(Bloomberg) — Public sentiment about private credit has become “divorced from the market-wide reality,” according to a report from the Alternative Credit Council, which represents fund managers in the industry.
Any healthy market is expected to go through tests, wrote authors Jiří Król and Cindy Ma, pointing instead to the 17% year-on-year increase in assets under management to $4.1 trillion as a sign of growth. Some credit metrics are continuing to improve, they added.
“Pressures remain concentrated rather than indicative of broader market deterioration,” they wrote.
The private credit industry has suffered some of its first shocks as a mature asset class this year. Fears around the potential impact of AI on software companies — among the industry’s biggest borrowers — fueled an exodus of investor cash from private credit vehicles known as business development companies.
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Behavior Shift
Those concerns have resulted in a broader shift in private credit lenders’ behavior, the report says, such as “requiring additional covenants, increasing loan spreads or in some cases an unwillingness to extend maturities for companies viewed as more vulnerable to AI disruption.”
Many of the market participants who contributed to the report acknowledged that the impact of the industrial revolution around AI will take years to become clear. For Michael Small, a partner at KKR & Co., other industries outside of software deserve greater lender scrutiny.
“The market is looking in the wrong place for agentic AI disruption in private credit,” he said. “Some software issuers will face stress, but professional services may be more exposed.”
A number of ratings agencies are currently flagging high default rates in private credit. The report acknowledged some signs of stress, with around one-sixth of funds surveyed reporting non-accrual rates above 5% — meaning lenders had stopped booking interest on those loans because of doubts over repayment.
Some lenders argued that stress is particularly concentrated among deals struck during the cheap-money era. Kevin Marchetti, chief investment officer and head of US direct lending at Man Group, said roughly 70% of lender takeovers stem from 2021 and 2022 transactions, “when purchase multiples were unsustainable and rates were low.”
In a more promising sign for the industry, the report also found that, on average, 10.6% of loans in respondents’ portfolios had been subject to a significant amendment — such as payment holidays, changes to maturities or financial covenants, or the introduction of payment-in-kind facilities — down from 11.7% reported in 2024.