Key Takeaways
- • Moody's forecasts private credit assets under management will exceed USD 2 trillion in 2026 and approach USD 4 trillion by 2030, according to the Kennedys Law analysis.
- • Recent failures of First Brands (US auto parts supplier), Tricolor (subprime auto lender) and MFS (UK mortgage lender) were each financed through private credit structures and involved fraud, including double-pledged collateral and misstated financial condition.
- • Opaque loan valuation practices, where lenders may carry loans at full value until classified non-performing, and PIK-heavy structures can make portfolio performance appear stable while credit quality deteriorates.
- • Claims exposure for financial lines insurers spans shareholder and securities class actions, criminal claims, borrower civil suits, SEC and ASIC regulatory action, fiduciary and valuation claims against fund managers, and first-party crime policy claims.
- • Kennedys recommends underwriters review existing private credit exposure at renewal, seeking information on loan book quality, due diligence and valuation strategies, and price the risk accordingly.
Summary
Private credit has grown into a core part of global finance, with private credit funds lending directly to borrower companies using capital from institutional investors such as pension funds and insurers, wealth managers and high net worth individuals. According to the article, Moody's forecasts assets under management will exceed USD 2 trillion in 2026 and approach USD 4 trillion by 2030, a growth trajectory that the authors argue also presents an opportunity for insurers. The sector has attracted borrowers because bank finance has become more expensive, with private lenders facing lighter regulatory requirements, faster loan issuance and tailored terms.
The article identifies several inherent risks. Unlike public credit markets, private lenders are not required to periodically revalue loans and often carry them at full value until they are classified as non-performing, so portfolio values may not reflect borrower distress. Payment-in-kind (PIK) notes, which allow borrowers to defer interest by adding debt, can increase leverage without addressing underlying problems and may inflate reported performance. Private credit funds also face fewer disclosure obligations than banks, leaving investors and insurers reliant on internal valuations.
Recent failures in the US and UK, including First Brands, Tricolor and MFS, each collapsed within the last year after being financed through private credit structures. Each involved fraud, including double-pledging assets as collateral and misstatement of financial condition and portfolio quality, and the article cautions that these cases do not necessarily indicate that the sector is risky per se. The article cites a securities lawsuit against a BlackRock private credit arm over inadequate disclosure of losses and net asset value, securities class actions against Hercules Capital over borrower due diligence, criminal indictment of Tricolor's senior executives, and civil claims by First Brands' borrowers against its executives.
The article also highlights regulatory scrutiny. The SEC is reportedly considering valuation practices, governance frameworks and redemption processes, particularly where retail investors have access to the market, while ASIC is pursuing private credit lenders over fraud and the Bank of England is focused on private markets risk. Kennedys expects further claims against fund managers for breach of fiduciary duty, misselling, erroneous valuation and understated unrealized losses, as well as derivative claims over fees based on asset values and potential actions against credit rating agencies. For underwriters, the authors conclude that the opacity and variety of claims make risk assessment and pricing difficult, and recommend using policy renewals to obtain information on loan books, due diligence and valuation approaches.
The article identifies several inherent risks. Unlike public credit markets, private lenders are not required to periodically revalue loans and often carry them at full value until they are classified as non-performing, so portfolio values may not reflect borrower distress. Payment-in-kind (PIK) notes, which allow borrowers to defer interest by adding debt, can increase leverage without addressing underlying problems and may inflate reported performance. Private credit funds also face fewer disclosure obligations than banks, leaving investors and insurers reliant on internal valuations.
Recent failures in the US and UK, including First Brands, Tricolor and MFS, each collapsed within the last year after being financed through private credit structures. Each involved fraud, including double-pledging assets as collateral and misstatement of financial condition and portfolio quality, and the article cautions that these cases do not necessarily indicate that the sector is risky per se. The article cites a securities lawsuit against a BlackRock private credit arm over inadequate disclosure of losses and net asset value, securities class actions against Hercules Capital over borrower due diligence, criminal indictment of Tricolor's senior executives, and civil claims by First Brands' borrowers against its executives.
The article also highlights regulatory scrutiny. The SEC is reportedly considering valuation practices, governance frameworks and redemption processes, particularly where retail investors have access to the market, while ASIC is pursuing private credit lenders over fraud and the Bank of England is focused on private markets risk. Kennedys expects further claims against fund managers for breach of fiduciary duty, misselling, erroneous valuation and understated unrealized losses, as well as derivative claims over fees based on asset values and potential actions against credit rating agencies. For underwriters, the authors conclude that the opacity and variety of claims make risk assessment and pricing difficult, and recommend using policy renewals to obtain information on loan books, due diligence and valuation approaches.
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