Private credit at a crossroads: Europe surges as US market shows strain

Private credit is entering 2026 under intensifying scrutiny as market stress surfaces and capital flows shift, with European fundraising eclipsing US volumes and structural risks drawing increased attention from allocators and advisers alike.

The private credit universe has matured dramatically over the past decade, but the latest data from S&P Global’s With Intelligence suggests the asset class is facing its first significant downturn test.

After a prolonged period of strong US direct lending growth, a combination of higher risk behavior, rising defaults and a pivot toward European markets signals a changing competitive landscape for investors and their clients.

A key stress indicator for private credit in 2025 has been a subtle uptick in selective defaults and the growing prevalence of payment-in-kind structures, where interest is added to loan principal rather than paid in cash. Taken at face value, headline default rates remained below historical highs, but broader calculations including selective defaults and liability management actions suggest an effective default rate of nearly 5% through the first nine months of 2025.

“The private credit market is facing its first big test as evidence of late-cycle behavior continues to build,” said James Harvey, research lead for private credit at With Intelligence. “After years of allocating overwhelmingly to US direct lending, limited partners are broadening their horizons, both geographically and by sub-strategy, and we expect some of these shifts to significantly alter the current landscape over the next several years.”

Rising use of PIK in senior secured loans — historically the domain of lower-tier subordinated financings — reflects borrowers’ strained cash flows and elevated leverage. Public business development companies, serving as a proxy for parts of the retail and wealth channel, are now reporting an average of 8% of investment income derived from PIK.

Europe’s Breakout Year, US Growth Cools

One of the most striking developments of 2025 has been the shift in fundraising geography. European private credit reached record levels, with €56 billion (approximately $66 billion) raised through the first nine months — up sharply from prior years — while North America-focused funds lagged, raising about $52 billion over the same period.

European funds accounted for roughly 35% of global private debt fundraising in 2025, compared to about 24% in both 2023 and 2024. By contrast, North America’s share has fallen from near 50% to just under a quarter of total capital raised.

Europe’s fragmented lender base and relatively inefficient markets can offer wider risk premia compared with the increasingly crowded US direct lending space. Combined with structural shifts such as Basel IV’s impact on bank loan supply, this has created fertile ground for private debt strategies that target niche sectors or bespoke financing solutions.

Growth of Evergreen Structures and Wealth Channel Capital

Another theme reshaping the asset class is the rapid expansion of evergreen private credit vehicles. Assets in such perpetual-capital structures, including non-traded BDCs and semiliquid funds, climbed past $640 billion by mid-2025, up more than 40% versus the prior year.

While institutional investors continue to command a large share of capital, allocation from private wealth channels has surged. These flows pose a dual challenge: they have broadened the base of capital available to managers, but they also raise questions around liquidity profiles, governance standards and alignment with long-term liability matching for traditional pension and endowment allocations.

As allocators recalibrate in 2026, those who integrate nuanced credit analysis with strategic sector and geographic tilts may better position their clients to navigate what could be a defining cycle for private credit allocations.