Private Credit: Identify and Manage its Current Risks

The following article was published by WTW

The state of the private credit market

Private credit has grown from a niche financing solution to a dominant presence within the global capital markets. Following the retreat of traditional banks in the wake of the 2008 financial crisis, non-bank lenders stepped in and filled the credit gap, particularly for small and mid-sized businesses. Since then, various credit strategies, including direct lending, asset-based finance, distressed debt and mezzanine financing, have driven global private credit assets under management to over $3 trillion, with such assets projected to reach $4.5 trillion by 2030.

What is the current risk landscape?

While the private credit market has created significant growth opportunities for lenders, concern around the transparency, resiliency and regulatory oversight of these strategies is growing. The recent bankruptcies of First Brands Group and Tricolor have exacerbated these concerns and further intensified scrutiny of non-bank financing. This ripple effect is now catching the attention of the insurance community, particularly those that underwrite the management and professional liability policies that protect lenders’ balance sheet assets, their sponsored funds, and their directors and officers.

Key risks for private credit funds

Credit and investment risk

Underwriting and due diligence failures: Missed red flags or loosened credit standards leading to defaults and claims.
Valuation risk: Inflated or inaccurate net asset values causing fee disputes and reputational harm.
Interest rate sensitivity: Rising rates leading to borrower defaults and inadequate risk assessment claims by investors.
Concentration and leverage: Sector overexposure and layered leverage increasing systemic and litigation risk.

Operational and compliance risk

Servicing errors: Procedural mistakes or regulatory filing issues resulting in liability claims.
Double-pledging: Reuse of collateral across loans, undermining protection and increasing fraud risk.
Regulatory scrutiny: Heightened oversight leading to investigations and costly enforcement actions.
Mandate breaches: Lending outside fund strategy or leverage limits, triggering mismanagement liability claims.

Technology and emerging risk

AI-driven risks: Errors, misrepresentations, or cyber vulnerabilities from AI use, potentially triggering multiple types of claims.

Supplemental solution: Credit risk insurance

Thinking beyond traditional insurance, consideration should be given to supplemental alternative insurance options. Our experts help identify potential credit risk insurance options to protect against non-payment of financial obligations — such as loans, notes, bonds, derivatives or portfolios (with vertical/horizontal risk sharing). Key benefits of these offerings may include:

Confidential credit risk mitigation
Enhanced risk-adjusted returns
Economic/regulatory capital optimization (A- to AA rated (re)insurers)
Limit management (obligor, sector, geography)
Broader risk distribution

Disclaimer: WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).