Private Credit Market Insights

Coming Soon: The Next Great Vintage of Opportunistic Credit JP Morgan's latest tally of stressed and distressed credit in U.S. markets exceeds $200B across High Yield and Broadly Syndicated Loans. That figure does not include private credit, which I expect to be just as large as HY and BSL combined. When you add Direct Lending to the equation, we are looking at ~$500B+ requiring some form of capital solution in the years ahead. Opportunistic Credit is the flip side of the primary market for HY, BSL, and Direct Lending. When waters are calm, spreads are tight, and new issues flow freely; in this case, there is typically less activity in Opportunistic Credit. That calm is ending. The Morningstar LSTA Leveraged Loan Index has fallen from 98 to 94.5 as the distressed ratio of BSL is 8% and rising. Approximately 12% of private credit borrowers are now generating negative cash flow, with 25% operating with interest coverage below 1.0x. These are not hypothetical stress scenarios; this is the current fundamental backdrop companies must contend with. This statistic rises to ~33% when using actual EBITDA, rather than pro-forma adjusted EBITDA which on average has been adjusted higher by 20%. Capital Solutions will be needed for growth and for turnaround situations across the credit landscape. With the exception of the energy sector, which is performing exceptionally well for obvious reasons, all other 20 industry sectors have issues brewing as JP Morgan shows below. Capital allocators should give special consideration to Opportunistic Credit as I believe this coming vintage will prove particularly rewarding.

The Federal Reserve Bank of New York data on household debt and credit for Q2 received a lot of attention due to credit card debt—which is capturing debt that appears on credit reports [i.e., it does include debt that is paid down each month]—topping $1 trillion. As I expect this figure will get thrown around on the Sunday news shows with minimal context, I wanted to take a deeper look to see what is going on. Two charts below. Thoughts: •The top chart shows seasonally adjusted credit card debt per account to normalizing by accounts. Normalizing by accounts is important because we saw a surge of new credit cards starting in 2021. When we normalize by account, debt per account is back to pre-COVID levels. This tells a different story than looking at nominal debt, which is far above 2019 levels. •Bottom chart shows the percentage of accounts that are considered newly delinquent. Here we have a concern that delinquency rates are now slightly above pre-COVID levels. This is consistent with consumers whose finances have been negatively affected by inflation. •However, to add one wrinkle to the delinquency story, (not pictured), the percent of credit card balances 90+ days delinquent (in other words serious delinquent), are slightly below their 2019 levels and down from their recent peak in 2021. Implication: my read of the credit card debt data is that consumers will likely be cautious with spending for this holiday season, which provides more evidence we are likely to have a weak peak season in terms of containerized import activity as well as air freight, especially when coupled with substantial inventory overhangs in many wholesale sectors such as apparel (https://lnkd.in/gE-SPaW5). #supplychain #supplychainmanagement #shipsandshipping #ecommerce #freight #trucking #logistics

Here is some longer term perspective on delinquencies and charge offs… Consumer-credit delinquencies and charge-offs are growing at a pace rarely seen outside of recessions, though given the current state of consumer balance sheets and debt-service ratios, the rise may be at least in part a delayed effect from the end of temporary Covid-19 assistance programs. Consumer-loan delinquency rates rose from record lows of 1.5% in 4Q21 to 2.74%, their highest level since 2012 but below their 1987-2008 3.4% average. Charge-offs, however, are up to 2.92%, above their 2.2% 1987-2008 average. Unlike the 1990, 2001 and 2008 recessions, charge-offs and delinquencies didn't rise in 2020. This suggests loans that would otherwise have defaulted from 2020-22, were it not for the pandemic-assistance programs, might be doing so as programs expire.

📊 US consumers increasingly running on fumes 💸 Consumer spending rose a seemingly healthy 0.5% m/m in February, but make no mistake, households are increasingly running on fumes. Adjusted for prices, real spending rose just 0.1%, with the composition of outlays pointing to growing caution. Spending rotated away from tariff-impacted and higher-priced goods, while services outlays remained subdued. 🔍 The details underscore a clear rotation. Inflation-adjusted durable goods spending rose a strong 0.9% m/m following a 1.4% decline in January, but excluding the 4.3% surge in vehicles (after a 4.2% plunge in the prior month), durable goods spending fell 0.4%, with weaker outlays on furniture and recreational goods. Nondurable goods spending declined 0.2% in February, as modest gains in clothing were offset by lower spending on groceries and gas. Real services spending rose just 0.1%. 📉 Personal income fell 0.1% in February, reflecting soft compensation growth, a sharp drop in dividend income and lower government social benefits. Disposable personal income also declined 0.1% m/m, as personal current taxes were unchanged following a 3.1% drop in January tied to larger refunds from the One Big Beautiful Act. Adjusted for inflation, disposable income fell more sharply, down 0.5%. 💳 With spending outpacing income, the personal saving rate dropped 0.5ppt to 4.0% –which, excluding post-pandemic swings, is tied for the lowest level since 2008. 📈 Looking at the broader trend, real consumer spending has firmed to a 2.5% y/y pace, but the income foundation remains fragile. Real disposable income growth has slowed to 1.1% y/y and has trailed spending since July 2024. This highlights that the resilience in spending is being sustained through tighter budgeting and greater selectivity, not stronger income growth. Increasingly, spending is being supported by a drawdown in savings, greater reliance on credit, and wealth effects. These relief valves are inherently limited, particularly heading into an oil shock. With job growth near zero and wage growth easing, one should anticipate soft income for the rest of the year. 🔥 Inflation pressures firmed in February, largely reflecting tariffs. Headline and core PCE prices both rose 0.4% m/m. On a year-over-year basis, headline PCE inflation held at 2.8%, while core inflation eased slightly to 3.0%. Notably, the 3-month and 6-month annualized measures have begun to reaccelerate ahead of the Middle East-driven energy shock. 🔮 Looking ahead, we expect an energy- and food-driven price bump to push headline PCE inflation toward 4%, with core PCE temporarily rising toward 3.5%. We have raised our year-end 2026 forecast to 3.0% y/y for headline PCE and now see core PCE ending the year around 2.8%. via EY-Parthenon EY

Private credit typically refers to non-bank, non-publicly traded debt financing.   The private credit market in the U.S. has grown substantially over the past two decades and has become a major source of financing. Private credit in the U.S. has grown exponentially, from roughly $46 billion in 2000 to about $1.7 trillion currently. The initial trigger was the tighter regulatory regime for banks post the Global Financial Crisis but that tailwind gained momentum from the growth of private equity which leveraged debt financing for acquisitions, investors chasing yield in a low-rate world and greater investor democratisation. Retail investors in the U.S in fact now access private credit with as little as $1,000, leading to growing retail flows into such funds. Private credit funds in the U.S and Europe have become large and mainstream and provide credit to a complete range of corporate borrowers, from large to small.   The Asian private credit market is still relatively small with less than 5% of global market share. The corollary of this is that bank led credit is about a third to half of the total credit supply in the US and Europe but is over 70% in Asia, including India. Whenever an asset class grows this rapidly there will be issues that would arise. The main issues around the rapid growth of private credit in the U.S centre around the illiquidity of the investments, relative opacity and the systemic risk, since banks often finance these non-bank credit providers.    The Indian private credit market has also grown rapidly. The categories of providers of private credit in India include NBFCs, Domestic AIFs, Venture Debt funds, Foreign private credit funds and, more recently, Family Offices and UHNIs. Insurance companies and pension funds, which are large players in the U.S, are limited participants here because of the regulatory guidelines. This asset class is seeing growing traction on the demand side. The drivers of demand growth are the growth of the space banks and NBFCs can’t or are not keen to finance, underdeveloped bond markets, the ability of private credit providers to create customised solutions for borrowers, growth of private equity led transactions and increasing investor appetite for higher yielding fixed income instruments, especially after the change in taxation on fixed income funds. As a result, we have seen an increase in activity on the supply side too, with more AIFs coming into existence.   As India grows, the demand for credit will have to be met by a wider range of providers and the opportunity for private credit funds is therefore going to be large and attractive. With growth comes greater complexity and issues like liquidity, top quality governance and a strong focus on borrower quality will be key as private credit funds strive to become part of mainstream portfolios and a large asset class by itself.

What happens when a $2T asset class enters its first real credit cycle? Private credit expanded rapidly during one of the most accommodative capital market periods in decades. Low interest rates, tighter bank regulation, and a surge in private equity transactions allowed direct lenders to replace banks as a primary financing source for sponsor backed companies. The industry grew to roughly $2T in assets. The path to today unfolded over several years. 2020–2022 | Expansion Low rates and aggressive dealmaking fueled rapid growth in direct lending. Private equity relied heavily on private credit to finance buyouts, and the asset class scaled quickly across institutional portfolios. 2023–2024 | Wealth channel opens Private markets expanded into wealth portfolios through non traded BDCs and semi liquid vehicles. Firms such as Blackstone, Ares, Blue Owl, and Apollo built large credit platforms supported by retail inflows. 2025 | Early signals Publicly traded BDCs began trading at discounts to NAV, signaling that markets were questioning private credit valuations in a higher rate environment. 2026 | Liquidity pressure emerges Redemption pressure has appeared across several vehicles. Blue Owl restricted withdrawals in one retail credit fund. Public private credit funds are trading at wider discounts, and capital raising for non traded BDCs has slowed. Markets are also repricing risk inside the sector. UBS warned that private credit defaults could reach 15% in a severe downturn. Several listed credit vehicles have already adjusted. Apollo’s MidCap Financial Investment Corp. reduced payouts and marked down assets. FS KKR Capital reported rising troubled loans. BlackRock TCP Capital cut its dividend. Secondary markets are sending another signal. Liquid private credit funds are trading at roughly 18% to 19% discounts to NAV, compared with a 6% premium one year ago. Widening discounts often signal expectations for asset markdowns, rising defaults, and slower recoveries. Recent situations involving Tricolor Auto Group, First Brands Group, and issues tied to an MFS property bridge loan highlight governance and verification risk within a rapidly scaled asset class. Private equity faces its own liquidity pressure. Bain estimates buyout funds hold about 32,000 companies worth $3.8T in unrealized value. Average holding periods have stretched to 7 years, and distributions to LPs remain near 14% of NAV. Private credit finances many of those companies, which extends loan duration and slows capital recycling when exits stall. Family Offices are focusing more closely on underwriting discipline, covenant protection, and fund structure as liquidity expectations meet illiquid assets. Private credit remains a critical financing channel for the private economy. The cycle is turning.

Equity Group CEO Dr. James Mwangi’s decision to shift KES 450 billion from government securities into MSME lending at 16% per year marks a bold, high-risk, high-impact move with the potential to unlock private sector growth, create jobs, and reduce reliance on government lending. Entrepreneurs and small businesses stand to gain as billions are redirected from passive investments into active private sector lending, with the impact likely to resonate across supply chains, local markets, and job creation. The challenge lies in balancing pricing and risk management, especially with a target to cut NPLs from 13.7% to below 10% in a year. Coupled with tighter fraud controls, fresh talent, and a culture of efficiency and results, this strategy could reshape Kenya’s credit landscape if executed with precision, disciplined risk assessment, fair pricing, and capacity-building for borrowers. Why do I feel like this is a catalytic moment that could strengthen the backbone of Kenya’s economy?

🚦 Working in NBFCs vs. Traditional Banks 🛞 People often wonder how working in a full-fledged bank differs from a Non-Banking Financial Company (NBFC). The reality is that NBFCs present unique challenges and require a distinct skill set. But first, let's understand how the landscape for NBFCs in India is evolving. With Moody's projecting moderate profitability over the next 12-18 months due to rising funding costs, it’s clear that the sector is facing some headwinds. Key Challenges: ⛔ Higher Borrowing Costs: RBI's increase in risk weights for consumer credit has made borrowing pricier, squeezing margins. ⛔ Regulatory Pressure: Emphasis on secured over unsecured lending could impact net interest margins. Bright Spots: ✅ Strong Credit Demand: Despite higher costs, robust economic growth (projected at 6.6% for fiscal 2025) fuels demand for loans, especially in infrastructure and SME sectors. ✅ Innovative Financing: Larger NBFCs are leveraging diverse funding sources and adopting FinTech solutions to stay competitive. So what does it entail for anyone who is going to start working for an NBFC or plans to? 1️⃣ Focus on Underserved Markets: NBFCs often cater to segments that mainstream banks might not serve, requiring professionals to be adept at risk assessment and innovative lending practices. 2️⃣ Regulatory Adaptation: Professionals must stay updated with regulatory changes and be proactive in adapting strategies to comply with new norms. 3️⃣ Versatility in Funding: Knowledge of various funding mechanisms, including retail deposits and external borrowings, is crucial for managing higher costs and maintaining profitability. 4️⃣ Product Offerings: NBFCs often specialize in certain types of loans such as personal loans, vehicle loans, and microfinance. They may offer more customized and innovative financial products tailored to specific customer needs. 5️⃣ Risk and Compliance: NBFCs typically face higher credit risk due to their focus on higher-risk segments. This necessitates robust risk assessment and management practices. For finance professionals eyeing the NBFC space, it's about embracing these changes and focusing on innovative lending practices, staying abreast of regulatory shifts, understanding the different products they have to offer, assessing the risks involved, and comprehending diverse funding mechanisms. It's a dynamic sector, promising both challenges and exciting opportunities. #NBFCs #Finance #CareerAdvice #RBI #FinTech #Innovation #Banking Feel free to share your thoughts in the comments below!

Is the average American consumer doing fine? On the surface of the latest report on household debt and credit issued by the Federal Reserve Bank of New York, it might look relatively "calm". - Aggregate household debt is at $18.8 trillion, up $18 billion from the last quarter. Credit card balances fell $25 billion. Aggregate delinquency held steady at 4.8%. But, looking beyond the calm surface ... - Student loan 90+ day delinquency jumped to 10.3%. That's the cohort that lost forbearance protections, now showing up in the data as defaults. This will bring downstream consequences for housing, auto loan, and potentially employment that damaged credit can bring. - Mortgage transitions into serious delinquency ticked up to 1.5% annually. - HELOC balances rose for the 16th consecutive quarter. Credit card limits expanded by another $60 billion and auto loan balances grew $18 billion to $1.69 trillion. Truth is, the cost of living has decoupled from wages for middle and lower income households. For the longest time, our industry's storyline has been: By extending credit to consumers who were previously underserved by traditional FIs, we are advancing financial inclusion: BNPL, earned wage access, subprime auto, cash advance apps, and expanded credit card lines for thin file borrowers. Instead of helping households build wealth and weather financial shocks, inclusion is now about servicing the gap between what consumers earn and what they need to live.