The Future of Private Credit

September 22, 2025

Based on data from J.P. Morgan, private credit funds raised $70 billion through July 22, 2025, “a figure that indicates private credit will likely not beat the $233.3 billion it raised last year,” according to Bailey McCann, a financial journalist and the Senior U.S. Editor for the Opalesque Alternative Market Briefing, a daily newsletter covering alternative investments. McCann, writing in Chief Investment Officer, says risk factors are rising in private credit, and performance is harder to predict. Will experts from NCTR valued commercial associate members Fidelity Investments, Principal Asset Management, and Alcentra (a Franklin Templeton company) agree? To find out the answer to this question – and more — don’t miss the panel entitled “What is the Future of Private Credit?” at NCTR’s 103^rd Conference on Monday afternoon, October 6^th, moderated by Craig Husting, Chief Investment Officer (CIO) of the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS).

As McCann points out, investors have favored the private credit asset class for years as it has grown into a $1.7 trillion market “that investors regard as important for everything from portfolio diversification to current income to secondaries.” Interest has stayed strong, she says, “despite a years-long slowdown in the types of mergers and acquisition deals that were core to private credit financing.” [“Secondaries” refers to the secondary market for private credit investments, where investors – such as pension plans — trade existing private credit positions with one another, rather than originating new loans or investing directly in new deals.]

Private credit trading in the secondary market — led by both general partners (GPs) as well as limited partners (LPs) — is increasing at the same time as these other slowdowns have occurred, and McCann asks why this is the case and what are the implications.

In response, she notes that analysts “are a bit divided about what these shifts ultimately mean.” For example, private credit money managers “are sitting on billions of dollars in dry powder” and loans, broadly speaking, are still performing. “On the other hand, default rates are up, and questions remain about how private credit as an asset class will fare in a significant market correction,” she observes.

Furthermore, she points out that both private equity and private credit “are also showing a greater sensitivity to macroeconomic factors like interest rates, inflation and tariffs than they have in the past.” All this, she explains, makes predicting future performance that much harder. Indeed, taken together, she says that private credit is showing the signs of a rapidly maturing asset class, and this “may mean that investors need to adjust their expectations going forward.”

McCann says that, against this backdrop, “the opportunity set in private credit is shifting.” As she notes, direct lending funds and transactions still make up the bulk of the activity, “but investors are taking a closer look at asset-backed lending” as such “collateralized strategies” can prove to be a diversifier in a portfolio dominated by direct lending, she points out.

As a consequence, she quotes David Scopelliti, global head of private debt at Mercer, as saying “deal volume is muted on the direct lending side,” but the slowdown “hasn’t reached a level where anyone is necessarily worried.” However, Scopelliti also notes there is “an overhang in direct lending,” with more activity happening in structured credit and asset-based finance, “areas that are less dependent on the [mergers and acquisitions] market.”

Scopelliti goes on to tell McCann that asset-based finance transactions “require more work than direct lending in terms of structuring and due diligence.” And with banks having “largely stepped out of the sector,” this has created opportunities for private credit managers. “This is really an opportunity set that has been hiding in plain sight,” he says, adding that asset-based lending is typically shorter duration, which he believes “can be a positive for investors looking for income with shorter lock ups.”

Stephanie Rader, global co-head of alternatives capital formation within Goldman Sachs Asset Management, agrees with Scopelliti. “Clients are focused on asset-based finance … the opportunity set is large and the spreads in private markets compared to public markets are attractive right now,” McCann quotes her as saying, with Rader adding that “We expect to see continued growth in this part of the market.”

What does this all mean for investors such as public pension plans? McCann warns that, “[w]hether as signs of a maturing asset class or a response to macroeconomic volatility, or both,” risk factors are increasing in private credit.

For example, she points out that default rates have been “elevated” since the beginning of 2025, and private credit managers “are beginning to turn to continuation funds to manage performing loans that have been extended and amended past the lifecycle of the original commingled fund in which they were first invested.” While McCann goes on to say that continuation funds “are not necessarily indicators of distress,” she does view them as a signal that “borrowers and managers are pushing out maturities, which, for whatever reason, can be risky.”

Timothy Lee, director of private credit – U.S. corporates at Fitch Ratings, agrees that the default index range over the past several quarters is elevated relative to the past couple of years. But he also tells McCann that “[b]roadly, issuer quality remains high and loans are performing.” The default activity, he says, is in smaller issuers and in C-grade paper, where the companies are weaker and they may already have other types of financing in play, like bridge loans, which makes the overall debt load higher.

In addition, for companies that need more time to pay on existing loans, if they have cashflows and their balance sheets are generally strong, McCann says Lee believes there “is still a preference among private credit managers to extend and amend the arrangements, and that is happening without a significant decline in loan quality.”

Finally, McCann points to the fact that payment-in-kind, or PIK, arrangements are also “on the rise.” According to Fitch Ratings, much of that activity has been concentrated within the business development company sector and levels are starting to normalize, but “those loans represent a riskier type of financing,” McCann notes. [A payment-in-kind (PIK) arrangement is a loan feature that essentially permits borrowers to defer interest payments by adding the interest to the principal balance of the loan rather than paying it in cash. Borrowers use PIKs to preserve cash, especially during periods of financial stress or when pursuing growth initiatives.]

McCann says average PIK income as a percentage of interest and dividend income is higher in 2025 than in 2024, which can be an indicator of declining credit quality. “PIK arrangements offer companies payment relief in the short run, but result in a much larger bill at the end of the loan term, so companies that ask for this option are betting big on their future growth in an uncertain economy,” she stresses.

Mercer’s Scopelliti agrees, explaining that if cash paying loans start converting to cash plus PIK, it can be an indicator of default risk, especially if the company is not on a high-growth trajectory. “PIK is definitely something we focus on in our due diligence process with managers because it’s a bit like an IOU at a poker game—it’s not cash on the table,” he is quoted as saying.

So what does the road ahead look like for private credit? McCann says “[f}orecasting the future in private credit is getting increasingly difficult,” but her sources “are expecting the near term to be more of the same.” However, she also underscores that questions linger around inflation and the impact of ongoing adjustments to tariff and other economic policies.

She also says lenders “appear to be taking steps to tighten terms,” with “priming” — the practice of new loans taking over seniority status in the repayment hierarchy –having come into focus as companies and private equity managers “look for ways to restructure their credit arrangements without entering bankruptcy court.” That is, private credit lenders “have been willing to participate in so-called liability-management exercises, if it means they can avoid bankruptcy court,” she explains. However, she refers to Cindy Davis, a partner at law firm Reed Smith, who told McCann that as priming becomes a tool that more companies and private equity managers are reaching for, lenders are taking a closer look at their covenants.

“We see these cases move forward and once it becomes known that a company got this deal or that deal, others try it. Then lenders move to put something in the documentation saying you can’t do that again. But it’s a bit of a chase,” she says. “It has the most negative impact on minority lenders because they end up with more risk than they anticipated,” Davis underscored.

Will NCTR’s panel of experts at our upcoming Annual Conference in Salt Lake City, October 4-7, agree with McCann’s assessment of the future of private credit? More importantly, what else will they have to say about the role of this asset class in public pension plans’ portfolio diversification? Have the investments produced the returns that were forecast? What about the claims of a lack of transparency leveled at all alternative investments? And how will this asset class perform in any prolonged market downturn, which it has so far not really had to deal with?

You won’t know if you don’t go!