Private credit has faced heightened scrutiny following a series of negative headlines, including concerns about fraud, software-sector exposure and systemic risk. The First Brands case, although a bank-originated syndicated loan to a non-sponsored company, was widely conflated with private credit, despite its structure and origination channel being fundamentally different from core direct-lending activity. Concerns around software and AI exposure have been described as overstated, with managers noting that many software holdings have performed resiliently and that portfolio construction accounts for varying levels of technological risk. As the asset class has grown, it has attracted greater media and regulatory attention, prompting calls for clearer communication about the distinct risk profiles, structures and transparency standards that apply to private credit.
Underwriting, structure and control
Direct lending activity is characterised by detailed due diligence, including access to data rooms and quality-of-earnings reports, often on both sell-side and buy-side. Capital structures in the European middle market are typically simple, with debt representing around 35–40% of the capitalisation and 60–65% equity, documented through bilaterally negotiated terms or small club arrangements. Lenders emphasise tight control over assets, cash flows and reporting, with some platforms receiving monthly financial information on every borrower and dedicating around 20% of their team to portfolio and asset management.
This combination of thorough underwriting, straightforward structures and ongoing monitoring is intended to identify emerging challenges early and maintain a strong informational and control environment relative to more widely syndicated transactions.
Selectivity is the source of resilience
- Large origination funnels enable high rejection rates
Leading managers review hundreds of opportunities annually but complete only 2–3% of new platforms, allowing them to filter aggressively at the desk stage.
- Deployment pressure is limited by scale and activity
Managers report closing on less than 10% of their pipeline and do not feel compelled to deploy capital simply because it has been raised, as ongoing deal flow supports selectivity.
- Diversification is a deliberate risk management tool
Portfolios are constructed with attention to country, sector and position size (often 1–1.5% per loan) so that individual stresses remain manageable and do not threaten overall performance.
Asset management creates value after origination
Origination is only the first stage of value creation in private credit. Leading managers dedicate around 20% of their teams to portfolio and asset management, with specialised groups focused on workouts, amendments and value-creation initiatives. These teams work to improve borrower performance through operational support, such as helping companies sell products into the lender’s wider network or obtain better pricing on technology and enterprise tools.
When underperformance or liquidity challenges arise, lenders emphasise direct engagement with borrowers, often combining additional equity support from sponsors with tighter controls, board representation and, where necessary, payment-in-kind (PIK) flexibility. The objective is to identify issues early, support turnarounds where feasible and maximise recoveries on loans that do not perform as expected, rather than relying solely on initial underwriting to drive returns.
Transparency and investor understanding
The discussion highlighted growing investor demand for clearer disclosure in private credit, particularly around valuation and performance. There was support for independent, third-party pricing on all assets each quarter, with expectations this will become standard. On payment-in-kind (PIK) interest, especially “bad PIK” added after origination, the view was that such cases are sometimes misread as attempts to conceal stress, whereas in practice they are typically discussed openly with investors, including the rationale and remedial steps.
On liquidity, the panel pointed to an educational gap at the point of sale, with many investors not fully appreciating what “private” and illiquid exposure entails. Better front-end understanding of liquidity constraints, alongside improved transparency on pricing and performance, was seen as key to aligning expectations and reducing misinterpretation of news flow.
Speaker Quotes
“I don’t think middle‑market, senior secured direct lending is an alpha business… it’s about access, selectivity and a properly constructed portfolio that can withstand volatility.” Stuart Mathieson, BARINGS
“We don’t feel pressure to deploy at all… we’re probably closing on less than 10% of the pipeline that we see.” Tom Maughan, BAIN CAPITAL
“Scale has become the alpha in many ways… the biggest private equity firms will reach out to those they have precedent transactions with that have capital.” Michael Carruthers, BLACKSTONE
“We definitely believe [private credit] is here to stay… but addressing themes about illiquidity and transparency would help put the news we read into perspective.” Marta Stojanova, S&P GLOBAL RATINGS
