Separating signal from noise in private credit

IF YOU have been casually following the financial headlines recently, you might be thinking private credit is teetering on the edge of collapse. Commentators have reached for a familiar menagerie of metaphors: canaries in coal mines, cockroaches in kitchens, stress fractures waiting to widen. In an environment already primed for anxiety, private credit has become a convenient focal point.

Yet private credit is neither a novelty nor a monolith. It is a large, diverse and increasingly important part of global capital markets, particularly for private companies navigating a lending landscape that banks have largely been out of for the past decade.

Like any asset class, it carries risk. There are pockets that warrant scrutiny, and the next phase of the cycle will undoubtedly be more challenging than the last. But sweeping claims of systemic fragility require evidence we simply do not have today. Much of the recent alarm has been driven by headlines rather than fundamentals.

Credit strain indicators remain muted

Consider the attention surrounding Blue Owl and the wind-down of OBDC II, a US$1.6 billion retail private credit vehicle launched in 2016. As the fund entered its pre-planned and orderly liquidity process, headlines focused on the temporary limitation of redemptions, framing this as a flashing red warning sign. Lost in much of that coverage were two critical details: This fund had planned liquidity from the jump and there has been little evidence of underlying portfolio distress.

To facilitate capital returns amid panic-inducing headlines, Blue Owl announced the sale of a sizeable portfolio of loans to institutional buyers at 99.7 US cents on the dollar. That pricing is inconsistent with the notion of a market under acute stress. If this is a crisis, it is a remarkably well-priced one.

More broadly, the traditional indicators of credit strain remain muted. Private credit default rates, while rising from the unusually low levels of recent years to 2.46 per cent in the fourth quarter of 2025, are still within historical norms. Public credit spreads remain relatively tight.

These are not trivial data points. Defaults and spreads are the market’s pressure gauges, and neither is currently signalling a system under duress. The more relevant question is not whether defaults are rising, but whether they stabilise at manageable levels or accelerate from here.

This distinction matters, particularly for wealth investors in Singapore who increasingly access private credit through diversified portfolios rather than tactical trades. Private credit is often discussed as if it were a single asset class, when in reality outcomes vary widely by vintage, sector, structure and, above all, manager discipline. Averages can be deeply misleading.

Dispersion has returned to credit markets. Some borrowers are navigating higher rates with relative ease, supported by resilient cash flows and conservative leverage. Others, particularly in cyclical sectors or with aggressive capital structures, face a far more difficult refinancing environment. The result is a growing gap between strong and weak underwriting, and between lenders prepared for volatility and those who were not.

The liquidity question

Liquidity is another area where rhetoric often runs ahead of reality. Private credit is, by design, illiquid. That feature is not a flaw, but it does require alignment between investor expectations and portfolio construction. Recent headlines have highlighted this tension, especially in semi-liquid vehicles. For investors, the lesson is not that private credit is inherently problematic, but that pacing, diversification and an honest assessment of liquidity needs are essential.

Covenants and structures are also being tested. The last cycle saw a gradual erosion of lender protections, driven by abundant capital and competition for deals. In a more constrained environment, those choices matter. Covenant-lite structures and aggressive leverage assumptions leave less room for error. Managers with restructuring experience and a willingness to engage early with borrowers are likely to fare better than those reliant on benign conditions.

Importantly, it is also worth remembering where private credit sits in the capital structure. Debt remains structurally senior to equity. In the event of a significant macro shock, whether driven by an economic slowdown, technological disruption or an AI-led boom-bust cycle, equity would be expected to absorb losses first. It is far from obvious that public equities or unsecured bonds would offer a meaningfully safer refuge.

None of this is to suggest complacency. The environment is shifting, and investors should expect more complexity, not less. Manager selection matters more than it did during the easy years. Diversification requires a deeper look at underlying exposures, not just the number of funds in a portfolio. And yield, while attractive, should never be viewed in isolation from risk.

Nor does the current evidence support a narrative of imminent collapse. Private credit is evolving, not unravelling. For long-term investors willing to focus on fundamentals rather than headlines, that distinction makes all the difference.

In markets, noise is plentiful. Signal is harder to find. The challenge for investors today is not to avoid private credit altogether, but to approach it with clarity, discipline and perspective.

The writer is global head of private markets, Arta Finance