Private credit refers to loans provided by non-bank entities – such as asset managers and private credit funds – directly to companies, bypassing public markets. There has been a lot of noise around private credit in recent months, especially due to liquidity pressures and rising defaults, fuelling investor fears and regulatory scrutiny. This has led to increased redemption requests. Against this backdrop, concerns about a potential contagion to the broader banking sector have also risen. Remaining largely unfazed, we still view private credit as a key part of portfolios over the long term. We believe investors should focus on top-tier managers with the ability to select high-quality deals from a larger opportunity set.

Understanding the contagion debate and other risks

In our 2026 Annual Outlook ‘Blowing Bubbles?’, we argued that there are two main concerns around private credit:

The first is the lack of transparency and the fear that challenges in private credit could spill over into the traditional financial sector. Despite pressures, the private credit industry is growing, and its potential impact on bank earnings and credit metrics has increased in tandem. However, we view the risk of this morphing into a major capital adequacy or liquidity event as remote. This is where the importance of liquidity management and asset-liability matching comes into play. The essence of banks is that they must return clients’ funds on demand. Indeed, the inability of some banks to do so during the 2008 Global Financial Crisis (GFC) led to higher capital and liquidity regulatory requirements and, consequently, the dramatic expansion of the private credit space. Back then, banks’ inability to fund deposit withdrawals stemmed from the fact that while the majority of their deposits were short term, a large proportion of their assets were fixed-term and difficult to liquidate. Therefore, some banks had insufficient cash on hand to meet depositor withdrawal demands.

In contrast, the funding model for private credit is quite different. Asset managers raise money from investors for long periods of time and can enforce limits on quarterly redemptions to protect against fire sales, which helps protect investors. Typically, managers commit to fund redemptions only up to a certain percentage – around 5% of assets under management (AUM) – per quarter. That said, there has been some increase in leverage, often provided by banks, and this is where a contagion risk could emerge.

The second concern is that strong investment demand for private credit could weaken due diligence and erode risk-return dynamics. We have certainly seen increased dispersion in asset manager quality. Investor sentiment is also vulnerable, given large private credit managers have multiple strategies with varying types of credit exposures, which can create confusion. Therefore, some funds are likely to come under pressure and close, potentially encouraging widespread redemption requests. Indeed, we began to see increased redemptions from Q4 2025 onwards. Interestingly, so far, redemption requests have generally been met, even when asset managers were not contractually obliged to do so. In one case, the manager met all requests and decided to proactively return capital to investors. However, the resilience of this dynamic will depend on market conditions.

Navigating the AI and software headwinds around private credit

Growing concerns over private credit’s exposure to software companies are adding to investor confusion. Software companies, especially software-as-a-service (SaaS) providers, face increasing speculation that AI could materially disrupt their business models, as many companies have started using internal AI agents to automate complex workstreams. This, in turn, has led to questions regarding the ability of these companies to service debt, leading to significant ‘haircuts’ for private credit managers.

In reality, this is unlikely to hit the entire software industry uniformly, with single-product companies being more vulnerable. It will likely take years before such adoption undermines cash flows to levels that prove to be worrisome for top-tier private credit managers. Of course, it is possible that these concerns could lead to continuing, or even accelerating, redemption requests in the coming months, especially as some analysts publish what could be excessively bearish estimates of potential default rates for private credit, at least as far as top tier managers are concerned.

What should be your investment strategy?

On balance, we retain a 6% allocation to private credit in our balanced Foundation+ allocation but hesitate to recommend adding to private credit allocations until the situation stabilises.

Our forward-looking expected returns remain high in absolute terms (our estimate is 8.6% per annum over the next five years) and relative to public credit (Developed Market Investment Grade and Global High Yield credit are expected to return 5.0% and 5.4%, respectively). However, as with most alternative asset classes, manager dispersion is wide and is likely to widen further in the coming months. In theory, any closure of weaker funds could improve the risk-reward profile for top-tier managers as competition for deals diminishes. However, now is probably the time to sit on your hands.

We believe our strategy of focusing on top-tier managers is still optimal in this environment and will allow investors to better weather the private credit storm.

(Steve Brice is Global Chief Investment Officer at Standard Chartered’s Wealth Solutions unit)