Why investors choose private credit (Roundtable Private Credit - part 2)

December 10, 2025

^{This report was originally written in Dutch. This is an English translation.}

In part 2 of this roundtable discussion, experts discuss why institutional investors find private credit attractive and which risks they consider most significant. They also discuss the quality of ratings, market transparency, the actual risk of default and the role of lenders in the growth trajectory of companies.

By Hans Amesz

This is part 2 of the report. You can read part 1 here, part 3 will be published on Thursday 11 December.

What do institutional investors cite as the main reasons for investing in private credit and what do they see as the main general risks?

Korat: 'Investors believe that this market has something to offer that they cannot get on the public markets, namely extra returns and access to underlying assets that are not directly available. They try to get more return from illiquidity than from taking absolute risk.'

Kalb: 'Pension funds and insurers are indeed allocating to private credit markets because it yields higher returns. Private credit is still relatively new, and they are also looking for ways to identify where to focus within private credit. Another important factor is that private credit offers opportunities to make an impact.'

Morrison: 'Investors are attracted to the potential for superior risk-adjusted returns that the asset class offers. It’s about diversifying credit risk, investing in a form of credit that doesn’t correlate with anything else. It’s about insulating their more liquid portfolios from market volatility.'

Korat: 'I think investors’ biggest concern is probably valuation and transparency. Investors want to feel that they can monitor the risk they have taken and detect when the quality of the investment is deteriorating. That is still quite difficult to do.'
 

Investors want to feel that they can monitor risks and detect when the quality of an investment is deteriorating.

  
Foster: 'The question that I think will come up more and more is whether investors are being adequately compensated for the liquidity risk they are taking. As a large active manager of fixed income and private credit, we always think about relative value and strive to offer investors appropriate compensation for the risks they take.'

Morrison: 'One thing that investors are increasingly concerned about is complacency in terms of underwriting and credit standards and discipline. As more liquidity has shifted into the private credit asset class and institutional capital has entered this bank-led market, we are seeing a general easing of credit terms across the asset class, with much less rigorous legal due diligence than before.'

Private credit ratings are mainly provided by smaller rating agencies. How good is the quality of their ratings?

Roblin: 'There is no public information, but we can gather detailed information, usually in niche markets. For example, we can access due diligence material, we can hold discussions with management, we can hold Q&A sessions. On the one hand, we need much more tailor-made credit analyses and, on the other hand, there is also the aspect of structuring transactions, which means that we need robust managers who are able to structure the transactions correctly. Our internal rating methodology is the result of all the credit analyses we have made and is used more as a benchmark.'

Sukdeo: 'In the more established asset classes, such as mortgages, there is a long history of data. Models have been tested during various recessions. That is somewhat reassuring, but of course you don't know how these models will perform if you end up in a serious recession.'
 

When business managers see the positive effect of an ESG strategy, for example a reduction in staff turnover, ESG becomes a business necessity.

 
Harmsen: 'We work with an external rating methodology that is specifically tailored to the European mid-market, a segment whose defaults we have been monitoring for decades. We manage capital for many European insurers and offer them complete transparency, which is made possible by this rating methodology.'

Foster: 'The quality of ratings varies, but in our opinion, no rating can replace a robust bottom-up credit assessment. With more than five decades of experience in public markets, we recognise that ratings from rating agencies are often outdated and that independent research can lead to a more nuanced picture. Investors structure transactions to meet rating requirements rather than purely on economic merits, which can distort pricing and make some investments less attractive. Rather than competing for overvalued assets, we seek to take advantage of these dynamics by purchasing private, unrated assets that offer higher returns due to the lack of a rating. We then structure them into rated instruments that can be sold to investors who require ratings. This allows us to capture the rating premium while retaining control over underwriting and structuring.'
 

The quality of ratings varies, but in our view, no rating can be a substitute for a robust bottom-up credit assessment.

 
Kalb: 'For our clients, we like to perform a scenario analysis to look at the overall portfolio context. This helps them to think about the risks they are actually exposed to. It also gives them insight into which assets are performing best or worst and to which asset classes they should allocate more or less.'

Is the default rate in private debt underestimated by non-accrual loans and payment-in-kind (PIK) loans? What is the actual default rate and how can we prevent losses?

Scheer: 'The market is very opaque. I think the default rate is slightly higher than is generally thought. It is right to be concerned about this. Unlike in the past, when documentation was stricter in certain areas of the market, it now seems as if the risk of default can be shifted considerably into the future. The moment when you, as a lender, can intervene may be a long way off.'
 

The market is very opaque. I think the percentage of defaults is no higher than is generally thought. It really is something to be concerned about.

 
Harmsen: 'Investors are best advised to choose managers who can clearly show how many defaults there have been and how leverage has developed. At our company, every interest rate increase or deterioration in leverage leads to a downgrade in the internal rating. The asset class has been severely tested in recent years by rising interest rates, inflation and political instability. How managers have dealt with these challenges clearly shows who really masters the profession.'

Many investors take relative valuation into account. How does that work in practice?

Mikdashi: 'The rule of thumb is simple: if you can get the same price or the same thing on the public markets, there is no reason to choose private markets. Price discipline is essential, but often difficult to achieve. Long commitment periods in private markets can put pressure on managers to become ‘forced buyers’ within their sector, limiting their ability to assess relative value. A more flexible, results-oriented investment strategy – one that looks beyond rigid sector labels – could help address this limitation. We call this the flexibility premium.'

How can (private) credit providers support companies in their growth trajectory?

Roblin: 'Firstly, we can offer bullet financing, which is suitable for companies that want to develop by using their cash flows to invest rather than to repay debt. But we also have the opportunity to share knowledge, best practices and an extensive network with the companies we support and work with. This network usually forms the basis for business opportunities.'

Harmsen: 'I think it is useful for a company to have a single lender, a party that acts as a true partner, understands your business model and can support you along the way. This speeds up decision-making in more difficult situations, thereby preserving more value.'