Structural shifts are redefining private credit markets: KBRA

The private credit landscape evolution is being fuelled by investor demand and market structural shifts. As the market adapts, it brings both opportunities and complexities, particularly surrounding longer maturity profiles and an increasingly diverse range of collateral types.

Peter Giacone, senior managing director at KBRA, who spoke on yesterday’s panel ‘The Rise of Private Credit: New Capital, New Risks’ at the Business Development Agency Risk Summit, held in Bermuda this week, sat down with Bermuda:Re+ILS ahead of the conference to dig into changes in private capital.

Much of the asset class’s growth has been driven by investor demand for assets that better align with institutional balance sheets. The appeal is straightforward. Private credit offers “a higher yield per unit of risk, a more effective match to liabilities, and more opportunities for broader diversification across managers, asset classes and sponsors,” Giacone said. “We see increased supply as these markets have benefited from sponsors’ preference for speed, certainty of execution, and structural flexibility relative to traditional syndicated loan markets.”

But as the market scales, analysts are beginning to focus less on growth itself and more on how the underlying structures are evolving.

From a ratings perspective, one of the clearest developments is the extension of maturity profiles. Giacone said KBRA is “noting a more recent trend of underlying collateral as well as the vehicles themselves having a longer tenor (sometimes 20 years or more), which adds complexity and risk to these transactions.”

For insurance investors, the shift is particularly relevant. Longer-dated assets can support the asset-liability matching objectives that initially attracted insurers to the market. But extending tenors also increases the range of variables that must be considered in credit analysis, from refinancing conditions to the durability of collateral and sponsor behaviour over extended time horizons.

At the same time, the composition of collateral is broadening. The expansion of asset-based lending is bringing new types of exposures into the private credit ecosystem. Giacone said: “The types of collateral are also becoming more numerous, particularly in asset-based lending, where there has been substantial growth, albeit from a relatively smaller base,  where investors are seeking the downside protection and predictable cash flow that these transactions can provide.”

That evolution is occurring alongside a shift in the investor base. The market has broadened “to include more insurance companies and retail-oriented vehicles,” a development that introduces different liquidity expectations and risk tolerances. From a credit standpoint, the shift “underscores the importance of asset-liability alignment and robust liquidity management frameworks,” Giacone said.

Giacone outlined attractive hubs for private credit activity as those that combine “regulatory clarity, creditor-friendly legal frameworks, capital and operational efficiency, and a strong ecosystem of service providers and institutional capital.” He also cemented the need for stability, transparency and alignment with global regulatory standards. “Bermuda,” he said, “meets all of these criteria.”

Giacone said that performance through a full credit cycle will be the defining theme for investor confidence and ratings outcomes, but he was quick to conclude that: “despite some of the persistently negative press accounts on the private credit sector, we believe it’s important to clearly note that default experience to date remains well within the conservative tolerances built into our ratings for transactions across the private credit market.”

Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.