Climbing default rates in private credit do not signal that it’s time for investors to panic, experts on a panel at the Bermuda Risk Summit said yesterday.

Many Bermudian re/insurers — especially in the life sector — have found a place in their investment portfolio for private credit, especially in the $2 trillion direct lending market, which is seeing strong growth fuelled by nonbank institutions and funds lending to businesses.

Concerns about illiquidity, perceived lack of transparency, and credit quality have grown amid the market volatility of recent weeks, particularly in sectors such as software and technology, which are vulnerable to market disruption.

Last month, it was reported that asset manager Blue Owl Capital sold $1.4 billion of loan assets held in three of its private debt funds and restricted quarterly withdrawals by investors, leading to concerns about other private-credit funds.

“The default risk of private credit historically has been around 3 per cent — I think over the last few months we've seen it create closer to 5 per cent,” said Ed McCartney, partner at global law firm Kirkland and Ellis.

“Because private credit has had such a strong track record, there's been a lot of focus as that number seems to be increasing, although financial professionals seem to view that as pretty steady and consistent with other asset classes.”

Scott McClurg, head of private credit at HSBC Asset Management, felt the headlines highlighting concerns about private credit were overly focused on a handful of isolated cases.

“The catalyst for the media coverage we have seen has been idiosyncratic illegal activities within a very small number companies,” Mr McClurg said, adding that four names had shaped media and public perceptions.

“There isn’t any evidence of a wide or systemic issue.”

On withdrawals from private credit funds, Mr McClurg said many funds private-credit funds were structured to allow a limited amount of liquidity for what are essentially illiquid assets. “We've seen a lot of media attention around this, but actually it’s just the market working as it should,” he added.

Dan Garzarella, managing director at global asset manager BlackRock, said financial markets had been tested by a four-year period of “rolling stresses” — ranging from an inflation spike and interest-rate shock in 2022, to more recent tariff announcements and AI disruption.

“You saw the immediate effects in public markets, because that’s where it’s most visible, “Mr Garzarella said. “So, probably syndicated loans will likely go through its worst five-year period of defaults — worse than the global financial crisis, worse than the dotcom boom — just if you assume primary defaults stay where they have been for the last three years.”

In private credit, there tended to be more features giving borrowers leeway to work through the stress, he said.

“A rolling loan takes no loss, as they say, but at the same time, when you look at public market default rates, it doesn't mean it's not coming in the private markets, and it still needs to hit.”

Insurance companies and retail investors were exposed to any private-credit downturn that may occur, Mr Garzarella added. Investors needed to be diligent in managing their private-credit investments to buffer against losses.

“So, I do think the next five-year period will look very different than the last five-year period in terms of losses through these markets, but there's still value in the right places with the right approach,” Mr Garzarella said.

Peter Giacone, senior managing director at credit rating agency KBRA, said the private-credit market was not inherently riskier than publicly traded equivalents — however, investors tended to be paid more for taking that risk.

He expected the growth in private credit to continue, in line with economic growth.

“In terms of market trends, we’re seeing longer tenures, particularly in the CFO (collateralised fund obligations) market,” Mr Giacone said. “They used to be five-, seven- and ten-year deals, now we’re seeing some of more than 20 years.

“So that extension of maturity introduces more risk and complexity, which we look at closely from a rating perspective.

“We also think yield will gradually trend downward over the next three to five years, so you will see higher performers standing out more versus their competitors.”