Private Credit Archives

Will Private Credit Trigger Another Systemic Financial Collapse?

Written by IntaCapital Swiss on May 27, 2026. Posted in News & Reports. Leave a Comment

A number of financial commentators have recently opined that recent ructions in the private credit market might bring about a repeat of the GFC (Global Financial Crisis) that the world suffered 18 years ago in 2008. Such commentators advised that investors were getting skittish with regards to the $3.50 trillion in AUM (assets under management), and for the first time, recent inward investments of $5 Billion were overshadowed by outflows/redemptions of $7 Billion. Also, a recent report on 6^th May 2026 by the FSB, (Financial Stability Board, headquarters basel, Switzerland) highlighted not just the benefits, but real vulnerabilities including complex interlinkages with banks, borrower credit quality concerns, and valuation opacity.

Shifting Sectors and Transparency Deficits

Analysts suggest that data shows some funds have lent heavily to companies in the software and tech sectors where existential threats from AI could exist, plus there are worries of an AI bubble bursting. Furthermore, the private credit market is suffering from a lack of transparency making it difficult to summarise what and how strong lender protections are in place, plus making it just as difficult to understand how loans in this market are performing.

Institutional Exposure and Global Footprint

Private credit experts point to the massive sector exposure held by traditional financial institutions. Current data confirms that non-bank financial institutions hold circa $2 trillion in private credit exposure, followed by insurance companies at roughly $1 trillion, and banks with approximately $300 billion. The US currently dominates the $3.5 trillion private credit market accounting for circa 75% of global activity, with Europe in second place accounting for circa EUR400 billion in AUM.

Lessons from 2008: The Subprime Catalyst

However, various experts point out that during the 2008 financial crisis, the initial subprime market was actually quite small. The widespread economic damage was ultimately driven by complex derivatives and the enormous leverage built up on top of those subprime loans. Everything began to grow exponentially when banks bought subprime loans and packaged them into MBS (Mortgage Backed Securities)**.

*The Subprime Market 2008 – This was a segment of the lending industry that provided mortgages to high-risk borrowers with poor credit scores or low incomes. As these borrowers were more likely to default, lenders charged higher interest rates, and history shows the mass defaults in this area triggered the 2008 GFC.

**MBS/Mortgage Backed Securities – These were the primary catalysts for the 2008 GFC. They are financial products where banks bundle thousands of individual home loans together and sell them to investors who are looking for high-yield bonds. Many of the buyers were from Wall Street who repackaged the MBS into CDOs (Collateralised Debt Obligations)***.

***CDO/Collateralised Debt Obligation 2008 – These were complex financial instruments that pooled together various debt assets (e.g., mortgages) and repackaged them into tranches with varying levels of risk, from AAA down to junk being the subprime mortgages. However, because of the senior risk packaged into the CDOs, the rating agencies gave them a AAA rating allowing institutions such as global banks to purchase these instruments without risk.

The Collapsing House of Cards

In short, when the subprime mortgages failed, they brought down the whole house of cards as the global market for CDOs exceeded $1.5 trillion (of which 700 billion contained subprime MBS). As the subprime borrowers began to default the CDOs effectively became worthless, forcing global banks to write down hundreds of billions of dollars. This engendered a lack of trust between banks, who refused to lend to each other wiping out the wholesale market. As a result, some of the major banking names had to be bailed out. Lehman Brothers, the fourth largest investment bank in the US, with 25,000 employees worldwide, filed for Chapter 11 bankruptcy protection on 15^th September 2008.

Synthetic CDOs and the Insurance Multiplier

However, there was another player in the collapse of the banking system in 2008, that is the synthetic CDO which was a complex financial derivative that actually accelerated the financial crisis. This synthetic CDO did not hold actual mortgages. Instead, it referenced a portfolio of MBS. Investors in this instrument sold Credit Default Swaps (CDS) on those reference assets in exchange for regular premium payouts. The primary buyers of these CDS were hedge funds looking to bet against the housing market.

*Credit Default Swaps – This is a financial derivative that acts like an insurance policy against a borrower defaulting on a debt, such as a corporate bond, loan, or a CDO. Investors use it to protect themselves from losses or to speculate on the financial health of an entity.

This type of CDO required no cash, just a derivative contract, and those in this market were able to create multiple synthetic CDOs on the same pool of MBS, magnifying the number of bets tied to a single underlying home loan. The dominant seller of the underlying insurance was AIG (American International Group) who did not bother to hedge their risk, as the rating agencies also issued AAA ratings on the synthetic CDO. When the crash arrived on September 15^th, 2008, AIG were on the hook for a staggering $32 billion, which they could obviously not cover, the rating agencies slashed AIG’s credit rating, and they had to be bailed out by the US government.

Structural Divergence: Private Credit vs. Subprime Debt

In today’s market, some experts are saying that private credit is not the same as subprime and private credit is just another term for direct lending. The derivative structures (CDOs synthetic CDOs*) and unhedged insurance cover on credit default swaps, that turned the subprime losses into a global disaster simply do not exist in a comparative form in the private credit market.

This does not mean to say that there won’t be a crisis in the private credit arena, but probably not to the extent that plagued the financial system in 2008. However, when a private credit fund struggles, losses will appear on the lending banks balance sheet as they provided the leveraged funds for the loan book in the first place.

Regulatory Safeguards: The Basel III Framework

After the 2008 crisis, the Bank for International Settlements (BIS), the central bank for central bankers, issued updated rules for Tier 1 and Tier 2 capital. This meant commercial banks had to hold significantly more capital on their balance sheets to prepare for future downturns. Over the years, regional central banks have used strict financial stress tests to ensure local institutions comply with these BIS requirements.

The Risks of Contemporary Deregulation

However, regulators in the US are actively loosening banking constraints, making one of the most significant rollbacks since the GFC 2008. Federal agencies have advanced sweeping proposals to reduce Tier 1 capital requirements and ease leveraged lending restrictions, effectively freeing up billions of dollars in Wall Street lending. Many experts, analysts and financial commentators fear the worst, as when President Trump loosened up financial restrictions in his first term, the US went on to suffer from the regional banking crisis.

Looking Ahead: A Wait-and-See Market

As always, lessons from the past are soon forgotten, and if the private credit market does become a problem, and it may not replicate the GFC in 2008, but with Tier 1 capital adequacy rules being torn up in the USA, markets can only wait and see what potential fallouts may present themselves to the global economy as a whole.

The Continuing March Upwards of Private Credit

Written by IntaCapital Swiss on February 26, 2024. Posted in Blog Article, News & Reports. Leave a Comment

Private credit can trace its roots back to the 1980’s where companies with strong credit/borrowing records were being loaned funds directly from insurance companies. However, post the 2007 – 2009 Global Financial Crisis, private credit really came into its own as an alternative to bank lending, especially as financial regulators were cracking down on those deposit taking institutions who were involved in risky lending. In today’s market, private credit has become a major contender in the loans market, and a serious rival to banks and similar lending institutions.

As of June 2023, data released shows that global closed-end private debt funds* have assets under management of circa USD1.7 Trillion, whereas as of close of business December 2015 global assets under management were circa USD500 Billion. Indeed, expert money managers suggest that by 2028, due to possible massive shifts in the financial markets, borrowers would flock to the front door of private credit funds, boosting the value of the global private debt market to USD3.5 Trillion.

Closed-End Fund – This fund is a type of mutual fund, and in order to raise capital or investment, the fund issues a fixed number of shares through a one-time initial public offering (IPO). The shares can be bought and sold on a stock exchange if the fund is quoted, but no new money can be received into the fund once the IPO closes. Access to closed-end funds is only available during a New Fund Offer (NFO).

Open-End Fund – As opposed to a closed-end fund, the open-end fund such as mutual funds and exchange-traded funds (ETF’s) accept new capital on a constant basis and also issue new shares.

Mutual Fund – This is an investment opportunity where monies/investments are received from a wide range of individuals and pooled together in order to purchase a wide range of stocks, bonds and other securities. Funds are managed by professional money managers and are structured to match the prospectus where the investment objectives are stated.

Private credit is responsible for providing a vast amount of financial resources into a number of differing investment strategies, some of which are outlined below.

1. Mezzanine Finance – Mezzanine loans or capital can be structured either as subordinated debt or as equity which is usually in the form of preferred stock. Mezzanine financing is recognised as a capital resource which can often be seen as subordinated debt and sits between higher risk equity and less risky senior debt. To facilitate the explanation of mezzanine debt, below are the definitions of senior debt and subordinated debt.

· Senior Debt – often issued in the form of senior notes and also known as a senior loan, is a debt that will be paid first by the borrowing company. In other words, it takes priority over other unsecured debt and in the event the borrowing company goes into liquidation, owners of senior debt will be the first to be repaid.

· Subordinated Debt – or as the name implies junior debt, is usually the last type of debt to be repaid. It has a lower status to senior debt and hence the name subordinated debt. Typically, subordinated debt or loans will carry a lower credit rating and will therefore offer a higher return than senior debt.

2. Venture Debt – Venture debt, sometimes referred to as venture lending, is a certain type of debt lending to venture-backed companies. A venture-backed company that receives venture debt is defined as companies who are at the start-up stage of their existence and rely on venture capital to expand their business. Typically the company has yet to make a profit, and loan size is usually based on the company’s recurring revenue

3. Distressed Debt – Private credit funds are known a). for buying up corporate debt that is currently trading well under its original value and b). where companies are in difficulties to provide new financing, with a view to make a profit when the company either liquidates or restructures.

4. Direct Lending – This type of lending by private credit funds, (aka unitranche loans), are typically a senior term loan (first lien and the least) but can also involve credit lines and second lien loans which are subordinated to the first lien.

5. Special Situations – As the subject suggests, loans in this case are applicable when a special situation or event occurs, and the company’s profitability or growth (a company’s metrics) are not taken into account when lending decisions are made.

A number of experts have asked the question: will private credit stand a sustained protracted recession? Private credit fund managers have answered that in many cases their loans are safer as they are locked in for longer than your standard lending institutions. However, the uncertainty that surrounds the terms in the private credit market means that in a recession no one really knows how far valuations would fall, and as a result would investors in funds that are struggling be able to sell out their positions.

Regulators in the United States, the United Kingdom and the European Union are looking at expanding regulation in the private credit market. Indeed, regulators in the EU are putting strictures in place which ensure that private credit funds will diversify risk, and will cap leverage, whereby funds use borrowed funds to enhance profits. However, it appears that regulation will remain somewhat opaque as there seems to be a lack of appetite to bring regulation in line with banks and other lending institutions. This of course may reflect the attitudes of many governments, who seem happy to encourage private credit investment that they deem too risky for banks.

The Growth of the Private Credit Market and the Potential Pitfalls

Written by IntaCapital Swiss on January 29, 2024. Posted in Blog Article, News & Reports. Leave a Comment

What is private credit and why has the growth of this particular market been so spectacular? Looking back at the lending market as a whole, first there were the banks, then debt specialists and private equity entered the lending market, quickly followed by hedge funds and wealth managers. The private credit market really began to make its mark after the 2007 – 2009 Global Financial Crisis, when banks tightened their belts and pulled back from lending. Today, not only on Wall Street in the United States, but in all major financial centres, the buzz word on everyone’s lips from venture capitalists to sovereign wealth funds is private credit.

An explanation as to what private credit represents is where SMEs (small and medium-sized enterprises) who are non-investment grade and typically represent the recipients of loans from non-bank lenders. This market can serve as a diversifier as debt is less correlated to equity markets, and due to periodic income from repayments the J-curve is smaller*.

*J-curve – is a trendline that shows an initial loss followed by a dramatic gain, hence the j-curve.

In a nutshell private credit targets non-investment grade SMEs, and unlike private equity there is no direct management involvement. Any added value will come mostly from restructuring. The type of investments are usually direct loans which relate to senior instruments in the capital structure, often accompanied with bespoke terms and floating-rate coupons**.However, it must be pointed out that as the market has expanded so have the catchment levels, with the market catering to a more diverse base.

**Floating-Rate Coupons – A floating rate note, commonly referred to as a FRN, is a debt instrument with a variable interest rate or coupon which is tied to a benchmark rate such as Libor (London Interbank Offered Rate) which of course has now been replaced in the US Dollar market by SOFR, (The Secured Overnight Financing Rate) and in the GBP market by Sonia, (Sterling Overnight Index Average). Many FRN’s have coupons that pay quarterly, and investors can benefit from increasing interest rates as the note adjusts periodically to current market rates.

The private credit boom has recently been driven by central banks monetary tightening policies which began in 2022 with unprecedented rate hikes over the next year to late 2023. The Federal Reserve raised interest rates ten times over in this period from a low of 0.25% to a high of 5.25%. Similarly in the United Kingdom, the Bank of England increased its key benchmark rate eleven times from a low of 0.25% to a high of 5.25%, and in Europe the ECB (European Central Bank) raised its rates seven times from a low of 0% to a high of 3.75%.

This has inevitably forced borrowers to look elsewhere to look for alternative lending sources, and the private credit market has benefited considerabley. Indeed, earlier this year in the United States, a number of mid-cap banks ran into liquidity problems, and this together with higher interest rates prompted some the more traditional lenders to exit certain business lines or unload assets. Hence, the retreat of bank lending, higher interest rates and bigger fees have brought a large number of new players to the private credit market, which has turned from what was essentially a niche market to a must-have market.

Today the private credit market has expanded its philosophy to what has been described as a catch-all concept. Indeed, the market now incorporates traditional direct lending to the SMEs to finance buyouts, real estate and infrastructure debt. Experts advise that this will help fund managers to profit from strategies which can shield them from the volatility of mark-to market* losses in public markets. The expansion can be seen by the number of new players entering the market, such as large asset managers who are bolting on private market funds to their existing businesses or in the private equity world increasingly using private market companies for their acquisitions. Indeed, the risk strategies employed by the new entrant private credit funds differ massively from one company to another. For example, some companies are offering high-risk mezzanine finance* to companies that are struggling, whilst mid-sized companies with fairly small or low leverage are being offered senior secured debt and private equity are being provided with funding for buy-out transactions.

*Mark-to-Market – is an accounting practice whereby the value of an asset is adjusted to reflect its true value in changing market conditions. Furthermore, it is also where assets and liabilities are recorded at their current market value, and if a company had to pay off all their debts and liquidate their assets, mark-to-market accounting would provide an accurate value of what the company is worth at that time.

**Mezzanine Finance – Mezzanine loans or capital can be structured either as subordinated debt or as equity, which is usually in the form of preferred stock. Mezzanine financing is recognised as a capital resource which can often be seen as subordinated debt and sits between higher risk equity and less risky senior debt. To facilitate the explanation of mezzanine debt, below are the definitions of senior debt and subordinated debt:

Mezzanine financing is a type of junior debt or capital and is viewed as the last stop on the debt borrowing chain or capital structure, before equity is sold in order to raise capital. Mezzanine financing allows companies to access capital beyond that of what can be accessed through senior debt. It is typically longer-term debt (7 – 8) years, and is interest only during the loan period, with amortisation at maturity. Many borrowers view mezzanine finance as “solution based” capital as opposed to permanent capital, serving a specific purpose(s), which can be replaced with lower interest-bearing capital such as senior debt at a later date.

The private credit market has increased by circa 300% in size over the last nine years, with experts valuing the market in the region of USD1.5 Trillion. Indeed, one of the largest alternative credit managers has advised that the industry could grow to the stage where it has replaced USD 40 Trillion of the debt markets. The private credit market began its life by catering to the private equity companies, and like the private equity companies they raise funds from investors. This however is where the similarity ends, as private credit lends debt to their clients whereas private equity as the name suggest invests equity in their clients.

Experts within the private credit market are referring to this boom as “debanking”, which according to one senior player is still in its infancy, while others refer to the current state of the private credit market as “The Golden Moment”. Both analysts and experts suggest that new banking regulations in the United States under proposed Federal Reserve rules will act as a catalyst for the private credit market, as the capital required to support the US wholesale banking industry could increase by as much as 35%.

However, there are some dissenters from the regulatory arena in the United States who say that the private credit market could prove a risk to the US banking system as, unlike the banking industry, it is subject to indirect and somewhat minimal oversight. Indeed, the Federal Reserve has been requested by lawmakers as to what they, the FDIC (Federal Deposit Insurance Corp), and the Office of Comptroller of Currency were doing to address this issue. However, in a counter statement the American Investment Council trade group advised that private credit services were noy systemically risky and were quoted as saying, “ In this economy, private credit is helping small businesses to get capital to grow and succeed”.

Naysayers and detractors who say the market has grown to a point where there will be failures should not be ignored. Whatever the market, history has shown that there is always a crisis waiting around the corner. The Global Financial Crisis stands out as a case in point as does the mid-cap banking wobble in the United States earlier this year which spread to Europe and led to the downfall of the eminent Swiss bank, Credit Suisse AG.

New entrants to the market are committing funds in the region of USD500 Million to USD1.5 Billion, despite the fact that some analysts are predicting that the market itself is coming under strain from rate hikes inflicted on economies through central bank quantitative tightening policies. Experts advise that most of the private credit investments that are outstanding as of today would have been contractually agreed eighteen months ago and would have been made against a completely different economic backdrop.

Most private credit loans are arranged (as stated previously) on a floating rate basis, and the interest hikes over the last year could potentially have a significant effect on the performance of those companies and the funds invested therein. One expert suggests or rather confirms that the whole structure is now coming under strain. Many balance sheets of debtor companies have five to seven turns of leverage and if they had to be refinanced today then every dollar earned would go on interest payments.

Many players in the private credit market have only experienced bullish tendencies; they have never experienced a bear market or a downturn. Recently released data shows that to date in 2023 the volume of defaults in the direct-lending market in the United States alone reached circa USD1.7 Billion. Indeed, some of the savvier participants are already hiring those with expertise in workout and restructuring including expertise in managing investments in a downturn. Market sentiment and data suggest interest rates are set to fall in 2024 – they can’t come soon enough for many in the private credit market.

Tag: Private Credit