Executive summary
Private credit enters 2026 facing its most challenging environment since the 2008 financial crisis.
Global economic uncertainty around trade, investor jitters over runaway spending on artificial intelligence, and damaging headlines tied to late-cycle excesses in broader credit markets mean fund managers and allocators must tread carefully.
Cracks are emerging in corporate credit. A series of high-profile leveraged loan defaults in late 2025 and the rising use of payment-in-kind toggles in direct lending point to mounting stress. A new cohort of distressed and opportunistic credit funds, which have raised more than $100 billion over the past two years, is poised to capitalize on any resulting volatility.
Stepping back, private credit is evolving rapidly. The market in 2030 will look materially different from that of 2020. After years of allocating predominantly to US direct lending, allocators are broadening their horizons, both geographically and by sub-strategy.
The surge in European fundraising in 2025 is unlikely to be short-lived. Market participants increasingly describe a structural shift in allocator behavior toward the continent.
At the same time, once-niche strategies such as credit secondaries and cross-capital-structure capital solutions funds are scaling quickly. Asset-based finance continues its remarkable rise and could challenge, or even overtake, direct lending over the long term.
Finally, asset managers’ push to expand their investor base, particularly across insurance and private wealth channels, will have lasting implications for fund structures and the balance of power between fund managers and allocators.
Volatile markets will test new cohort of opportunistic credit funds
Looking below the surface of private credit reveals a market vulnerable to economic shocks, and we anticipate an increasingly volatile environment heading into 2026 as the asset class is tested through a full credit cycle for the first time.
With stock markets trading at all-time highs, growing concerns about an emerging bubble in the AI sector, continued uncertainty around the US’s trade policy and rising geopolitical tensions, investors head into 2026 on a hair trigger for any signs of a potential market crash.
Against this tense backdrop, corporate credit is beginning to display signs of late-cycle behavior, with a series of high-profile bankruptcies in late 2025 adding to long-standing concerns about loosening lending standards in private debt.
While the headline default rate in private credit has remained below 2% for several years, once selective defaults and liability management exercises are taken into account, the “true” default rate approaches 5%.
Meanwhile, payment-in-kind (PIK) usage has risen notably in private credit in recent years, with public BDCs now receiving an average of 8% of investment income via PIK.
Once limited to mezzanine and subordinated debt, PIK is increasingly appearing in senior secured loan documentation.
And while many managers argue for a distinction between “good” and “bad” PIK, this broad-based increase suggests that borrowers are increasingly struggling under higher interest burdens.
Elsewhere, the International Monetary Fund’s 2025 Financial Stability Report found that around 40% of private credit borrowers have negative free cash flow – up from 25% in 2021.
However, such an environment may present a unique opportunity for a new cohort of opportunistic credit funds, as we saw during the market selloff after President Trump’s “Liberation Day” tariff announcements in April 2025, when fund managers including Apollo and Arcmont stepped in to snap up opportunities in hung bank loans and stressed corporate credit.
Opportunistic, special situations and distressed debt funds have collectively raised $100 billion in the past two years, while the 10 largest funds currently in market are targeting almost $50 billion – suggesting fund managers and allocators are looking to build war chests in the event of a turn in the cycle.
Allocators will look to Europe for alpha
With US direct lending becoming more commoditized, we expect allocators will increasingly turn to European private credit, both as a diversifier and a source of alpha in its own right.
Despite the EU’s Capital Markets Union initiative, Europe remains a diffuse and relatively inefficient market – particularly when compared with the US – meaning there are still opportunities for wider spreads for similar levels of risk.
Meanwhile, as European countries look to ramp up infrastructure and defense spending, fund managers such as Apollo Global Management and Ares Management have cited a “substantial origination opportunity” on the continent over the next several years.
Furthermore, as Europe implements Basel IV over the coming years, we expect a major shift away from bank lending – currently around 70% of total lending in Europe – toward private debt funds.
Europe saw two €10 billion+ “mega-funds” in 2025 – including Ares Management’s record-breaking Ares Capital Europe VI, which raised €17.1 billion – and in general, European private credit had a breakout year, with fundraising hitting a record $65 billion through the first nine months of the year – 14% higher than 2024’s full-year total of $57 billion.
European funds accounted for 35% of all private debt fundraising in the first nine months of 2025 – up from roughly 24% in each of 2023 and 2024 – while multi-region funds raised $70 billion, or 37% of the total.
North America-specific funds, by contrast, raised just $52 billion over the same period, or 28% of the overall total – a sharp fall from 2023 and 2024, when North America accounted for around half of all private credit fundraising.
While we expect the decline in North American fundraising to be a temporary consequence of economic volatility in the US, Europe’s increase is unlikely to be a flash in the pan, but rather a sign of a longer-term structural shift in the continent’s capital markets.
Major US allocators – including the Florida State Board of Administration, New Jersey Police & Fire Pension and Pennsylvania Public School Employees’ Retirement System – are also building out European private debt allocations. US allocators point to Europe’s more diverse credit markets as an attractive feature, with less concentrated exposure to the tech sector. At the same time, many European fund managers run smaller, specialist funds, which fit with many allocators’ push for strategy diversification.
Evergreen funds to proliferate as fund managers seek perpetual capital
While recent annual closed-end fundraising figures have been relatively stable at around $200 billion, assets in evergreen private debt funds have surged in recent years.
As of June 30 2025, assets held in evergreen private credit funds reached $644 billion, up 28% from the end of 2024 and roughly 45% year-over-year.
Of this figure, around $120 billion is held in institutional funds, with allocators such as New Mexico State Investment Council and Utah School and Institutional Trust Fund favoring the structure as an efficient tool to access the direct lending and asset-based finance markets.
In 2025, we tracked over 40 commitments to evergreen funds from institutional allocators, totaling over $3 billion. The 10 largest mandates accounted for $1.9 billion.
However, the bulk of evergreen AuM is held in private wealth-focused ’40 Act vehicles – particularly non-traded, perpetual-life business development companies, which have grown from zero in 2021 to more than $200 billion today.
In addition to evergreen commingled funds, the world’s largest asset managers have raised vast sums of “perpetual capital” via their insurance solutions platforms – typically in the form of long-dated separate accounts – as they look to future-proof their fee-earning AuM.
The five largest listed private markets fund managers – Apollo, Ares, Blackstone, Carlyle and KKR – now manage a combined $1.5 trillion in perpetual capital: around 40% of their combined AuM, up from 35% in 2021. If the CAGR seen since 2021 continues, these firms will manage almost $5 trillion in permanent capital by the end of the decade.
While many allocators are attracted by the efficiency of underwriting and re-upping an evergreen vehicle – as well as potential liquidity benefits – not all allocators are convinced.
Institutional allocators, from insurers and pension funds to endowments and foundations, have told us they remain skeptical about whether evergreen private credit funds can deliver the liquidity they promise.
Others say that the “set it and forget it” nature of the fund structure conflicts with their best practices for underwriting and due diligence. Likewise, as no single standard exists for fund terms, some allocators reserve judgment on the evergreen structure and consider opportunities on a case-by-case basis.
In the long term, we expect evergreen SMAs and fund-of-one structures to become an ever-larger proportion of private credit AuM, as an increasingly sophisticated allocator base seeks customized solutions, and fund managers prioritize stable, permanent capital bases.
However, for commingled evergreen funds, core real estate redemption queues still cast a long shadow and allocators should evaluate the potential risks of these structures carefully before writing large tickets.
Blue Owl’s abandoned BDC merger shows liquidity comes at a price
Blue Owl’s proposed merger of a non-traded BDC with its listed vehicle, Owl Rock Capital Corporation, is a warning to allocators looking to allocate to evergreen vehicles for their liquidity benefits.
The $295 billion manager announced plans in November to merge its non-traded BDC, Blue Owl Capital Corporation II (OBDC II), with its listed BDC, Blue Owl Capital Corporation (OBDC), in response to a sharp increase in redemption requests from investors in the non-traded fund. Under the terms of the merger, OBDC II shareholders would have their shares exchanged for OBDC shares at the two funds’ stated net asset values (NAVs). The two vehicles’ portfolios have around 98% overlap.
However, OBDC, which is listed on the New York Stock Exchange, was trading at a 20% discount to its NAV when the move was announced, owing to broader investor jitters around private credit, as well as nervousness about AI valuations (Blue Owl invests heavily in technology loans).
As such, OBDC II investors would have instantly taken sharp paper losses to the value of their investments post-merger. Blue Owl ultimately canceled the move, citing “market volatility,” although it is still exploring its options for the two funds.
The situation serves as a reminder that, when investing in private markets, liquidity comes at a price.
Private wealth’s rise will shift allocator balance of power
Closely related to the rise of evergreen vehicles, the rapid and sustained swell of private wealth inflows to private credit vehicles will drive significant shift in the allocator landscape by 2030 and create challenges for institutional allocators.
Of the $644 billion currently held in evergreen vehicles, around $520 billion is held in various private wealth-focused fund structures, including BDCs, interval funds and European semi-liquid funds. When finite-life vehicles are included, ’40 Act vehicles manage almost $600 billion. Closely related to the rise of evergreen vehicles, the rapid and sustained swell of private wealth inflows to private credit vehicles will drive significant shift in the allocator landscape by 2030 and create challenges for institutional allocators.
Of the $644 billion currently held in evergreen vehicles, around $520 billion is held in various private wealth-focused fund structures, including BDCs, interval funds and European semi-liquid funds. When finite-life vehicles are included, ’40 Act vehicles manage almost $600 billion.
The world’s largest asset managers increasingly see the private wealth market as the key driver of their future AuM growth. KKR, for example, plans to raise as much as 50% of its capital from high-net-worth clients over the medium-to-long term.
If ’40 Act funds continue to attract capital at the rates seen since 2022, we project that these funds will surpass $1 trillion in combined AuM by 2028, with nontraded BDCs alone set to reach this milestone by 2030.
After extensive lobbying by industry giants, the US recently gave the regulatory green light to private credit managers to sell to the roughly $13 trillion defined contribution market, which could further shift the balance of allocators away from institutions and toward individuals.
Across the Atlantic, the implementation of the “ELTIF 2.0” regime – which broadened the list of eligible assets for European Long Term Investment Funds (ELTIFs) – has led to a surge in new approvals for private credit ELTIFs. While lagging the US by some distance, European semi-liquid funds now manage over €20 billion, and this figure will likely increase further in 2026 as this new cohort of funds go live.
Institutional allocators are grappling with how so much capital flowing in from more nimble investors will impact their long-standing fund manager relationships, as well as those they hope to develop with sought-after managers.
Meanwhile, as managers continue to court private wealth clients, institutional allocators will have to be on alert for increased “blurring” of these products, necessitating heightened vigilance when they conduct due diligence.
Specialty finance will challenge direct lending’s dominance
Specialty finance broke through in 2025, emerging from relative obscurity to become one of the hottest corners of the private credit market.
Specialty finance saw $37 billion of fundraising in 2025, more than the previous two years combined, and second only to direct lending ($79 billion) among the most sought-after sub-strategies in private credit. This is a significant shift: specialty finance accounted for just 5% of fundraising in 2023 and 3.6% in 2024.
2025 saw KKR raise the second-largest ever asset-based finance fund, pulling in $6.5 billion for its Asset-Based Finance Partners II, while 17Capital’s Strategic Lending Fund 6 became the largest ever NAV financing fund.
In the first three quarters of 2025, specialty finance was the most popular strategy for new private credit launches (84), ahead of direct lending (71).
Meanwhile, specialty finance launches as a proportion of all funds in development rose, from 23% in 2024 to 34% in 2025.
The 10 largest specialty finance funds in market are collectively targeting around $35 billion, pointing to sustained demand for niche credit strategies heading into 2026.
In the long term, we expect asset-based finance to challenge, or even overtake, the direct lending market, as banks continue to de-risk their balance sheets and private credit managers look to fill the gap.
Europe’s implementation of Basel IV will further spur adoption of tools such as significant risk transfer and SME portfolio sales over the coming years, while US banks are increasingly using “forward flow agreements” with private debt firms to offload large portfolios of ABF assets.
Other private debt managers are looking to cut out banks altogether, developing ABF origination platforms of their own, such as Apollo’s Atlas SP unit, which the manager formed in 2023 after acquiring Credit Suisse’s structured products group. Atlas is expected to be the key driver of Apollo’s ambition to hit $275 billion in annual originations across its credit platform by 2029.
A word of caution, however: allocators looking to allocate to asset-based finance must ensure that fund managers have firm recourse to the collateral pool underlying their investments, through special purpose vehicles that properly isolate the underlying assets from the operating company (so-called “lock boxes”).
Without these protections, managers and allocators leave themselves open to potential “double-pledging” of collateral by lenders, which could leave them facing lengthy court battles to recover losses – as seen in the recent cases of First Brands and Tricolor.
Private credit’s fund financing push illustrates shift away from banks
The fund financing market serves as a microcosm for how private debt managers are moving into territory traditionally occupied by banks.
Historically, banks dominated facilities such as subscription lines and NAV loans, with Silicon Valley Bank (SVB) one of the largest players in the asset class.
Following the collapses of SVB and Signature Bank – another key player in fund financing – in 2023, there has been a marked rise in private debt funds investing in NAV loans: lending to funds outside of their investment period to finance add-on acquisitions (and occasionally, distributions to allocators).
2025 saw a record $12.9 billion of NAV lending fund closes, including 17Capital Strategic Lending Fund 6, which at $5.5 billion is the largest fund ever closed in the asset class.
Several more NAV lending funds are in market with targets of more than $1 billion, hinting at untapped allocator demand for the strategy.
More recently, fund managers have begun to push into subscription line financing: Aegon Asset Management, L&G and NLC Capital have planted their flags as early movers in the space, each seeking $1 billion+ for sub-line financing funds, while Värde Partners launched a fund of its own with a $300 million anchor investment from CPP Investments.
Meanwhile, Eagle Point Credit Management is carving out a niche for itself as a leverage provider to third-party private credit funds – particularly those active in complex strategies such as non-sponsored direct lending or asset-based finance. The Greenwich-based manager recently surpassed $5 billion in AuM for the strategy, most of which is managed in SMAs for insurance clients. This means that there are now private credit managers active at all stages of the fund-financing lifecycle.
Credit secondaries will be widely adopted by fund managers and allocators
With private credit now firmly established in most institutional investor portfolios, we are seeing the emergence of a developed secondaries market for the asset class.
The first three quarters of 2025 saw record credit secondaries fundraising of $16 billion – more than the previous three years combined – including $5 billion+ raises from Coller Capital and Pantheon Ventures. Sizeable funds from Cross Ocean and Tikehau Capital are also nearing final closes.
Several asset managers are looking to launch dedicated credit secondaries platforms, including Antares, Blackstone, HarbourVest Partners and PGIM, while startup manager FoxPath Capital Partners recently received an anchor investment from Reinsurance Group of America as FoxPath markets its $500 million debut fund.
While allocator-led transactions drove secondaries volume in previous years, 2025 saw fund manager-led volume overtake allocator-led deals for the first time, with over $7 billion of credit continuation vehicles closed in 2025.
While private credit is a more liquid market than private equity, it is still beholden to buyout mechanics; as exit activity has dried up in private equity, market participants tell us that average loan duration rose from around two to three years to four to five years.
As such, private credit fund managers are increasingly using multi-asset continuation vehicles and strip sales as a way to “clean up” mature, performing portfolios and provide liquidity to allocators.
With the tough private equity exit environment set to persist amid geopolitical and macroeconomic headwinds, we expect a sustained increase in credit secondaries deal volume and fundraising in the coming years.
Even with Evercore projecting record secondaries deal volume of around $18 billion in 2025, this would only represent around 1% of the overall private credit industry AuM.
Longer term, we expect this to increase toward the private equity market’s average annual volume of around 2–3%, with the host of new entrants being able to support a sustained increase in deal activity.
Junior capital back in vogue amid tough exit environment
With a difficult exit environment piling pressure on private equity managers to return capital to investors, we expect strong fundraising from “hybrid” junior capital funds over the coming year.
“Mezz 1.0” funds tended to invest in high-risk junior debt instruments that relied on PIK interest, which led to a perception of private equity risk for private debt return.
By contrast, the newer cohort of hybrid funds tend to focus on highly structured financing, combining contractual cashflows – often fixed-rate – with warrants or preferred equity. Some funds even use a blend of senior debt plus equity to produce a similar overall return profile in the mid-teens.
This contractual cashflow element offers an attractive feature for allocators concerned about relatively low DPI figures in buyout funds, while warrants or Holdco preferred equity offer the potential for a degree of equity upside. Fund managers active in the sector say the current market environment is producing an attractive pipeline of opportunities to use junior capital to achieve “partial realizations” – for example, through minority recapitalizations or refinancings. At the same time, fixed-rate debt components could serve as a hedge against potential future interest rate cuts.
While annual fundraising figures for junior debt can be lumpy, due to a limited number of active fund managers in the strategy, the seven largest funds in market are targeting over $50 billion between them – 30% more than the fundraising total for junior debt funds in 2023 and 2024 combined.
