Private credit is resilient

It is overblown to worry about an imminent financial crisis affecting private credit

Should you invest in some funds that offer attractive yields ?

Private credit, according to scaremongers, is an imminent financial catastrophe that will cause the financial crisis of 2008-2009 to recur. To be fair, there are some reasons to be concerned about the industry. Asset manager Pimco warned earlier this month that some riskier businesses will find it difficult to pay their debts, saying, "The credit loss cycle is upon us."

Leading private credit investors have substantial exposure to software companies, and The Wall Street Journal has discovered that not all of this exposure is disclosed. Many of their business models are in jeopardy due to AI's disruption of software. According to the Bank of International Settlements, this industry accounted for £500 billion in loans at the end of 2025, or 19% of the total.

Anxious investors have turned to selling, and default rates are rising. Redemption limits have had to be used by private credit funds in order to stop investments from being forced to be liquidated. Credit spreads have expanded, terms have been tightened, and lending is slowing.

Don't be afraid of defaults on private credit.

However, according to Pieter Staelens of CVC Capital, "it is hard to see how private credit could be a systemic issue for bond markets." According to him, only £3 trillion of the £140 trillion global fixed income market is made up of private credit. "There is no cause for concern, although the rate of defaults in all credit markets has slightly increased recently. It is below the 20-year average at nearly 2%. "The first quarter's earnings were the highest on record; as a result, defaults will continue to be low."

Watch the entire video here. In addition, avoiding defaults is not always the solution because they are a natural part of credit investing. "If you are willing to lose money when selling a position, I can manage a portfolio with no defaults," says Staelens. "The key is not defaults but credit losses. They won't wipe out our money because we are accustomed to defaults, which average 1% annually."

What you receive back is what counts in defaults. According to Staelens, "we typically recover 80 cents in the dollar in an insolvency," though an asset-light software company would likely recover less. These circumstances can occasionally be highly lucrative. CVC participated in the reorganization of Doncasters, an aerospace manufacturer of precision parts, in 2020. The company will use the proceeds of its upcoming initial public offering (IPO) to pay off debts. CVC "will get a lot more than we put in."

In the private credit market, get compensated for the risks.

According to Staelens, "there is a lot of misperception about how risky the credit market is." Risks include default, foreign exchange, liquidity, inflation, early repayment, duration, and interest rates, of course. However, the goal is to "only take exposure when you are paid for the risk" rather than to avoid risk.

There will probably be some fallout from that boom because private credit has been one of the subsectors that has grown the fastest. "Some people most likely take short cuts when determining risk. Any rapidly expanding asset class will experience hiccups along the way, but they won't go away. The issue is not structural risk, but poor risk management. Investing should be done by professionals."

Credit rating agencies, according to CVC, "are too backward-looking to be helpful." "A significant portion of our work involves identifying areas where credit ratings are inaccurate. A large portion of the market, particularly passive funds, make investments based on the ratings of the agencies. This means that a debt that has been downgraded to CCC and is currently trading at 50 cents in the dollar due to forced sales by funds that are no longer permitted to own it could present a fantastic opportunity.

CVC Income & Growth (LSE: CVCG) has an 8.5 percent yield and is traded at net asset value (NAV). Similar yields of 7% or 8% are offered by competitors like Invesco Bond Income Plus (LSE: BIPS), M&G Credit Income (LSE: MGCI), CQS New City High Yield (LSE: NCYF), and TwentyFour Select Monthly Income (LSE: SMIF). With a five-year return of 61%, which is significantly higher than what government bonds have produced, CVC leads the field. Don't let the scaremongers stop you.