Not all private credit is created equal

Private credit has attracted significant investor capital in recent years, and for good reason. The asset class has offered attractive yields, floating-rate income, and the potential for compelling returns with lower reported volatility than public credit markets. But rising defaults are an important reminder that not all private credit investments are created equal — and attractive yields need to be considered alongside the risks being taken.

That credit stress is now becoming more visible. According to Fitch Ratings, the trailing 12-month default rate across approximately 1,300 U.S. private credit borrowers reached a record 6.3% in August. Importantly, much of the stress is showing up through restructurings rather than traditional missed payments. Nearly half of defaults over the past year involved interest deferrals or borrowers shifting from cash interest to payment-in-kind (PIK), while stress-driven maturity extensions represented 45% of August defaults.

Defaults have also varied significantly by sector. Healthcare and industrial/manufacturing borrowers each recorded trailing-12-month default rates of 9.9% in August, while technology software remained considerably more resilient at just 0.6%.

The broader backdrop helps explain the rise in stress. Higher borrowing costs, persistent inflation uncertainty, and a slower transaction environment have made it more difficult for private equity sponsors to exit challenged companies or refinance debt as it matures. In some cases, extending maturities or capitalizing interest can provide companies with additional time — but it can also defer the recognition of underlying credit deterioration.

The takeaway for investors. Private credit remains an attractive source of income and diversification, but the environment increasingly favors selectivity over broad exposure. For allocators, this is precisely the type of environment where manager selection and portfolio construction can matter as much as asset-class selection. Identifying managers with disciplined underwriting, deep credit expertise, and the experience to navigate challenged investments and restructurings can be critical to generating attractive risk-adjusted returns.

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