Private credit: Opportunity, risk and selectivity in a maturing market

Private credit remains attractive, but returns increasingly depend on selectivity, conservative underwriting and lender protections rather than broad exposure to the asset class.

• Banks’ retreat after the global financial crisis and successive Basel capital requirements created a financing gap that private lenders filled, particularly in Europe’s lower mid-market, where companies typically have EBITDA below EUR 50 million.
• European lower-mid-market borrowers may offer lower leverage, longer-term relationships and stronger covenants than private-equity-backed companies, while attracting less competition from large direct-lending platforms.
• Loans to SaaS companies expanded from less than USD 8 billion in 2015 to more than USD 500 billion at the end of 2025, or roughly one-fifth of total direct-lending exposure; generative AI is now challenging the growth and valuation assumptions behind some of this lending.
• Because many loans were sized against enterprise values based on revenue multiples, weaker software growth could simultaneously reduce collateral values and repayment capacity, while private-market valuations may delay recognition of credit deterioration.
• A private-credit downturn is unlikely to replicate 2008 because closed-end funds are mainly funded by institutional investors rather than short-term deposits, and lenders can use amendments, payment deferrals and restructurings to manage stressed borrowers.

Takeaway: Investors should focus on lower-mid-market, non-sponsored and less crowded sponsored lending, prioritizing capital preservation, covenant protection, borrower quality and managers capable of negotiating recoveries through stress.