economy
Why Pension Funds Are Doubling Down on Private Credit Despite Deepening Cracks
Pension funds are sticking with private credit, and in some cases doubling down even as concerns mount over underwriting standards, valuation opacity and sector concentration.
TL;DR
- Pension funds are increasing their allocations to private credit, despite growing concerns about underwriting standards, valuation opacity, and sector concentration.
- Institutional investors, including pension funds, are committed to private credit, with many building out their allocations.
- New inflows into private credit vehicles by institutional investors were steady in 2025, while redemptions were driven by retail and high-net-worth investors.
- Large pension investors like APG and Nest are planning significant increases in their private markets and private debt allocations.
- Pension funds are structurally suited to hold illiquid assets due to their long-term liabilities, allowing them to harvest an illiquidity premium.
- Stress in the private credit market is concentrated in specific areas, such as large-cap, sponsored, covenant-light lending with heavy software exposure.
- Some allocators are rotating within private credit towards middle-market lending, asset-backed strategies, and deals with stronger covenants.
- Private market allocations involve long-term commitment letters and gradual capital calls, making them difficult to unwind quickly.
- Behavioral incentives may also play a role, with some institutions believing concerns are exaggerated or reluctant to reduce exposure after heavy commitments.
- Risks remain, including scrutiny of software-heavy portfolios and loans with weak underwriting, as well as opacity and potential fund runs from retail investor participation.
- Manager selection is critical due to a larger performance gap between strong and weak managers in private markets.