Private credit is not a monolith

Private credit today is significantly broader than it was a decade ago. Its growth has made it both more complex and more systemically relevant, a fact that is increasingly evident with today’s headlines around BDCs, software exposure amid AI disruption, and overall default risks.

In our view, some of the recent news flow is painting the asset class with too broad of a brush. We use a three-dimensional framework to map the nuances of the private credit space and track its potential risks:

1. the underlying asset being financed
2. the vehicle structure that holds those assets
3. the form and amount of leverage being used

Each of these dimensions operates along a spectrum, and we believe considering all three together adds important context to the overall risk profile of the asset class.

Dispersion across the private credit asset spectrum

The asset mix in the private credit market today looks very different from 10 – 15 years ago. At more than US$3 trillion (and even larger if you include its full opportunity set), it has become a durable part of the financing ecosystem and has expanded well beyond its roots financing leveraged buyouts and middle-market corporate lending. The market now spans a wide range of credit qualities, collateral types, and geographies, with clear parallels to bank and public-market lending.

Many private credit portfolios now hold hundreds or even thousands of positions, creating diversification across these different factors. However, this does not eliminate dispersion, and stress is emerging unevenly with the pressure noted above in specific subsectors (e.g., software and technology), as well as among borrowers with near-term refinancing needs.

This reinforces our view that underlying asset composition remains the primary driver of outcomes in the asset class. Notably, we believe the rapid expansion of the market in recent years challenged underwriting quality in some areas. For allocators, this means asset-level underwriting is therefore increasingly important in distinguishing resilient exposures from more vulnerable ones.

Vehicle structure can shape outcomes

Private credit is likewise held through a diverse range of structures, including in institutional closed-end funds, on balance sheets, via buy-and-hold separate accounts, and increasingly, through evergreen vehicles. This last structure offers limited periodic liquidity, often capped at 5% per quarter or less. We’ve heard strong feedback from the market and wealth distributors that evergreen vehicles are the preferred future vehicle in this space, but even within that, there are various structure types with different profiles. For example, US 40 Act interval funds are typically capped at a 0.5:1 debt-to-equity ratio, whereas BDCs generally can go up to a 2:1 debt-to-equity ratio.

Vehicle design has recently proven to play a central role in shaping outcomes. Some structures introduce conditional liquidity, where redemption availability depends on fund-level constraints. Recent redemption activity in these vehicles has reflected not only fundamentals but also portfolio rebalancing, profit-taking, and reactions to market headlines. This dynamic can also introduce path dependency, where flows themselves affect market outcomes.

We believe the market’s recent stress has also exposed misalignment in liquidity expectations for some investor types. Redemption caps, queues, and timing constraints are built into many of these structures to ensure that open-ended vehicles have liquidity terms that match the underlying portfolio liquidity. In our view, it’s critical for fund sponsors to ensure clients understand these vehicles’ liquidity features in periods of stress.

Leverage comes in many forms

Finally, private credit funds also generally use a range of financing approaches. These include traditional bank financing through subscription lines, bank asset-backed facilities at a fund or asset level, private placement debt, NAV-based lending from other private credit funds, and structural leverage through mezzanine debt or middle-market CLOs. There is no single optimal structure, and leverage profiles vary widely.

We believe headline leverage ratios can obscure the underlying risk as some vehicles maintain relatively low balance sheet leverage but embed additional exposure through structurally levered assets. Notably, leverage also connects private credit to the broader financial system. Banks play a meaningful role in providing financing, and tighter credit standards can transmit stress even to otherwise stable assets.

In our view, this reinforces that leverage should be assessed as a spectrum rather than a single metric, and that leverage format matters as much as leverage amount.

Bottom line on private credit investing today

To put it bluntly, private credit is not a monolith. The combination of asset exposure, vehicle structure, and leverage determines how risk emerges across the asset class. Treating private credit as a single asset class obscures meaningful dispersion in exposures and risk profiles. In contrast, understanding how asset type, vehicle structure, and leverage levels interact provides a more effective way to identify where risk is concentrated, how it may evolve, and which areas may be mischaracterized by broader market sentiment.