Private credit is maturing, not collapsing, says PwC strategist

It’s been a rough few weeks for participants in the private credit space as many of the purveyors of the asset class have suffered both in the press and in their publicly traded share prices.

Nevertheless, the panic doesn't capture that these growing pains are confined to one corner of the asset class, according to Roland Kastoun, asset and wealth management advisory leader at PwC. In his view, private credit remains structurally sound and the true story isn't collapse - it's maturation.

“Private credit has been on an exceptional growth trajectory in both size and breadth, driven by the supply of capital interested in the space and, more importantly, by borrower demand for this type of capital. During this growth phase, sponsors have also been on a steady journey toward further institutionalization and innovation across the market. This evolution will undoubtedly be shaped by the questions and concerns investors are raising in response to recent market events,” Kastoun said.

Some of those key concerns include underwriting quality amid record-breaking allocations, with closely watched metrics like PIK usage and leverage trending higher. Another concern is how interconnected participants across the private credit ecosystem truly are, as highlighted by recent governance and valuation concerns.  

Another worry for the market is whether portfolio monitoring and counterparty risk management are sufficient, particularly in asset-based financing arrangements. Also concerning, of course, is the impact of AI as a disruptive catalyst, requiring lenders to reassess counterparties' performance and financial health.

There is also a growing question of trust in valuations or in underlying collateral, driven by events that, while idiosyncratic so far, may require more transparency.

Kastoun believes asset managers who get ahead of these compounding concerns will be better positioned than those who wait for defaults to tell the story.

Still, he sees this unfolding stress test ultimately strengthening the asset class, making it safer and more resilient.

“Credit cycles and periods of stress are common in financial services. They typically separate winners from losers and drive consolidation. We’ve seen similar patterns recently in the commercial real estate fund market. After a period of intense growth, the current stress may act as that same forcing mechanism as private credit matures,” Kastoun said.

Kastoun points out that unlike public markets, private credit is not structured to be a forced seller. As a result, some will argue that the 5% quarterly redemption cap is working “exactly as intended.”

“This dynamic will likely slow capital raising for some managers, including the retail channel, while concentrating flows into a smaller subset of stronger players,” Kastoun said.

WHAT’S AN ADVISOR TO DO?

As to what advisors should be doing if their portfolios are under pressure or scrutiny, Kastoun says they need to engage with the asset managers whose products they have recommended. They need to ask them questions such as: "How do you know deal quality isn't slipping?" and "Are your benchmarks still the right ones?" 

These are relevant because standards for private credit risk management have shifted. What was acceptable two years ago may not meet current expectations from investors, regulators, and boards.

“The focus now is whether the frameworks, forensic capabilities, and manager assessment processes are aligned where the market is going, not where it's been. Formalizing risk identification, expanding scenario analysis, and increasing the frequency of testing can strengthen decision-making and support investor confidence,” Kastoun said.

Kastoun also suggests advisors ask the asset managers whether their operational due diligence is systematic or reactive. As private credit becomes more complex, with more PIK activity, more restructurings, and more governance pressure, operational due diligence can lag behind, according to Kastoun. The key question in his opinion is whether health check processes for managers are proactive and structured, or triggered only by market events and headlines.

ENGAGE WITH CLIENTS TOO

At the same time, Kastoun says advisors should continue engaging with clients to ensure a clear understanding of each product's profile, risks, and characteristics, and alignment with the investor's risk appetite, investment horizon, and liquidity needs.

Advisors need to guide their clients toward managers, strategies, and structures better suited to their needs, while accounting for the cumulative impact of recent market disruptions.

“Rotation is happening within private credit: away from more complex or weakly governed vehicles toward simpler capital stacks, senior-secured strategies, and managers with strong underwriting discipline, liquidity planning, and transparency,” Kastoun said.

Emphasized Kastoun: “Investors are not abandoning the asset class. They are reallocating toward structures that perform more predictably under stress.”