Is Europe’s private credit boom cracking? What fund selectors should watch in 2026
31 AUG, 2026
Private credit has spent the past decade as one of the fastest-growing corners of institutional and private wealth allocation. In 2026, that growth story is being tested for the first time at scale — and fund selectors across Europe are being asked to look past the yield and price in the risk.
A market entering its “moment of truth”
The stress signals have been building for months. In the US, private credit Business Development Companies (BDCs) have faced hundreds of millions in redemption requests, forcing several to impose gates. Karl Pettersen, Co-Head of Corporate Ratings at Scope Ratings, doesn’t mince words: “The US private credit market is entering a ‘moment of truth’ as investors signal concerns around weaknesses that may have been masked by opacity and abundant liquidity.” He points to rising use of payment-in-kind (PIK) interest structures — sometimes informally labelled “shadow defaults” — and valuation uncertainty as the clearest warning signs.
Benoît Pelloille, Chief Investment Officer at Natixis Wealth Management, sets the scene in similarly stark terms: “While global headlines focus on geopolitical tensions and economic jitters, a more insidious pressure is building within the opaque corridors of private credit.” He notes that BDC redemption pressure stems directly from rising rates — a clear precursor to higher defaults — compounded by two headwinds specific to this cycle: heavy exposure to software-company debt now facing AI-driven disruption, and a broader deterioration in BDC credit quality over the past year.
What the data confirms
- The European Central Bank’s May 2026 Financial Stability Review found euro-area financial institutions have limited direct exposure to private credit — but flagged that insurers and pension funds could face material second-round losses if stress spills into leveraged loans, high-yield bonds and equities.
- PwC’s Global Private Credit Survey 2026 found 93% of managers expect flat or lower returns this year, with stress concentrated in consumer/retail (56% of respondents), automotive (42%) and hospitality (27%).
- Morgan Stanley’s European Financials Conference in March saw bank CEOs downplay systemic risk, characterising the correction as isolated to less-experienced players rather than a sector-wide problem — even as banks privately increase monitoring.
- KBRA expects broadly stable ratings across its rated private credit universe, but anticipates rising, if manageable, default rates among middle-market borrowers through 2026.
Pettersen’s own read reinforces the “contained but not costless” picture: “banks are exposed to private credit through indirect channels (e.g. subscription lines, NAV facilities), but bank exposure is more remote and fragmented than during the run up to the GFC.”
Why fund selectors shouldn’t wait for a systemic verdict
The consensus across contributors is that this isn’t 2008 — but it doesn’t need to be for it to matter to allocators. Richard Philbin, Head of Investment Solutions at Hawksmoor Investment Management, doesn’t dismiss the appeal: “At first glance, the opportunities within private credit can seem appealing – an attractive yield, the potential to invest in assets with strong covenants, the benefits of diversification, income which can be floating rate and spreads that can enhance returns.” But he’s equally direct about the catch: “There are drawbacks to private credit investing. The main one is liquidity, or lack thereof.”
Onur Erzan, President of AllianceBernstein, makes the case that the scrutiny is healthy rather than alarming: “Private credit can definitely play a role in the discussion, but it should not be viewed as a single, homogeneous allocation.” He argues the opportunity lies not in the category as a whole, but in accessing the right segments — direct lending, asset-based finance, commercial real estate debt — through experienced lenders with genuine underwriting discipline.
That reframes the fund selector’s job. The question isn’t “private credit: yes or no” — it’s manager-by-manager, structure-by-structure diligence on:
- Redemption terms and gating history — has the vehicle ever capped or suspended withdrawals, and under what triggers?
- PIK usage — what share of portfolio income is payment-in-kind rather than cash, and is that share rising?
- Valuation cadence and methodology — how often are holdings marked, and by whom?
- Sector concentration — exposure to software, consumer/retail and other segments PwC’s survey flags as higher-risk for 2026.
- Bank-linked funding lines — reliance on subscription lines or NAV facilities that could tighten if lender sentiment shifts.
The bottom line
Marco Busca, Head of Indirect Private Debt at Generali AM, points to where the market is already adapting: “Private credit secondaries are increasingly emerging as a strategic component of private markets allocations.” As primary investors seek liquidity and new entrants want faster, more visible returns, the secondary market is maturing into a genuine portfolio-management tool — offering shorter duration, faster distributions and better visibility on asset quality than primary commitments.
For European fund selectors, that’s arguably the most useful takeaway from the current stress episode. This isn’t a moment to abandon private credit — the contributors, across wealth management, asset management and ratings, broadly agree the asset class still has a structural role to play as banks retreat from parts of the lending market. It is a moment to demand more transparency, tighter due diligence on liquidity terms, and more discipline in manager selection than the boom years required.
Sources: RankiaPro Europe Magazine, June 2026 (“Private Credit Under Scrutiny,” pp. 22–25); European Central Bank, Financial Stability Review, May 2026; PwC Global Private Credit Survey 2026; Morgan Stanley European Financials Conference, March 2026; KBRA Private Credit Outlook 2026.
