James Mackreides says the opaque private-credit market is finally facing overdue scrutiny after a US insurance empire drew attention.
Private equity - and, increasingly, private credit - present themselves as more exclusive and more rewarding than the public stock and bond markets. In finance, simply placing "private" before an asset class can create an aura of higher returns. Access is restricted, much like with a Louis Vuitton handbag or a Rolex watch: favored institutions and high-net-worth individuals (HNWIs) get in, while others do not. For a sought-after private fund, entry can require at least £1 million.
According to the Bank for International Settlements (BIS), global private-credit assets under management were below £200 billion before the 2008 financial crisis. They reached roughly £1.5 trillion during the COVID pandemic and now stand at £2.5 trillion.
Publicly traded bonds generally pay fixed coupons. Private credit is different: most loans carry floating rates, so payments increase as interest rates rise. That feature has helped drive rapid growth, bringing the asset class to £2.5 trillion - larger than the US high-yield bond market. The BIS estimates that AUM could reach £4.5 trillion by 2030.
Post-2008 regulation helped drive this expansion. New rules required banks to finance more of their balance sheets with equity, while mortgages and government bonds received favourable risk weightings. Corporate debt, by contrast, became more expensive for banks to hold. At the same time, quantitative easing (QE) pushed down government-bond yields and discount rates, prompting life assurers and pension funds to look for assets with better returns. With sovereign yields collapsing, institutions carrying long-term liabilities could no longer rely on government debt to meet their future obligations. They began moving into private credit, hoping to earn the theoretical "illiquidity premium": a higher return for committing capital to assets without a secondary market.
The post-crisis rules were meant to prevent another meltdown. Yet the next crisis often grows from the last one's foundations. Banks fund longer-term loans with short-term money - customer deposits and overnight borrowing from other banks. That mismatch is called maturity transformation.
When banks pulled back from corporate lending, private credit moved in to fill the gap. Its appeal was straightforward: funds collected money from insurers and pension funds with investment horizons stretching over decades. Investors accepted high fees and agreed to leave their capital tied up because they expected better returns. Since those long-term commitments financed long-term loans, the argument went, private credit avoided maturity transformation - and therefore could not face a bank run.
To widen the supply of capital, the US private-credit industry created business development companies (BDCs). They offered quarterly redemptions of up to 5% of net asset value (NAV), bringing back the same liquidity mismatch that private credit had claimed to remove. Once investors grew nervous and started withdrawing their money, the problem surfaced - as it has over the past year.
The £82 billion Blackstone Private Credit Fund, or BCRED, faced redemption requests equal to about 10% of its assets in each of the past two quarters. Requests at BlackRock's £27 billion HPS Corporate Lending Fund (HLEND) reached the low teens as a percentage of the fund. Blue Owl Technology Income (OTIC) has been hit harder: redemption requests exceeded 38% of shares, amid its heavy exposure to software-as-a-service (SaaS) debt.
BDCs account for less than 15% of the £2.5 trillion private-credit market, according to the IMF. That still amounts to roughly £400 billion. The BIS and IMF say BDC activity offers an unusually clear view of a sector that otherwise discloses little. Blue Owl's failed attempt last year to deal with redemptions at OBDC II brought that opacity into sharper focus: the firm proposed merging the unlisted BDC into publicly traded OBDC, whose shares were trading 20% below NAV. Investors in OBDC II rejected the plan because it would have forced an immediate markdown.
Private credit's hidden defaults and connected deals
Higher interest rates can help private credit funds because the loans they issue bring in more money. But those same rates put pressure on borrowers, increasing the risk of missed payments and losses. The sector rarely offers enough public information to show the full scale of the problem. Fitch reported that private credit borrowers had a 6.3% default rate in the third quarter of 2026. That is ten times higher than the estimate from Houlihan Lokey, the restructuring-focused investment bank. Houlihan Lokey puts defaults at below 1% of outstanding principal, though the rate rises to 2.5% when measured by borrower count. Smaller companies account for much of the distress, which explains the gap between the two figures. Pimco, the California-based investment giant with more than £2 trillion in AUM, reaches a much higher estimate: 19%, or three times Fitch's figure, based on its analysis of £500 billion in retail BDC assets.
The relationship between private equity and private credit may create another source of risk. Private-equity firms increasingly turn to private-credit funds, rather than banks, to finance the debt in their deals. But the money does not flow only one way. Apollo, Blackstone and KKR recognised that life insurers could provide "permanent capital": policyholder premiums remain invested for the long term, unlike the money available through BDCs. The firms therefore bought life insurers and used those premiums to fund their own transactions. Those insurers then shifted money away from government bonds and into affiliated private-credit vehicles, which lent to companies connected to the same private-equity groups.
Mark Walter's Guggenheim Partners offers a prominent example. Before leading the consortium that bought Chelsea FC from Roman Abramovich, who had been forced to sell, Walter had already used policyholder premiums to acquire US sports franchises. He bought the Los Angeles Dodgers in 2012, then took a stake in the Los Angeles Lakers.
That financing is now under scrutiny. Federal prosecutors in the US are examining whether tens of billions of dollars from private-credit portfolios helped fund purchases of these high-value teams. After receiving grand jury subpoenas, Delaware Life, the insurer controlled by Walter, revised its disclosures. The new filing showed that affiliated investments connected to other Walter entities totaled £17 billion - about 40% of invested assets - rather than the previously reported £1.4 billion. Walter's holding company, TWG Global, denies wrongdoing. He is facing a civil fraud case, but prosecutors have filed no criminal charges against him.
Best home for long-term capital
The promise that private credit can deliver higher returns from illiquid assets - including football clubs - deserves scrutiny. "Private" sounds exclusive, helping fund managers defend opaque investments with limited liquidity and steep fees. Those terms suit the firms selling them. As Matt Levine of Bloomberg writes, "A critical goal of the financial industry in 2026 is to invest more of people's retirement savings in private assets," since private investments can still command fees of about 1% or more.
That is the key point. Across investment periods lasting decades, public equities have delivered the strongest long-term record. Elroy Dimson, Paul Marsh, and Mike Staunton made the case in *Triumph of the Optimists: 101 Years of Global Investment Returns* (2002). The evidence had already been building since the 1950s, when George Ross Goobey moved the Imperial Tobacco pension fund out of 2.5% consolidated annuities - "consols" - and invested it entirely in equities.
Ross Goobey's view was straightforward: because dividends should rise broadly in line with GDP, equities offered long-term investors greater safety than gilts. In 1957, he cited Economist Intelligence Unit figures showing that 1 million invested in 1919 would have become 3.7 million in gilts, assuming the proceeds were reinvested. The same sum invested in equities, with dividends reinvested annually, would have grown to more than 28 million. Events supported his argument. The real value of 2.5% consols dropped by 75%, while equities rose through a long bull market that lasted from the 1950s until the secondary banking crisis of the mid-1970s.
The institutional rush into private credit overlooks a basic investment principle that has held for decades. For investors and institutional fiduciaries with time horizons measured in decades, owning equities makes sense because shareholders share in the compounding growth of businesses. Private credit reverses that logic: lenders bear the full loss when a borrower defaults, yet receive none of the upside when the company's equity value rises.
Institutional asset allocators and HNWIs seem to have lost sight of that old lesson. Private credit funds have, ironically, tied up investors' capital while global stocks - as measured by the MSCI World index, with dividends reinvested - have risen more than seven-fold in sterling terms over the past 20 years and tripled over the last decade. If amateur investors are putting their money into global index trackers while sophisticated investors favour private credit funds, who is really making the foolish choice?
Private credit may still offer investors opportunities, but probably not through the illiquid, opaque and expensive products the industry wants to sell. The recent pressure on UK-listed life insurers - Legal & General (LSE: LGEN), Aviva (LSE: AV) and Standard Life (LSE: SDLF) - shows the gap between the market story and the companies' balance sheets. Concern about private credit has driven investors out of the sector, lifting dividend yields to 6%9%. Much of that fear, though, comes from treating the UK and US regulatory systems as if they were the same. The US has no federal life-insurance regulator; each of its 50 states has one, which is why Delaware is investigating Mark Walter's empire. UK insurers, by contrast, fall under close supervision from a single regulator.
S&P's stress tests found that UK insurers holding illiquid assets, including private credit, to back bulk-purchase annuity liabilities would still have enough capital to withstand a repeat of the 2008 financial crisis. The test assumed an 11% default rate on those illiquid holdings, yet insurers would remain above regulatory capital requirements. Private credit makes up only about 9% of UK life assurer portfolios, and most of that exposure sits in long-dated, secured infrastructure and social housing assets - not speculative leveraged buyout (LBO) loans. Investors willing to accept the risk may therefore see the current fears surrounding the sector as a buying opportunity.
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