Private credit is facing its first “real test at scale”, according to PwC, as its rapid growth is creating unique deal opportunities but simultaneously intensifying scrutiny.
With more than US$2 trillion ($2.8 trillion) in assets under management, the consultancy said the asset class is turning into a “major force” in global capital markets.
But pressure on software valuations and AI’s impact has led to several major funds such as Ares, Blue Owl and Blackstone facing redemption pressures and being forced to cap withdrawals.
“This does not mean private credit is in crisis. It does mean that the asset class is facing its first real test at scale,” PwC said. “Negative headlines have added to the pressure, but the underlying question is more important. Can private credit keep scaling while maintaining discipline around underwriting, valuation, governance, and investor expectations?”
In Australia, the sector has been under regulatory scrutiny from ASIC which has conducted a thematic surveillance of the sector to establish its governance, disclosures and transparency. Last month, it warned private credit managers on their asset valuations and urged them to ensure they were “realistic” at the end of the financial year as it had found some valuations were not reflective of the true underlying economic conditions.
The consultancy’s survey of private credit managers said they expect borrower defaults and credit losses will affect their 2026 performance with 43 per cent “moderately concerned, concerned or very concerned” about the increase in defaults and restructurings over the next two years. This especially applied to lower quality or smaller operators which are concentrated in software or SaaS assets.
Borrower default rates or credit losses and competition and spread compression between lenders were cited as the biggest factors affecting private credit performance this year.
This concern is leading managers to place greater emphasis on investment selection, performance, governance and downside protection. Managers are also accepting greater complexity and risk as they shift to asset-backed finance, non-sponsor lending and use of leverage.
“The dispersion between top quartile and median managers is expected to widen as weaker platforms face defaults and liquidity pressures. Strategies built during the period of intense competition and spread compression are most exposed, particularly where documentation standards weakened or sector concentrations increased.”
PwC was moderately optimistic that private credit will remain part of the M&A landscape but it may look different to before. This includes credit funds becoming M&A targets as scaled asset managers and private capital firms look to add origination capability and deepen their credit platforms and via private credit funds partnering with banks to provide structured finance solutions.
“Private credit continues to move into areas traditionally dominated by banks. The combination of both players will allow better lending solutions to be available in the market for customers across a range of asset classes. Private credit can achieve scale by accessing banks’ origination, servicing, and product manufacturing infrastructure. For banks, these partnerships can unlock lending opportunities that would not otherwise exist given regulatory and risk constraints.”
Insurers may also expand allocations to credit funds or acquire their own credit asset management capabilities which would enable them to deploy their balance sheets more directly while also raising third-party capital from limited partners.
