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21 / 11 / 2025
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Private credit: Misguided fears and the real risks
Private credit recently hit the headlines for all the wrong reasons due to the collapse of First Brands and Tricolor. But these are not typical of private credit investments, argues Doug Clark.
Recent credit issues at First Brands and Tricolor have prompted alarmist headlines about private credit. Three main arguments are typically cited, firstly that these defaults signal a broader wave of credit losses, secondly that private credit’s lighter regulation poses systemic risk and thirdly, that lending standards have weakened. While each contains a kernel of truth, they largely miss where the real risks lie.
Recent credit issues at First Brands and Tricolor have prompted alarmist headlines about private credit. Three main arguments are typically cited, firstly that these defaults signal a broader wave of credit losses, secondly that private credit’s lighter regulation poses systemic risk and thirdly, that lending standards have weakened. While each contains a kernel of truth, they largely miss where the real risks lie.
Defaults are not the warning sign many think
In our view, the two high-profile bankruptcies do not reflect
the health of private credit. Neither First Brands nor Tricolor were financed primarily through private credit structures – one used syndicated loans, the other asset-based lending. Both lacked private equity sponsors, unlike most private credit deals.
Both cases involve alleged frauds, which tend to be isolated rather than systemic. Ironically, the greater risk today may be the lack of defaults.
In recent years, “liability management exercises” and “amend-and-extend” arrangements have often replaced traditional defaults.
These mechanisms can mask underlying distress, delay recognition of losses, and erode recovery prospects.
Regulation and systemic risk
Calls to regulate private credit like banks overlook fundamental differences.
Private credit funds are not leveraged deposit-takers; they have limited maturity mismatches and better alignment between capital and assets. Banks, by contrast, rely on flighty deposits and operate with much higher leverage.
Even after rapid growth, private credit remains modest in scale – around 10% of U.S. corporate lending versus 35% for banks. JP Morgan’s balance sheet alone is larger than the size of the entire private lending market. It is therefore reasonable that regulation differs in intensity.
In addition, aggregate equity market valuations remain at
historically elevated levels. Consequently, any relaxation in
private credit lending standards is generally reflective of the
increased risk appetite we see in many other markets.
The lesson from recent bankruptcies is not that private cred
it is inherently fragile. Instead, investors should focus on ‘5
Ds’ to help them manage risks going forward:
- Diversification: to prevent single-name events from damaging portfolios
- Default experience: favouring managers who have navigated full default cycles
- Due diligence: rigorous credit work remains the best defence; and
- Discipline: maintaining lending standards during periods of excess
- Dynamic: ability to reduce risk and evolve portfolio exposures
Private credit carries risks, but not the ones most headlines suggest.
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