Private Credit Defaults: The Data Behind the Headlines

Private Credit Defaults: The Data Behind the Headlines

Despite a few high-profile defaults, the data shows that private credit continues to offer steady, compelling returns and an expanding opportunity set.

Several recent high-profile defaults have led some investors to worry about private credit investments. In our view as a manager, the recent defaults were not systemic to the asset class but rather isolated events. We see a number of key indicators that support the view of an environment of heightened dispersion rather than widespread market disruption.

The first data point is the default rate itself. Defaults among non-investment grade loans are nothing new, with the long-term default rate hovering at around 3.5%, in line with the last 12 months.¹ Non-accruals, which indicate when a borrower has stopped paying interest and or principal (typically for 90 days or more) are not trending upward, and remain below the 10-year average, according to Cliffwater, which tracks nearly 20,000 loans across publicly traded, non-traded and private BDC portfolios.

By the numbers
Non-accrual rates remain under the 10- year averages suggesting that credit performance has remained stable.²

Defaults remain lowest among larger companies. Companies with US$100 million of EBITDA or more show a covenant default rate of just 1.4%. Even when excluding Covid-related default peaks in 2020, this is below the average from 2019 to 2024. The differentiating factor within private credit has more to do with the size of the borrower - companies with less than US$25 million in EBITDA, however, are experiencing higher covenant defaults than companies at the upper end of the market. This reinforces our view that experienced private credit managers with scale that invest in larger companies are best positioned during challenging macroeconomic environments.

At the same time, private company fundamentals remain encouraging according to Lincoln International, a prominent independent valuation agent for private credit portfolios. It found private borrowers with $25 million of EDITDA or more showed 6-10% year-over-year trailing 12-month EBITDA growth as of September 30, 2025.³

The use of payment-in-kind (PIK) options in private loans is another data point investors often use to gauge the health of the private-credit market. The use of PIK allows a borrower to defer interest payments, adding the interest payment to the principal balance of the loan and increasing its future interest payments. PIK usage has increased modestly in recent quarters but is still well below levels seen in 2020, 2022 and early 2024.

Limited stress
The use of payment-in-kind options by private borrowers is below recent peaks.²

A higher profit for private credit

Additional attention paid to recent defaults in the headlines may be related to the growth of private credit. This has led to questions about whether the expansion of the asset class reflects a shift into riskier lending. In reality, private credit has grown at a pace consistent with the expansion of private equity, which remains the main driver of private credit activity.

Over the past decade, dry powder in both private credit and private equity has grown at a similar compound annual growth rate of just over 9%, but private credit has done so from a much lower base⁵. Over the same period, private credit’s market scale has remained proportionate to private equity.

Holding steady
The dry powder in the overall private credit market has maintained a consistent relationship to dry powder in private equity over the past decade⁵.

In addition, we believe the private credit investable universe is expanding because many companies are staying private longer, and larger public companies are borrowing from private lenders, notably during period of market volatility.

Persistent relative value

Today, direct lending is offering more than 200 basis points of excess spread return relative to new-issue single – B broadly syndicated loans, the closest public – market floating rate asset class. This relative return potential sits at the wider end of the range dating back to 2022, underscoring that relative value remains favorable even as rates and spreads normalize.

Private premiums
Direct lending spreads continue to outpace the spreads offered by broadly syndicated loans⁶.

In volatile markets, we believe private credit managers who build diversified portfolios with a focus on larger companies are best positioned to mitigate risk. We remain positive on the private credit opportunity set as it continues to exhibit strong and resilient fundamentals, while offering compelling risk – adjusted returns compared to traditional fixed income instruments.