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Confidence Holds Firm Despite Red Flags

Private credit continues to draw massive investor inflows, even as prominent executives and analysts warn that risks are quietly building beneath the surface. Concerns over aggressive leverage, weaker loan protections, and borrower stress have not meaningfully slowed fundraising momentum, reinforcing the asset class’s position as one of the fastest-growing corners of global finance.

The debate intensified last September after troubles at First Brands Group, a heavily leveraged U.S. auto-parts manufacturer, exposed vulnerabilities tied to complex private credit structures. The episode fueled fears that similar problems could be embedded across portfolios that expanded rapidly during years of cheap money.

High-Profile Warnings Fail to Cool Demand

The First Brands situation prompted renewed scrutiny from senior banking figures. JPMorgan CEO Jamie Dimon cautioned that private credit risks were “hiding in plain sight,” warning that financial stress tends to surface only when economic conditions deteriorate. He likened the situation to “cockroaches,” suggesting problems remain unseen until the lights are switched on.

Bridgewater founder Ray Dalio echoed those concerns, pointing to pressure across venture capital and private credit as higher interest rates strain leveraged private assets. With policy rates far above the ultra-low levels that prevailed for more than a decade, refinancing risks and cash-flow stress are becoming increasingly visible.

Even so, these warnings have not fundamentally altered investor behavior.

Fundraising Remains Exceptionally Strong

While some investors pulled capital late last year, withdrawing more than $7 billion from major private credit managers such as Apollo, Ares, and Blackstone, the broader trend remains one of expansion.

KKR recently completed a $2.5 billion raise for its Asia Credit Opportunities Fund II, highlighting continued appetite in regional markets. TPG closed more than $6 billion for its third flagship Credit Solutions fund in December, significantly exceeding its $4.5 billion target and doubling the size of its previous vehicle.

Neuberger Berman also surpassed expectations, finalizing its fifth flagship private debt fund at $7.3 billion. The firm cited strong demand from pension funds, insurers, and global institutional investors seeking stable income streams in a higher-rate environment.

In Asia, Granite Asia announced the first close of its inaugural pan-Asia private credit strategy, raising over $350 million with backing from major sovereign investors, including Temasek, Khazanah Nasional, and the Indonesia Investment Authority. Early closes of this scale underscore confidence even before full fundraising cycles are completed.

Why Capital Keeps Flowing In

Supporters of private credit argue that structural forces continue to outweigh cyclical risks. Middle-market companies, infrastructure developers, and asset-backed borrowers still face persistent financing needs, particularly as traditional banks pull back.

Regulatory reforms introduced after the 2008 financial crisis have raised capital requirements and tightened risk-weighting rules for banks. As a result, many lenders have reduced exposure to bespoke, leveraged, or non-investment-grade loans. Private credit funds have stepped into that gap, positioning themselves as essential providers of capital rather than niche alternatives.

Large investment banks increasingly describe private credit as a core portfolio allocation. What was once treated as an opportunistic strategy is now embedded in long-term asset allocation models for pensions and insurers seeking predictable yield.

Growing Signs of Strain Beneath the Surface

Despite strong fundraising, warning signs are becoming harder to dismiss. Elevated interest rates have sharply increased debt servicing costs, leaving a growing share of borrowers under pressure.

Data cited by major investment banks suggest that roughly 15 percent of private credit borrowers are no longer generating sufficient cash flow to fully cover interest payments. Many others are operating with minimal buffers, increasing vulnerability to even modest economic slowdowns.

While potential rate cuts could offer some relief, analysts caution that easing would only reduce pressure at the margins rather than resolve underlying leverage issues or weak operating performance.

Credit research firms have also flagged deteriorating borrower quality across both higher-rated and riskier segments, as years of easy financing give way to a more restrictive environment.

Regional Differences Matter

Risk is not evenly distributed across global private credit markets. Industry executives point to stark contrasts between the United States, Europe, and Asia.

In developed markets, intense competition has driven looser covenant structures and higher leverage ratios. Asia, by contrast, remains relatively underpenetrated. Many borrowers are founder-led or family-owned businesses that still rely heavily on bank loans or equity funding, allowing private credit to grow without the same degree of financial engineering.

Market participants in the region emphasize that lending structures remain conservative, with lower leverage and stronger contractual protections. This divergence has made Asia an increasingly attractive destination for investors seeking exposure without the excesses seen elsewhere.

A Market at a Crossroads

Private credit’s resilience reflects both confidence and complacency. Structural demand, regulatory shifts, and the search for yield continue to draw capital, even as evidence of borrower stress accumulates.

For now, investors appear willing to look past the warnings, betting that risks remain manageable and largely isolated. Whether that confidence proves justified will depend on how long interest rates stay elevated and how resilient borrowers are when economic conditions inevitably tighten further.

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