The private credit market has grown from approximately USD 800 billion in assets under management in 2019 to over USD 2 trillion today. The risk infrastructure — default management capability, workout experience, LP liquidity facilities — has not grown at the same rate. When the credit cycle turns, the mismatch will become visible.
The second-order effects
For public market investors, the concern is contagion. Private credit funds hold positions in companies that also have public debt outstanding. When private credit portfolios come under stress, the forced selling of public instruments to meet LP redemptions creates dislocations in listed credit markets that equity volatility models do not capture well.
What we are watching
Three indicators are most useful for anticipating private credit stress before it transmits to public markets: PIK toggle usage rates in direct lending portfolios, covenant amendment frequency in broadly syndicated loans, and the spread between private credit yields and equivalent public high yield instruments.