US private credit markets under pressure: Why Asia and Europe may be less exposed to the risks

READING the headlines around the private credit market in recent months, investors would be forgiven for thinking some kind of crisis was imminent, as different platforms and pundits weigh in on what has been happening in the US. 

However, these discussions have also revealed that there is a lot about private credit that people do not really understand. 

Says Radek Jezbera, co-founder and chief executive officer of Kilde, an investment platform focused on private credit: “The conversation around private credit today conflates a sprawling, diverse ecosystem with the specific features of its largest and most mature market, which is the US.”

To help clear things up, he unpacks three misconceptions that he has seen emerge around private credit and shares the reality of what is happening on the ground.

Misconception 1: Private credit mostly works the same way

First things first – what even is private credit?

“To put it simply, private credit is a loan made by a non-bank lender to a company. It’s a form of lending where private investors act as the bank for businesses,” explains Jezbera. 

If it sounds pretty broad, that is because it is. One of the most common misconceptions people have about private credit is that they think of it as a monolith, when in reality, it is made up of many different types of loans.

“Corporate lending accounts for about 60 per cent of the market, but the remaining 40 per cent spans real estate debt, asset-backed lending, infrastructure debt, and other specialist strategies,” Jezbera says. “Holdings are also diversified across financial, industrial, healthcare, IT, real estate, and consumer sectors.”

These varying types of lending create vastly different circumstances for investors. 

The current concerns around private credit are largely focused on private equity-backed deals – this is where a private credit fund provides debt to a company owned or controlled by a private equity firm, known as a sponsor. 

These deals are perceived as riskier, as sponsored financing allows companies to secure larger loans and ‘covenant-lite’ deal structures with fewer financial restrictions and requirements, which could leave lenders in the lurch in the event of a default. 

This type of deal is common in the US, and less so in markets like Europe and Asia, where investors are more conservative and private credit consists of senior secured loans, which offer high repayment priority and collateral backing for investors. 

“We do not observe these private-equity-style sponsor-backed transactions as often in Europe and Asia. That means all the credit underwriting is based on the merits of the borrower and is supplemented by strict covenants,” says Jezbera. “In conclusion, this results in a lower probability of default and higher recoveries if a default occurs.”

Misconception 2: What is happening in the US is what will happen elsewhere

What is happening in private credit right now is particularly unique to the US and not indicative of the rest of the world. 

US private credit assets surged from under $12.72 billion in the early 2000s to nearly $890.7 billion by 2023, with the broader market estimated at above $1.35 trillion. 

“That explosive growth brought with it features unique to the American landscape: widespread retail participation through semi-liquid vehicles, heavy exposure to venture-backed software companies, increasingly aggressive underwriting, and a growing web of bank-non-bank linkages,” says Jezbera.

Elsewhere in the world, things look very different. According to Jezbera, Europe and Asia have not followed the same trajectory. 

“Private credit in these regions remains significantly smaller, earlier in its development cycle, and structurally different. Retail investor participation is minimal. Software exposure is a fraction of what it is in the US,” he shares. 

The problematic dynamics – including withdrawal spirals and the erosion of underwriting standards – are symptoms of a market that has scaled rapidly. 

“Asian and European private credit has not yet reached that level of proliferation, and as such, these problems are significantly less likely to happen outside of the US,” Jezbera says. 

Misconception 3: US redemption issues signal a failure of private credit as an asset class

The current ‘crisis’ has been sparked by decreasing interest rates in the US. When interest rates are high, lenders are happy as they make money off the interest. When these drop, investors may decide to move their money elsewhere where they can see higher returns. 

This move led to major US funds like Blackstone, Ares and Apollo seeing withdrawal requests surge past their quarterly limits, forcing them to “gate” redemptions. This, in turn, created a feedback loop where the act of limiting withdrawals itself triggered more fear and further redemption requests – a redemption spiral.

“This stress is not a sign of private credit’s failure as an asset class – it is a structural issue specific to semi-liquid retail vehicles in the US and mismatched expectations,” Jezbera emphasises. 

This mismatch lies in the expectations of investors – especially retail investors – around private credit. Much of the ongoing turmoil lies in open-ended private credit funds, which were marketed to retail investors as “semi-liquid,” promising the ability to withdraw a percentage of their money every quarter. However, the underlying loans are locked up for five to seven years. When withdrawal requests exceeded the cap, they had to be gated, which led to uncertainty.

“The mismatch between quarterly liquidity windows and multi-year loan maturities creates an imbalance in the fund’s liabilities,” Jezbera says.  

Outside of the US, around 80 per cent of global private credit is held in closed-ended funds with long lock-up periods, particularly in Europe and Asia. Investors in these deals understand that these are long-term investments and are not looking for liquidity. 

“They are structurally insulated from the ‘negative feedback loop’ of forced selling and redemptions currently seen in the US, and are therefore in a much more stable position,” Jezbera explains.

Understanding the risks and realities of private credit

At the end of the day, private credit is like any other asset class – investors need to go into it with their eyes wide open, understanding its unique features, how it works, and whether it makes sense for what they want to achieve. 

At the same time, it would also serve the market well to not hyperfixate on headlines and focus on facts. 

“Private credit deserves scrutiny. But it deserves informed scrutiny. The current debate is dominated by US-centric data, US-specific structures, and US-market dynamics,” Jezbera says. “Investors in Europe and Asia should evaluate the asset class on its own regional terms.”

It remains a viable asset class and investment, but it is perhaps not for everyone – and players in the space need to ensure that they manage expectations.  

“At Kilde, we work exclusively with institutional and accredited investors. Precisely because of that, we’ve been able to commit to a level of radical transparency that retail-focused funds rarely can,” concludes Jezbera. “The challenge for the industry is not to deny risk, but to explain nuance in a market that rewards simplicity.”

Learn more about Kilde and its private credit investment platform.

This article was first published in Tech in Asia.