Article

Private credit: The gateway to the future of credit markets

Explore the future of private credit markets; current challenges, opportunities, and how synthetic securitizations can enhance resilience and investor confidence.

Driven by bank retrenchment and increased regulation, the private credit industry has grown to an estimated US$2.5 trillion and is forecast to reach US$3 trillion by 2028. The US alone presents a significant opportunity for private credit funds, with the total potential available market estimated to exceed US$30 trillion across a range of asset classes.

Private credit funds are considered attractive to institutional investors as they offer diversification, customizable strategies, regular cash flows, and an illiquidity premium that can potentially deliver higher returns with lower volatility. Retail investors are also increasingly participating in the market through interval funds and publicly traded business development companies (BDCs), which present higher growth prospects but also raise concerns about potential liquidity risks.

Current challenges for private credit

Private credit spans a broad range of industries, but individual funds often have loan portfolios heavily concentrated in a few sectors. While this specialization can enhance understanding of borrower characteristics and underwriting, it may heighten vulnerabilities to sector-specific downturns. This risk can be compounded by elevated and uneven leverage levels across industries.

Traditionally non-cyclical sectors — such as telecommunications, media, and healthcare — now carry higher debt levels compared to more cyclical industries like energy and metals, raising concerns about their debt-servicing capacity. In the context of heightened geopolitical tensions, persistent supply chain disruptions, elevated interest rates, and tariff uncertainties, the risks of contagion, spillover effects, and credit quality deterioration have increased. These factors place additional pressure on firms to deploy capital judiciously.

To manage concentration and contagion risks, institutional investors often diversify across multiple private credit strategies. For retail investors, funds that balance specialization with diversification can be especially important, given this investor group’s often-limited understanding of the risks associated with illiquid and concentrated portfolios. Funds are often looking to align strategies with investor expectations while safeguarding long-term stability.

Sharing risk with insurers

Portfolio synthetic securitization with insurers is a strategic tool to address contagion, concentration, and liquidity concerns. Unlike traditional risk-sharing approaches — such as bank partnerships or co-lending with peers — this innovative financing mechanism allows risks to be distributed discreetly, without disclosing investment strategies or sharing yields.

Many insurance companies hold investment-grade ratings from major agencies, making them generally reliable partners capable of absorbing losses during economic downturns. Non-life insurers are often able to diversify their underwriting portfolios with risks largely uncorrelated to other insurable risks. This positions insurers to absorb credit migration, manage correlation and concentration risks, and recycle capital more efficiently and at scale.

Portfolio securitization can enhance portfolio resilience, strengthen investor confidence, and unlock capital for deployment into new markets. It can also assist portfolio realignment toward emerging markets and developing economies, or mobilize private finance for high-impact sectors aligned with climate-resilience economic development , such as clean energy and renewable infrastructure.

Enhancing resilience and confidence through synthetic securitizations

The shift of trillions of dollars in assets from banks to non-bank balance sheets presents a major opportunity for private credit funds seeking a role in everyday lending. However, during economic downturns, fund risks could escalate, increasing vulnerability to retail investor withdrawals and liquidity challenges.

To reinforce investor confidence and maintain an advantage in origination and distribution, funds can embrace alternative risk mitigation strategies, such as portfolio-level synthetic securitizations. These transactions can provide a level of protection in stressed credit environments, transferring embedded loan portfolio risks to insurers. This approach can help mitigate concentration and liquidity risks while enhancing overall fund resilience.

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