Private credit valuations under pressure; back to fundamentals for buyout firms in 2026: MSCI

[SINGAPORE] There are signs of more pressure on private credit loans in 2026, as higher base rates challenge borrowers’ ability to fulfil interest burdens, said data platform MSCI.

What began as a trickle of write-downs in 2022 has become a larger leak. The number of senior loans – or loans that take top repayment priority – with write-downs of 20 per cent has trebled since 2022.

The loan values for 11 per cent of mezzanine loans have been cut in half, data from MSCI Private Capital Universe showed.

Widespread restructuring to mop up troubled loans has not yet occurred, and repricings have increased to patch things with loan amendments.

Deeper impairments are creeping up the capital structure; 5 per cent of senior loans have experienced more than 50 per cent write-downs.

“These more aggressive markdowns suggest an increasing number of loans are circling the drain, sliding toward restructuring – the point where debt holders risk becoming equity holders,” said MSCI.

Loans appear to be generating income to compensate credit losses, but news of bankruptcies appears to be growing. MSCI said declining interest rates may give some relief to struggling borrowers to repair balance sheets and allow loan valuations to recover.

But persistently high inflation slows the pace of rate cuts, which will require more drastic adjustments in marks to market. MSCI added that the scattered signs of stress may emerge as a pattern that will test the resilience of private credit’s recent expansion.

The relative youth of private credit as a major investment class means that it has yet to undergo a full cycle.

SEE ALSO

Nomura seeking private debt acquisitions in alternatives push, CEO says

Sovereign wealth funds join clamour for private credit in EMs

KKR secures US$2.5 billion for second Asia private credit fund

There is still an unknown on how the asset class will perform as an increasing volume of borrowers struggle to pay back loans, MSCI said.

“Signs of borrower stress after two years of elevated base rates have already emerged; whether a more settled economic outlook and a hoped-for downward path in central bank rates eases that pressure is yet to be seen.”

Value bridge

For buyout firms, value creation between acquisition and exits – known as the value bridge – has been increasingly driven by revenue growth, it said.

Revenue growth has accounted for just under two-thirds of incremental value generated above invested capital for buyouts that exited between 2022 to the third quarter of 2025. Multiple expansion is contributing less significantly and margin improvement is adding a smaller uplift than before.

This is a break from the past, when over half the incremental gains came from earnings before interest, taxes, depreciation and amortisation-multiple expansion. MSCI said this underscores the elevated exit-valuation multiples at the peak of the low-rate cycle.

The picture was more balanced between 2015 and 2019, with incremental gains split almost evenly between revenue growth and multiple expansion.

Margin growth’s role was a minor contributor to value creation in the 2015-to-2019 exits. MSCI said this role is now increasing, indicating an emphasis on profitability.

This has implications for liquidity and has seen improvements in fund-level distribution rates track portfolio company margins. This reinforces the idea that cash back to limited partners is tied to portfolio companies’ fundamentals, said MSCI.

It added that on the valuation front, revenue is doing the heavy lifting in the value bridge, and any slowdown in top-line growth could threaten potential exit valuation and distribution.

“In short, in 2026 limited partners and general partners may find that crossing the buyout value bridge depends far less on market sentiment, and far more on whether portfolio companies can grow and sustain their fundamentals.”