The asset class still represents a relatively small share of total corporate borrowing, credit fundamentals remain broadly resilient, dry powder remains abundant, redemption limits reduce liquidity risks and bank exposure remains modest.
Private credit’s rapid growth and some recent negative headlines about the asset class have led some investors to question whether private credit could become the source of a risk-off event. We see a number of factors that mitigate the risk of private credit posing a systemic threat to global risk markets.
Risk one: Private credit funding dries up
The first route by which private credit could become a systemic risk is if funding in the asset class dried up, making it difficult for businesses to roll over loans or achieve new credit. This situation could put pressure on public market alternatives, like high yield debt, and ultimately starve businesses of the funds needed to support economic activity, which would affect the broader economy. We see several factors that limit that risk.
First, the vast majority of private credit is invested through closed-end institutional vehicles, rather than semi-liquid retail structures. While retail funds have attracted attention because of redemption pressures, they account for only around 15% of global private credit assets. Institutional financing, which accounts for the lion’s share of the capital in the asset class, is largely invested in funds that do not offer periodic liquidity and is therefore invested long term (see Exhibit 23).
Indeed, institutional investors continue to allocate capital to private credit strategies despite recent concerns around the asset class. While fundraising has moderated from its post-pandemic peak, demand from long-term investors remains positive (see Exhibit 24).
Importantly, even if new fundraising slowed sharply, the industry has accumulated substantial dry powder in recent years (see Exhibit 25). This stock of uncalled capital provides a buffer for managers to continue deploying capital and support borrower refinancing activity for an extended period without relying on additional fundraising. This provides an important safeguard against any near-term slowdown in fundraising from retail investors.
It’s important to also remember that despite its rapid growth, private credit remains a relatively small component of the broader financing ecosystem. Private credit accounts for roughly 9% of corporate borrowing, meaning the overwhelming majority of corporate financing continues to come from banks, public debt markets and other sources of capital.
Risk two: Private loan losses affect solvency and create problems elsewhere in the financial system
The second risk is that rising defaults across private credit portfolios result in losses that affect balance sheets elsewhere in the financial system, creating systemic problems. This risk has garnered attention because a high proportion of direct lending funds have built significant exposure to software and technology companies over the last decade (see Exhibit 26).
The behaviour of public equity prices highlights that rapid advances in artificial intelligence (AI) have introduced greater uncertainty around some of these companies’ long-term earnings prospects and their ability to service future debt obligations. The concern is that defaults and losses could rise over the coming years, particularly in selected sectors.
However, there is little evidence of a broad deterioration in aggregate credit fundamentals today. Default rates have edged higher but remain low by historical standards. And while broader measures of distress such as payment-in-kind (PIK) interest, covenant amendments and borrower waivers rose meaningfully over the last few years, they have moderated over the last few quarters.
In addition, for a solvency event to become systemic, losses must impair the institutions responsible for creating credit. Historically, these events have occurred when losses were concentrated within highly leveraged banks.
During the Global Financial Crisis (GFC), many banks operated with leverage ratios of around 10x and had substantial exposure to mortgages. In some cases, residential and commercial real estate lending accounted for close to half of total loan books. As losses mounted, bank capital was eroded, forcing institutions to deleverage, reduce lending and raise capital. The resulting contraction in credit availability amplified the economic downturn and transformed a housing correction into a broader financial crisis.
The structure of today’s private credit market is materially different. Most credit risk is held by pension funds, insurers, sovereign wealth funds and other long-term institutional investors, rather than deposit-taking banks. While global banks remain involved through subscription lines, warehouse facilities and other financing arrangements, their exposure to private credit is estimated to be around 12.5%. In addition, private credit funds typically employ relatively modest leverage, often around one turn of debt, compared with the substantially higher leverage employed by banks prior to the GFC.
As a result, even if defaults were to rise meaningfully, losses would be less likely to impair the institutions responsible for creating credit across the broader economy than they were in 2008. The more likely outcome would be weaker investor returns, lower future commitments and, over time, less available credit within the asset class, rather than the type of balance-sheet shock required to trigger a systemic credit crunch.
A risk, but not the main event
Private credit will undoubtedly experience periods of stress, and it’s likely that defaults will move modestly higher through 2026. However, for private credit to derail a constructive outlook for risk assets, those stresses would need to constrain the supply of credit to the broader economy or trigger a destabilising solvency event.
Current evidence suggests the risks are fairly low. The asset class still represents a relatively small share of total corporate borrowing, credit fundamentals remain broadly resilient, dry powder remains abundant, redemption limits reduce liquidity risks and bank exposure remains modest.
While potential stress in the private credit market is one of the many risks worth monitoring, we do not currently see it as a sufficient reason to abandon a risk-on view for 2026.