigger if the rise in equity volatility persists, if government bond yields rise further or if the downgrade/default cycle evolves. In fact, compared to government bonds, credit looks already expensive as implied by the low level of corporate bond spreads compared to government bond yields. The rise in downgrades including downgrade reviews by ratings agencies suggests that a US credit cycle is already evolving. Rating downgrades including downgrade reviews typically precede defaults and are more timely indicators of credit perception changes. Indeed defaults appear to be following rising downgrades with this year’s volume of defaults on track to be the third highest on record in dollar terms. Rising downgrade risk appears to be already putting downward pressure on total vs. credit spread returns. The other valuation challenge for publicly traded credit markets stems from their comparison with private credit markets. Over the past year activity from public leveraged loan markets has shifted to private credit markets, suggesting price discovery for new credit is increasinglytaking place in private markets. And the yield divergence between private and public credit markets remained wide in July at around 300bp, posing a valuation challenge for public credit markets. Finally delinquencies are rising in consumer credit and commercial real estate. The Trepp US CMBS delinquency rate for office jumped by 338bp since December, suggesting that the deterioration in credit quality in office sector may already have entered a non-linear phase. Moreover, Trepp reported for July a greater rate of delinquency for larger (above $50m) loans, a rare occurrence as typically larger loans have lower delinquency rate. This occurrence happened only twice in the past during periods of economic weakness I.e. in July 2012 and June 2020 when the overall delinquency rate went above 10% in both cases. In all, rising downgrades, defaults and delinquencies suggest that a US credit cycle is emerging which is likely to worsen into 2024 given stalled credit creation and persistently high refinancing costs.

The headline that caught my eye this week was "Moody's, MSCI to Offer Private-Credit Risk Assessments." Here's my take: This partnership represents a meaningful evolution in the maturing private credit landscape. While the market has grown (depending on how you define it) to an estimated $2.5 trillion, the analytical frameworks haven't kept pace with its increasing complexity and scale. This gap between market size and transparency tools has been particularly noticeable during periods of economic uncertainty. What's interesting about this collaboration is how it addresses a fundamental tension in private markets. The very opacity that creates alpha opportunities for sophisticated investors also limits broader adoption. By developing standardized risk assessments that weigh factors like leverage, profitability, and borrower size, Moody's and MSCI are effectively creating a common language for evaluating credit risk. The collaboration also highlights a wider trend: the growing institutionalization of alternative investments. As private markets scale, they inevitably adopt more of the analytical infrastructure that's long been standard in public markets. This represents both a challenge and opportunity for asset managers – greater transparency typically narrows information advantages but also expands the total investor base. The line between "alternative" and "traditional" investing continues to blur – mostly through the gradual institutionalization of private markets. https://lnkd.in/ezv67EWN

‘Peak’ Private Credit? A prominent bank CEO in the news has stated Private Credit has peaked. With the highest level of conviction, I can assure you that is simply not the case. First, some imply that Direct Lending (DL) defines Private Credit (PC), however, it is just one of the three main pillars that represent private credit. DL is currently the largest segment of PC, it is still growing, and I expect it to grow proportional to PE, a business that will undoubtably be bigger 5-10 years from now than it is today. As corporate earnings grow, the corporate sector at-large will support more debt that allows a company to add operating leverage, a reasonable assumption since corporate earnings grow with GDP and earnings are only temporarily interrupted by an occasional recession that comes along ~1x every 10 years or so. Second, Assrt-Based Lending (ABL) is only getting started. Although Marathon has been in the ABL business for 20 years, having invested $30B+, investor interest in ABL is just ramping up now. A leading consulting firms released its survey of institutional clients with ABL representing the #1 allocation request for the coming year. The TAM for ABL is enormous with some estimates providing a range of $30 to $40 trillion. In the next 5-10 years, I believe the ABL business overall will grow by 30% annually as AUM for ABL becomes as large as DL. The ABL outlook should enable PC to grow 2x on its own. Diversification and low correlation to DL, makes ABL a terrific compliment for PC investors (institutional, insurance, wealth management). The third PC leg to the stool is Opportunistic Credit, which includes capital solutions and special situations. Capital solutions provide tailored financing to meet a company’s strategic needs, ranging from growth capital and debt refinancing to solve for liquidity or restructuring through credit or hybrid structures, structured as debt, often with equity upside. The return objective for Opportunistic Credit should allow managers to generate higher IRRs than observed in DL & ABL. As DL has slowed over the past year, capital solutions have picked up rather significantly. PC also includes infrastructure debt, data centers, and more. Specialty finance such as litigation finance and NAV lending are not sectors that Marathon favors, however, they do represent a growth for PC. So, while, certain skeptics may question the growth of PC, you should have no doubt the direction of travel—the size and scope are huge and getting bigger. As the global economy grows $3 trillion per year (global GDP now exceeds $100 trillion), the amount of credit needed grows proportionally. Private Credit peaking? Not even close; that’s like saying the internet peaked in 2001 à before smartphones, cloud computing, streaming, social media, and more recently AI has helped to re-define the global economy. The Private Credit markets are ~$4T today and I believe it will grow to $10T over the next 7 years.

I was asked what happens to private credit returns if we see a credit cycle. I've analyzed the factors at play here: - Default rates could increase, bringing total returns down. In J.P.Morgan's 2025 Long Term Capital Markets process, this was one of the factors leading to lowering expected long-term returns in private credit. - If there is real economic distress, central banks will cut interest rates to stimulate growth. Since private credit is floating rate, yields will come down. (That's why you still need to hold investment-grade bonds that will rally in this scenario!) - But on the other side, NEW debt issued could be at higher yields. Spreads are already widening in response to concerns in software credit. We could see 50-100bps higher yields to compensate for perceived higher risk. - Private credit, like any credit, has an asymmetric return profile. That means there's usually more to lose than there is to gain. If you lend $100 with the expectation to get back $110, maybe you only get back $105 (if rates go down) or even $50, or $0 (if you take losses). If you're very lucky you might get $120 (if rates go up). But you won't get $200 back. - That means we could see bottom-quartile managers and funds underperform in a down-cycle. But the top-quartile performance is unlikely to be higher than in the past. - Putting it all together, we can expect dispersion across private credit to increase going forward, with lower median returns and lower bottom quartile returns -- but not necessarily lower top-quartile returns! -- if we have a credit cycle. This underlines the importance of manager and fund selection when it comes to private credit. The gap is already wide between top performers and bottom performers, and it could get much wider.

What happens when a $2T asset class enters its first real credit cycle? Private credit expanded rapidly during one of the most accommodative capital market periods in decades. Low interest rates, tighter bank regulation, and a surge in private equity transactions allowed direct lenders to replace banks as a primary financing source for sponsor backed companies. The industry grew to roughly $2T in assets. The path to today unfolded over several years. 2020–2022 | Expansion Low rates and aggressive dealmaking fueled rapid growth in direct lending. Private equity relied heavily on private credit to finance buyouts, and the asset class scaled quickly across institutional portfolios. 2023–2024 | Wealth channel opens Private markets expanded into wealth portfolios through non traded BDCs and semi liquid vehicles. Firms such as Blackstone, Ares, Blue Owl, and Apollo built large credit platforms supported by retail inflows. 2025 | Early signals Publicly traded BDCs began trading at discounts to NAV, signaling that markets were questioning private credit valuations in a higher rate environment. 2026 | Liquidity pressure emerges Redemption pressure has appeared across several vehicles. Blue Owl restricted withdrawals in one retail credit fund. Public private credit funds are trading at wider discounts, and capital raising for non traded BDCs has slowed. Markets are also repricing risk inside the sector. UBS warned that private credit defaults could reach 15% in a severe downturn. Several listed credit vehicles have already adjusted. Apollo’s MidCap Financial Investment Corp. reduced payouts and marked down assets. FS KKR Capital reported rising troubled loans. BlackRock TCP Capital cut its dividend. Secondary markets are sending another signal. Liquid private credit funds are trading at roughly 18% to 19% discounts to NAV, compared with a 6% premium one year ago. Widening discounts often signal expectations for asset markdowns, rising defaults, and slower recoveries. Recent situations involving Tricolor Auto Group, First Brands Group, and issues tied to an MFS property bridge loan highlight governance and verification risk within a rapidly scaled asset class. Private equity faces its own liquidity pressure. Bain estimates buyout funds hold about 32,000 companies worth $3.8T in unrealized value. Average holding periods have stretched to 7 years, and distributions to LPs remain near 14% of NAV. Private credit finances many of those companies, which extends loan duration and slows capital recycling when exits stall. Family Offices are focusing more closely on underwriting discipline, covenant protection, and fund structure as liquidity expectations meet illiquid assets. Private credit remains a critical financing channel for the private economy. The cycle is turning.

Private credit typically refers to non-bank, non-publicly traded debt financing.   The private credit market in the U.S. has grown substantially over the past two decades and has become a major source of financing. Private credit in the U.S. has grown exponentially, from roughly $46 billion in 2000 to about $1.7 trillion currently. The initial trigger was the tighter regulatory regime for banks post the Global Financial Crisis but that tailwind gained momentum from the growth of private equity which leveraged debt financing for acquisitions, investors chasing yield in a low-rate world and greater investor democratisation. Retail investors in the U.S in fact now access private credit with as little as $1,000, leading to growing retail flows into such funds. Private credit funds in the U.S and Europe have become large and mainstream and provide credit to a complete range of corporate borrowers, from large to small.   The Asian private credit market is still relatively small with less than 5% of global market share. The corollary of this is that bank led credit is about a third to half of the total credit supply in the US and Europe but is over 70% in Asia, including India. Whenever an asset class grows this rapidly there will be issues that would arise. The main issues around the rapid growth of private credit in the U.S centre around the illiquidity of the investments, relative opacity and the systemic risk, since banks often finance these non-bank credit providers.    The Indian private credit market has also grown rapidly. The categories of providers of private credit in India include NBFCs, Domestic AIFs, Venture Debt funds, Foreign private credit funds and, more recently, Family Offices and UHNIs. Insurance companies and pension funds, which are large players in the U.S, are limited participants here because of the regulatory guidelines. This asset class is seeing growing traction on the demand side. The drivers of demand growth are the growth of the space banks and NBFCs can’t or are not keen to finance, underdeveloped bond markets, the ability of private credit providers to create customised solutions for borrowers, growth of private equity led transactions and increasing investor appetite for higher yielding fixed income instruments, especially after the change in taxation on fixed income funds. As a result, we have seen an increase in activity on the supply side too, with more AIFs coming into existence.   As India grows, the demand for credit will have to be met by a wider range of providers and the opportunity for private credit funds is therefore going to be large and attractive. With growth comes greater complexity and issues like liquidity, top quality governance and a strong focus on borrower quality will be key as private credit funds strive to become part of mainstream portfolios and a large asset class by itself.

Here are the Questions Private Credit LP’s should be asking! Below is the due diligence request list prepared by a C-Level executive with significant investing experience (an existing LP) before committing to increase his allocation to RE Real Estate Debt Fund II, LP (the private credit fund managed by RD Advisors).  The team, led by Juan Carlos, covered this in a four hour meeting in our Boston office. The List:  “ --Loan listing with amounts, maturities, rates, other key terms, current loan status --Loans in delinquent status, including further analysis on how these are addressed (extensions, revised terms, foreclosures) --Writeoffs (if any) --Detailed cash flow statement, including analysis of inflows and outflow timing.   --If there's a grading system or risk assessment system for entering into loans, further insight into that would be great --Would like to go through the 2-3 worst deals the fund has ever done, to understand what happened and what the learning points were. --Any sort of concentration risk (multiple or high dollar loans with one or few counterparties) --Amount of repeat loan business vs. new loan business --Planned or possible expansion areas being considered outside of Boston --How RD thinks about expansion, and prioritizing where to invest additional funds --How does RD think about the risk of loss if the Boston market turns, and what the overall portfolio risk would be if there's a 20% decline in the Boston real estate market.  Worst case scenario planning.” And this list is in addition to our regular monthly and quarterly reporting (including full investor presentations/webinars)! Personally I think it’s a great list that LP’s should add to their own due diligence process.  What items are on the top of other private credit investors list? Were there key items you would add? By no means investment advice. #PrivateCredit #InvestorEducation #AlternativeInvestments Paul Shannon, Scott Trench, Ian Ippolito , Ignacio Ramirez Moreno, CFA, Chris Fitzpatrick, George Webb, CF2®, Matthew Burk, Tod Trabocco, CFA Aleksey Chernobelskiy , Leyla Kunimoto John Imbriglia

In our latest IFM Investors Insights paper we turn our attention to strategic role of private debt within institutional portfolios, with a particular focus on its contribution to portfolio defensiveness, diversification and robustness. Our analysis is motivated by the growing institutional interest in the asset class, driven by its potential to deliver stable income, downside protection, and diversification benefits in an increasingly uncertain macroeconomic environment. Key findings include: • Private debt plays a foundational role in defensive portfolios, offering superior risk-adjusted returns compared to traditional fixed income and other private market assets. • Diversification benefits are most pronounced for risk-averse investors, with diminishing marginal utility as risk appetite increases and allocations shift toward higher-growth alternatives. • Portfolio construction within private debt matters—the choice of strategy and underlying exposures significantly influences the magnitude of performance enhancement. • The results reinforce the case for a more prominent strategic allocation to private debt, particularly for investors seeking to enhance portfolio resilience amid evolving, highly uncertain, market dynamics. With IFM Economics Frans van den Bogaerde, CFA & Christopher Skondreas and Hiran Wanigasekera #privatedebt #assetallocation #investment #riskadjustedreturns #IFM