“Private credit markets are not optional, they are necessary”: The stakeholders holding firm on private credit despite bubble fears
Bank of England governor Andrew Bailey is among those worried about defaults within the private credit space (Unsplash/Robert Bye)
It’s been a bad time for private credit lately. 2025 saw high-profile defaults from First Brands Group, now on the verge of total liquidation, and Tricolour Holdings, which is facing over $900mn in potential losses.
As the old adage goes – although former Tricolour CEO Daniel Chu would probably disagree – there is no smoke without fire. Indeed, for some policy makers and investors, including Bank of England governor Andrew Bailey, the failure of both firms set “alarm bells” ringing.
Robert Sears, chief investment officer of Capital Generation Partners, told AOX in November last year that “companies in a wide array of different sectors were facing private credit defaults over an extended period of time – as opposed to being concentrated in one sector and at the same time”.
A month prior to this, Lee Foulger, director of financial stability at the Bank of England, told AOX that a growing trend towards payment-in-kind – allowing borrowers to defer interest payments by adding them to the loan principal – could collectively increase the risks of default.
In August 2025, TCW estimated that the percentage of loans allowing PIK as a form of payment had reached nearly 20 per cent. The asset manager warned that the presence of PIK income can cause a “liquidity mismatch” between cash interest received and obligations to investors, and ultimately risks straining capital management and investor returns.
There are others, however, who maintain that these fears are overstated, with the private credit market – estimated to be worth $3.5tn by the Alternative Investment Management Association in 2025 – yet to yield persistent default issues.
Stuart Hitchcock, head of portfolio management for private credit at Legal & General, cautions against conflating different parts of the private credit universe when discussing potential defaults.
He says: “In the investment grade space, many asset classes have existed for decades – importantly, in an institutional investment context, and the evidence does not point to persistent or widespread default issues; we have not seen recurring challenges across one sector, let alone a ‘wide array’ of them.”
Hitchcock added that observing defaults across a range of sectors does not indicate a uniform problem within private credit, but rather reflects unique outcomes across different risk profiles, capital structures and underwriting standards.
Capricorn Private Investments, a London-based multi-family office with £3bn in assets under management, has taken a similar line. It says that 2025 was a “robust” year for its client portfolios, with private credit continuing to be a source of relatively stable returns.
The multi-family office’s 2026 investment outlook argues that the high-profile defaults of First Brands and Tricolour “represented more noise than signal”. According to Capricorn, private credit benefits from structural advantages such as more rigorous due diligence, stronger covenant protection and greater flexibility to engage directly with borrowers when issues arise.
The document continues: “Many established managers in this space have delivered close to 10 per cent annualised returns over extended periods. From a system-wide perspective, private credit has helped distribute credit risk away from banks and towards long-term capital providers, reducing asset–liability mismatches and contributing to greater financial stability than in the pre-[global financial crisis] period.”
Capricorn’s private credit portfolio involves privately negotiated loans secured against assets or cashflows, spanning a range of strategies beyond traditional direct lending and including differing levels of rights or seniority.
Its exposure spans lower-risk strategies yielding 6 to 7 per cent, through to more specialised, less liquid opportunities targeting higher returns of 10 to 15 per cent.
The Bank of England warns that amend-and-extend transactions, whereby a lender alters or delays a loan’s maturity in exchange for a higher yield, may “mask” borrower vulnerability.
Pitchbook put US leveraged-loan amend-and-extend volume at $226bn in 2024, versus $176bn in 2023 – a nearly 30 per cent increase.
However, Michela Bariletti, chief credit officer at Standard Life, does not necessarily see this as an issue: “The market has already shifted away from simple maturity extensions. Extensions now tend to involve a meaningful repricing of risk and a broader renegotiation of terms.”
She cautions that not all A&Es are equal, with robust underwriting of renegotiated terms being “essential”. For Bariletti, strong A&Es generally include fresh equity injections, revised amortisation schedules, broader capital-structure resets and tighter controls on excess cash within the structure.
Regarding the risk of default, Bariletti acknowledges that private credit defaults have risen since post-pandemic levels. Yet these, she argues, are not too dissimilar to the trends in public markets.
“The key issue is the scale and timing of defaults. More diffuse defaults over an extended period are not necessarily a concern, provided they do not rise to abnormal levels. In fact, this pattern may reduce the likelihood of a systemic risk event.”
Ultimately, says Hitchcock, structural changes in bank balance sheets, alongside growing financing needs, including for infrastructure investment, emerging markets, and sustainability-related capital expenditure means that “private credit markets are not optional, they are necessary”.
“The question,” he said, “is not whether defaults occur, but whether risks are appropriately priced, managed and recovered within each segment of the market.”