Private credit: cockroach or workhorse?

November 18, 2025

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Recent headlines about a handful of private credit defaults have ignited a fierce debate in financial circles. If there’s one default, should we expect more? Like spotting a cockroach in the kitchen, some worry that a single sign of distress hints at deeper problems lurking unseen. Others view these incidents as isolated - the natural byproduct of credit investment. So, which is it? Is private credit the cockroach or the workhorse of modern finance? Tatjana Greil Castro provides her views in this article.

From fringe to foundation

Private credit began taking shape around the time of the Great Financial Crisis, when companies unable to access the bank, bond or syndicated loan markets turned to asset managers for financing. Initially, these deals carried a whiff of risk: lenders filled gaps left by retreating banks, extending capital to borrowers deemed too small or too leveraged for public markets.

Today, that image no longer fits. The private credit universe has grown into a multi-trillion-dollar market, spanning everything from investment-grade infrastructure to mid-market loans and quasi-high-yield financing. Borrowers can now choose among the bond market, syndicated loans, or private credit  - a Venn diagram of overlapping funding options.

The recent defaults in private credit have prompted some to ask whether these are early warnings of broader stress. The cockroach theory - that one default means more are coming - resonates emotionally, particularly in a sector with limited transparency and non-public data.

Yet, context matters. The private credit market has become far more diversified than it was in its early days. Loan exposures now range across industries, geographies, and credit qualities. Defaults, while notable, remain contained within idiosyncratic situations. To date, there is little evidence of systemic weakness or underwriting deterioration akin to the pre-2008 leveraged finance cycle.

Discipline and structure matter

The reality of the market is that a workhorse is a better metaphor than a cockroach. In investors’ portfolios private credit is a steady, income-producing asset class designed to deliver attractive returns with low correlation with public markets. Through careful structuring and diversification, investors can mitigate downside risk and achieve predictable cash flows that align with long-term obligations, particularly for pension and insurance funds.

As with all credit strategies be they public or private, the stability of private credit depends on two things: credit discipline and portfolio construction. Strong underwriting standards, covenants, and sector diversification remain crucial. Moreover, some strategies deploy slight leverage to boost returns of senior secured assets or create securitization structures, allowing investors to access senior tranches with enhanced protection while others take on mezzanine risk in search of higher yields. And with yields elevated, the market’s built-in buffers - or “break-evens” - give lenders more room to absorb losses without derailing performance.

A maturing workhorse of capital markets

In Europe especially, private credit is filling a structural gap: the lack of deep corporate bond markets. As pay-as-you-go pension systems strain fiscal budgets, private credit offers a path toward funded, market-based investment that supports both retirees and real-economy borrowers. Far from a speculative niche, private credit has become a core financing channel - an engine of capital formation for companies and a source of reliable income for investors.

Defaults are inevitable in any credit market. But the assumption that one default heralds a wave of failures misreads how far the market has evolved. The relevant question is not whether defaults happen, but whether the system can absorb them. Increasingly, the evidence suggests it can. With robust underwriting, thoughtful structuring, and diversified exposure, private credit proves less a swarm of cockroaches and more the quiet workhorse pulling much of today’s corporate lending forward.

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of November 2025 and may change without notice.

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