Therefore, we consider private credit as limited systemic risk.

A growing, but still limited market

Private credit has established itself as a central source of financing for companies outside the publicly listed markets in recent years. The strong growth, particularly in direct lending to mid-sized, private equity-owned companies, has also led to increased attention and skepticism in parts of the financial market.

Portfolio managers Knut Bakkemyr and Kjell Morten Hjørnevik at DNB Finance believe that this concern should be considered in light of the market's size. Even after strong growth, private credit still represents about five percent of the U.S. corporate credit market. "The market is not insignificant, but the size alone makes it difficult to assess this as a systemically critical risk", says Bakkemyr.

Structure and capital binding

At least as important as the size is the structure of the market. Most of the capital is tied up in closed funds with a long investment horizon, and the investor base is dominated by institutional investors. This often provides better alignment between long-term capital and long-term loans than in traditional bank financing. "We have long-term capital that finances long-term loans. This can help reduce the risk of liquidity pressure, although such risk cannot be excluded", points out Hjørnevik.

Liquidity and withdrawal restrictions

Much of the media attention has been directed towards funds that have implemented withdrawal restrictions. According to the managers, this applies to a smaller part of the market, primarily semi-liquid products aimed at wealthy private clients. Such restrictions are part of the funds' liquidity management and are intended to handle risks associated with investments in less liquid assets. At the same time, limited liquidity also poses specific risk conditions for investors.

Credit quality and sector risk

The greatest uncertainty instead relates to the credit quality in certain vintages. Especially loans made in the period 2020–2022 were often structured with high debt levels and optimistic assumptions, particularly in software. Technological shifts driven by artificial intelligence, combined with a challenging refinancing window, may further increase the risk. The concentration towards software companies is also higher than in other credit markets.

Part of a broader financial landscape

The managers also believe that private credit can address a need for financing in parts of the market where banks' lending capacity has been limited. They also point out that banks today are better capitalized than before, and that this over time may contribute to changes in market shares between banks and alternative lenders.

Private credit will at some point have to go through a credit cycle, but according to Bakkemyr and Hjørnevik, the asset class is here to stay. It represents a natural evolution of modern capital markets.