Scaremongers claim that private credit is an impending financial disaster that will lead to a re-run of the 2008-2009 financial crisis. And in fairness, there is some justification for concern about the sector. “The credit loss cycle is upon us,” said asset manager Pimco earlier this month, warning that some riskier companies will struggle to service their debts.
There is significant exposure to software firms among leading investors in private credit and not all of it is disclosed, as The Wall Street Journal has found. The disruption of software by AI is putting many of their business models at risk. This sector accounted for $500 billion of loans at the end of 2025 (19% of the total), says the Bank of International Settlements.
Defaults are rising and nervous investors have switched to selling. Private credit funds have had to exercise redemption limits to prevent the forced liquidation of investments. Lending is slowing, terms have been tightened and credit spreads have widened.
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Don't fear private credit defaults
Yet “it is hard to see how private credit could be a systemic issue for bond markets”, says Pieter Staelens of CVC Capital. After all, private credit accounts for just $3 trillion of the $140 trillion global fixed income market, he says. “The rate of defaults across credit markets has picked up a little recently but there is no red flag.” At close to 2%, it sits below the 20-year average. “The first quarter saw the best earnings on record; with strong earnings, defaults will stay low.”
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Besides, defaults are part and parcel of credit investing; avoiding them is not always the answer. “I can run a portfolio with zero defaults if you are prepared to incur a loss in selling a position,” says Staelens. “Credit losses, not defaults, are the key. We are used to defaults, which average 1% each year, so they won't destroy our funds.”
What matters in defaults is what you get back. “We typically recover 80 cents in the dollar in an insolvency,” says Staelens, although this would probably be lower for an asset-light software company. Sometimes these situations can be very profitable. In 2020, CVC took part in the restructuring of Doncasters, a maker of precision parts for aerospace. The firm is set for an initial public offering (IPO) soon and will use the proceeds to repay debts. CVC “will receive way more than we invested”.
Get paid for the risks in the private credit market
“There is a lot of misperception about how risky the credit market is,” says Staelens. Of course, there are risks: default, foreign exchange, liquidity, inflation, early repayment, duration and interest rates. However, the aim is not to avoid risk, but “only take exposure when you are paid for the risk”.
Private credit has been one of the fastest-growing sub-sectors, so some fallout from that boom is likely. “Some people probably cut corners in assessing risk. Any asset class that grows quickly will see wobbles along the way but it won't disappear. Bad risk management rather than structural risk is the problem. You need to invest with people who know what they are doing.”
CVC is sceptical of credit-rating agencies, “which are too backward-looking to be helpful”, he says. “A large part of what we do is working out where credit ratings are wrong. Much of the market, especially passive funds, invest according to the agencies' ratings.” That means a debt downgraded to CCC and now trading at 50 cents in the dollar – as a result of forced selling by funds that are no longer allowed to own it – could be a great opportunity.
CVC Income & Growth (LSE: CVCG) trades at net asset value (NAV) and yields 8.5%. Rivals such as Invesco Bond Income Plus (LSE: BIPS), M&G Credit Income (LSE: MGCI), CQS New City High Yield (LSE: NCYF) and TwentyFour Select Monthly Income (LSE: SMIF) have similar 7% or 8% yields. CVC leads the pack with a return of 61% over five years, far above what government bonds have delivered. Don't be put off by the scaremongers.
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