After a rapid rise in recent years, private credit is facing stress that is rattling investors yet may set up a healthier market. Roland Kastoun, asset and wealth management advisory leader at PwC, said the shakeout is a needed reset for a sector that grew fast as banks pulled back from lending.
The comments come as higher interest costs strain borrowers and as fundraising slows from pandemic-era highs. Deals signed during the low-rate years are being tested. Managers are working through downgrades, amendments, and a trickle of defaults. The outcome could reshape how risk is priced and how loans are structured across the $1.5 trillion to $2 trillion market.
A Market Under Pressure
Private credit expanded when regional banks stepped aside and sponsors wanted speed and certainty. Direct lenders financed buyouts, growth plans, and refinancings, often with flexible terms. That momentum met a tougher rate cycle. Many middle-market companies now face interest expenses that rose faster than earnings. Coverage ratios have narrowed, and some borrowers need more time or fresh equity.
Fundraising has cooled as limited partners balance cash needs and commitments to other private strategies. Competition among large managers has eased in some segments, while smaller shops without scale feel more pain. Valuation marks have raised questions for some funds, though listed business development companies remain a window into portfolio health.
Regulators have flagged data gaps and pockets of concentration but have not signaled an immediate systemic threat. The loans are largely held by funds, not deposit-taking banks, which may limit spillover but can amplify outcomes for investors in those funds.
Why Some See Strength Ahead
Kastoun argued that short-term turbulence will improve lending discipline and returns. He said investors are already demanding tighter documentation, stronger covenants, and higher spreads to reflect true risk. In his view, the reset is healthy for an asset class that expanded quickly.
“Private credit’s recent troubles will ultimately make the asset class stronger,” said Roland Kastoun, asset and wealth management advisory leader at PwC.
Managers with scale can add value through workout experience, sector expertise, and access to fresh capital. They can also steer deals toward structures with better protections, including quicker triggers for intervention. For new loans, higher base rates and wider spreads translate into higher income, provided losses stay contained.
Skeptics Warn of Hidden Risks
Not everyone agrees the path is clear. Critics point to limited transparency and uneven reporting standards. They worry that sponsor support may fade if equity cushions shrink. Some see rising stress in cyclical sectors such as consumer-facing services and in companies burdened by high leverage from 2021 and 2022 deals.
There is also a debate about recoveries. Private loans are often senior and secured, but outcomes vary by sector and structure. If the economy slows, defaults could rise, lengthening workouts and pressuring net returns. Fund liquidity remains a concern for investors who need cash in a market where secondary sales can be thin.
What the Data Suggests
Industry estimates put global private credit assets near $2 trillion, up several times over the past decade. The pace has slowed, but dry powder remains sizable at large platforms. Default rates have ticked up from low levels, while amendment activity has surged as managers buy time for companies to adjust.
Case studies show mixed results. Some healthcare and software borrowers absorb higher rates due to recurring revenue. Others in discretionary retail and building products struggle with costs and softer demand. Outcomes hinge on sponsor support, pricing power, and balance-sheet flexibility.
Signals to Watch
- Trends in interest coverage and free cash flow for 2021–2022 vintages
- Amend-and-extend activity and covenant resets
- Default and recovery rates by sector
- Fundraising flows and secondary-market pricing
- Regulatory steps on disclosure and leverage
Outlook and Next Steps
The next phase will test underwriting and patience. Larger managers appear positioned to gain share as sponsors seek certainty and as banks remain selective. New deals are likely to feature tighter terms, higher equity checks, and more careful sector screening. Investors will press for clearer reporting and better alignment on fees and incentives.
Kastoun’s view captures a cautious optimism: strain now can create stronger standards and steadier returns later. For allocators, the task is to separate managers with proven workout skills from those stretched by rapid growth. For borrowers, discipline on leverage and cash flow will be essential.
As the market adjusts, watch the data on amendments, defaults, and recoveries. If losses remain manageable, higher yields could support performance and reset expectations. If stress deepens, consolidation may follow. Either way, the shakeout is setting new guardrails for one of finance’s most watched lending markets.
