Private credit and the persistence of credit fundamentals

OVER Chinese New Year, several relatives asked me these questions: What is your view on private credit, and does it belong in a long-term portfolio?

That moment was telling. When an asset class begins to surface in informal conversations well beyond institutional circles, it is usually a sign that it has moved from niche to mainstream.

Market data supports this observation: Evidence from the State Street Private Capital Index showed a pronounced expansion in private credit activity between 2020 and 2022.

The index tracks performance, cash flows and fundraising across thousands of private-capital funds globally.

Fund sizes increased materially, capital concentrated among larger managers, and institutional investors expanded allocations in response to yield scarcity and diversification objectives.

More recently, that pace has moderated. Since 2023, fundraising activity has softened, average fund sizes have declined and there has been a surge in the frequency of product launches – particularly for semi-liquid and evergreen structures.

This reflects a more cautious approach to deployment, liquidity management and pacing as market conditions and exit dynamics evolve.

At the same time, access to private credit is broadening beyond traditional institutional channels.

Demand alone does not explain it. This shift is supported by structural developments such as advances in technology that enable fractionalisation of ownership, automation of complex operational workflows and continued innovation in legal and fund structures.

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Semi-liquid vehicles are a manifestation of this change. As access expands, regulatory attention on investor protection is also increasing, placing greater emphasis on transparency at the underlying asset level.

Lending is not new

Private credit is sometimes characterised as a post-crisis innovation. In reality, the activity itself is as old as finance.

At its core, private credit is lending. What changed following the global financial crisis was not the economic function, but the composition of balance sheets.

Regulatory reforms made certain forms of bank lending more capital intensive and less attractive, particularly for leveraged or unrated borrowers. As banks retrenched, private capital filled the gap.

The fundamentals of credit risk, however, remained unchanged.

A more challenging phase

Recent performance data reinforces this point. Across private markets, returns in 2024 were positive but subdued, particularly when compared with strong public equity performance.

Cash-flow dynamics are more instructive. Fund-level data indicates that distributions remain structurally constrained, reflecting an exit backlog that has persisted since 2022.

Private credit’s growth has also become increasingly intertwined with private equity (PE).

While direct lending to PE-backed companies remains the dominant strategy, private credit is now routinely used to finance general partner stakes, net asset value (NAV) facilities and continuation vehicles.

These structures have helped extend duration and manage liquidity in a difficult exit environment – but they also alter how risk propagates in portfolios.

At the beginning of the year, I spent time with institutional clients across the Asia-Pacific, the Middle East and the US.

Although private credit often served as the starting point for those discussions, the underlying concerns were broader, focused on private markets as a whole and how they integrate into total portfolio risk frameworks.

Correlation beyond the fund view

Markets today are characterised by more frequent and less predictable tail events than traditional models assume.

In such an environment, the unexpected loss component of credit risk becomes increasingly significant, particularly when leverage, duration and liquidity are tightly linked.

When assessed in isolation, many private credit strategies appear well diversified and defensively positioned. At the portfolio level, the picture can be more complex.

As private credit finances assets whose equity exits are delayed or whose valuations are under pressure, credit risk becomes increasingly linked to equity outcomes. The lender’s downside is no longer independent of the sponsor’s ability to realise value.

These correlations are rarely visible in standard fund-level reporting. They emerge only when exposures are aggregated across strategies, vintages, sectors and geographies.

Without that consolidated perspective, diversification assumptions can weaken gradually, often becoming apparent only during periods of stress.

Opacity as a data architecture challenge

Opacity in private credit is often framed as a valuation issue. More fundamentally, it is a data architecture issue.

Traditional reporting frameworks were designed to calculate NAVs, not to connect financial outcomes back to underlying asset-level characteristics such as leverage, covenant structures, sector exposure or geographic concentration.

As a result, investors may receive high-quality financial reporting while still lacking a comprehensive view of where risk resides in their private markets portfolios.

As allocations grow and structures become more complex, the ability to link fund level reporting to granular asset-level data is becoming essential.

From fund reporting to asset-level insight

This marks a broader structural transition within private markets infrastructure.

Historically, fund administration answered a narrow question: What is my NAV?

Today’s institutional investors are asking a different one: What do I own, and how does it connect across my portfolio? Meeting that need requires linking financial holdings to asset-level data through a consistent taxonomy.

This involves connecting:

• Individual loans, counterparties and covenant terms;
• To portfolio companies, sectors and geographies;
• Through fund structures, special-purpose vehicles and holding vehicles; and
• Into a unified view of exposure and risk.

The objective is not to generate more reports, but to enable dynamic analysis – by borrower, sponsor, industry, leverage and correlation across asset classes.

Transparency as a source of resilience

As private markets become more interconnected, data architecture increasingly shapes investment outcomes.

Investors with asset level-transparency are better positioned to:

• Identify unintended concentration and correlation risks;
• Understand the interaction between credit and equity exposures;
• Stress-test portfolios across scenarios rather than in silos; and
• Allocate capital based on underlying economic exposure, not fund labels.

Those without this visibility often rely on lagging indicators, discovering correlations only after market conditions deteriorate.

The discipline of the credit cycle

Private credit is likely to remain a permanent feature of capital markets. But credit cycles have not disappeared.

Periods of abundant capital tend to weaken underwriting standards. Weaker underwriting eventually leads to defaults. Defaults, in turn, impose a form of transparency that voluntary disclosure rarely provides.

The private credit strategies that endure will be those grounded in underwriting discipline: rigorous origination, meaningful covenants, and alignment between asset liquidity and fund structure. The questions long asked by bank credit committees remain relevant:

• Who underwrote the loan?
• At what leverage?
• With what protections?
• Where does the downside ultimately sit?

Credit is not new, but the structures may be. The fundamentals and the risks remain constant.

As public and private markets continue to converge, the ability to assess exposures holistically across asset classes will be central to understanding risk and navigating the next phase of the cycle with discipline.

The writer is head of alternative solutions for the Asia-Pacific, State Street. The views expressed are his own and do not constitute investment advice.