What should asset owners really be worried about over private credit?
The boom in demand for private credit has led to an influx of asset managers into the sector, and a growth in the number of funds available to asset owners - which is what concerns Mercer’s Niall O’Sullivan (Reuters/Carlo Allegri)
Good morning. Many investors are worried about private credit, and a lot of that worry is centred around whether or not the asset class as a whole is on the verge of blowing up.
But what if there was a more nuanced approach available?
It’s certainly true that demand for private credit has increased in recent years - a trend that is largely projected to continue.
The size of the private credit market was about $2tn in 2020 but by the start of 2025 it was $3tn. Some estimate that it will grow to $5tn by 2029. This is due to a number of trends including bank lending regulations and market volatility.
Because no one spots a business opportunity like a fund management company, this has led to a proliferation of private credit funds.
Not only this: it has led to an increasing number of fund management companies entering the private credit market.
This in particular is a concern for Niall O’Sullivan, chief investment officer for global solutions at Mercer.
When AOX asked him if he was worried about a private credit bust, he said: “Am I more worried than normally? Yes, but possibly about something slightly different.
“If I look at the aggregate amount of credit provided, there was a far bigger amount from bank balance sheets to collateralised loan obligations. I don't think the amount of private credit is enormous.
“You can see where the overall spreads are, and they are tighter but not ridiculous.
“We always are going to get idiosyncratic defaults, slowdowns, accidents and events. What I’m worried about is what happens next because I worry that a lot of the managers who have come in have no experience of a genuine credit crisis.
“Where I’m much more worried as all this comes through over the next while is if there is a credit event some of the lenders are not skilled and won’t be able to work it out.”
So what is O’Sullivan recommending to asset owners? Basically, they need to do their homework.
He said: “You don’t want your credit manager to be someone who has dipped in to create a team and when it all goes wrong they will dip out.
“You want evidence they have worked through credit defaults. What is their legal team like? How are you going to be able to evidence it?”
