Manager selection is critical amid private debt growth and headlines

Key Takeaways

• Recent high profile bankruptcy headlines associated with private debt have caused financial publications and investors to question the growth and discipline of managers in the space.
• We believe that broad generalizations, based on isolated headlines, paints an incomplete picture of the asset class and private debt still has a place in diversified portfolios, but the bar for entry and oversight should be rising.
• Partnering with private debt managers that are thoughtfully constructing and growing their portfolios, while maintaining rigorous underwriting discipline, should benefit investors through market cycles.

What Happened

Select high profile bankruptcies have raised questions around the health of the private debt market, the industry’s level of growth, and the investment discipline being demonstrated by investment managers.

Recent headlines have exacerbated investor fear that the asset class has been witnessing an unsustainable trajectory of inflows. For context, it bears notice that assets under management for private debt have grown from around $700 billion in 2017 to over $1.75 trillion in 2024, a nearly 2.5x increase. To put this growth into perspective, there have been five funds registered since 2021 which now have over $20 billion portfolios, with the largest gathering $77 billion in just under 5 years. Simple math shows that the monthly deployment pace for these managers is averaging anywhere from $300M to $1B, a significant portion of the $5-10B in monthly sponsor backed middle market private debt transactions tracked by Preqin in 2024

Our Take

Recent bankruptcy headlines obscure key idiosyncratic and company-specific attributes, creating a misleading picture of broader industry dynamics in private debt.

 In two recent high profile cases, losses stemmed largely from isolated incidents involving alleged fraud and opaque business practices that allowed these heavily indebted companies to conceal existing issues, including double pledging of collateral. “Company A”, a major aftermarket auto supplier, filed for bankruptcy in late September 2025, following multiple credit downgrades, and a lack of transparency around its opaque off-balance sheet financing. “Company B”, a subprime auto lender, serving primarily lower-income households, also defaulted on its loans in September, filing for Chapter 7 liquidation. Notwithstanding differing circumstances, both situations highlight the growing complexity of the private debt market.

Direct exposure to these bankruptcies was relatively limited to private debt investors. Company B’s exposure was largely contained as its subprime consumer ABS and warehouse lines were mostly bank-financed.1 However, Company A’s private debt was held by several private and public Business Development Companies (BDCs) across the BDC fund universe. For most funds, Company A’s debt accounted for less than 2% of net assets. 2 While modest, it is important to note that up until the quarter prior to the bankruptcy filing, many of the BDCs with exposure marked the debt at ~90-95 cents on the dollar, meaning net asset values have (or will) adjust to reflect current fair value pricing. There’s certainly an argument that what’s transpired was idiosyncratic in nature. However, there were several warning signals about what eventually occurred, including highly adjusted EBITDA, weak governance, and ongoing debt issuance to fund growth. These factors were cited by managers who passed on the deal, underscoring the importance of disciplined origination and due diligence, particularly among fast growing private debt platforms which are deploying capital at a rapid pace.

Both of the aforementioned issues stem from alleged fraud, not operational failures. While we expect more stringent underwriting and idiosyncratic credit developments ahead, overall fundamentals across private debt and leveraged loans remain fairly stable and may improve,

Flexibility of private debt attracts borrowers and drives deal flow, but creative loan term amendments and extensions are becoming more broadly common.

Credit quality remains solid with the percentage of loans in non-accrual status stable. However, the low headline default rate (fluctuating between 2% and 5% since 2021) masks the use of liability management exercises, which may lead to stress down the road. Additionally, the growth of PIK usage seems to be a symptom of a broader “amend and extend” strategy and could be artificially suppressing default rates and is permeating the large cap private debt market. This trend will likely pressure cash yields to investors and could potentially increase losses, as affected loans are continually lengthened or reach maturity 

Bottom Line

All private debt managers are not created equally and so it is critical to understand the character of their strategy and portfolio. The private debt universe is vast, with hundreds of firms and thousands of funds, targeting various sub-markets or industries, using diverse sourcing and diligence methods. We believe that generalizing the asset class based on recent headlines, or a select group of vehicles and loans, doesn’t paint a comprehensive picture.

Private debt remains a significant and growing part of the debt ecosystem – not an immediate systemic crisis, but these recent headlines are signs of where risk may concentrate (opaque lending structures, weak covenants, late-cycle pressures). The bottom line for allocators and/or advisors is that private debt has a place in a diversified portfolio for qualified investors, but it demands exceptionally rigorous due diligence, clear understanding of structural risks, and cautious sizing relative to market conditions as the bar for entry and oversight should be rising.

We believe that advisors may achieve better outcomes by focusing on private debt managers that are thoughtfully constructing and growing their portfolios, while maintaining rigorous underwriting discipline, which should ultimately benefit investors through market cycles.