Key Takeaways
- • Pinsent Masons, in an article co-written by Natasha Fons, warns that banks involved in the private credit funding cycle should prepare for rising litigation risk as borrowers, funds and investors face growing financial pressure.
- • Moody's estimates private credit assets under management will exceed $2 trillion in 2026 and approach $4 trillion by 2030, per the article.
- • The article cites the collapse of Market Financial Solutions Limited and Godwin Capital as drawing attention to collateral management, creditor rights and governance issues, with private credit default rates rising particularly in industrials/manufacturing and healthcare.
- • Four principal litigation exposures are identified: lender-on-lender disputes, claims against fund managers by bank co-investors, investor claims where banks take on fund management roles, and insolvency-related claims.
- • Banks are advised to assess exposure upstream, midstream and downstream, document decisions contemporaneously, and review collateral and risk allocation terms regularly.
Summary
Banks participating in the private credit funding cycle should weigh a widening range of litigation risks as borrowers, funds and investors come under increasing financial pressure, according to a Pinsent Masons article co-written by Natasha Fons. Private credit, defined as non-bank lending to privately held loans outside public markets, has grown significantly, with Moody's estimating assets under management will exceed $2 trillion in 2026 and approach $4 trillion by 2030.
The article says market participants are entering a more challenging phase of the credit cycle. The collapse of Market Financial Solutions Limited and Godwin Capital has drawn attention to collateral management, creditor rights and governance, while rising borrower distress is pressuring portfolios. Default rates are rising across sectors, particularly industrials/manufacturing and healthcare. The UK Financial Conduct Authority has identified governance, conflicts of interest, valuation practices and investor protection as areas of focus.
Lender-on-lender disputes are a principal risk where a borrower enters distress. Conflicts may arise over security priority, recovery entitlements and creditor treatment, including where preferential security is granted to one lender. Restructuring plans under Part 26A of the Companies Act 2006 may also prompt challenges to valuation assumptions, voting arrangements or creditor class treatment.
Banks acting as co-investors alongside private credit funds may pursue claims against fund managers after poor performance. Potential challenges include valuation methodologies, decisions to support distressed borrowers, restructuring strategies and conflict management. The article notes that information asymmetry in GP-led continuation vehicle transactions could generate pricing disputes. Where banks become closely involved in fund management or investment decisions, investors may bring negligence, fiduciary duty or misrepresentation claims, particularly where fraud is alleged. The article describes such claims as relatively uncommon but more likely as lending and fund management roles blur.
In insolvency, possible claims include failure to protect customers from authorised push payment fraud, breach of the Quincecare duty of care, asset tracing applications, and claims under sections 235-236 and 423 of the Insolvency Act 1986.
The authors recommend that banks assess exposure across the ecosystem, including upstream lending to funds, midstream co-investment and downstream lending to borrowers. They advise regular monitoring of covenants, liquidity and collateral, independent collateral reviews, periodic review of transaction documentation, and comprehensive contemporaneous records of decisions on restructurings, valuations and distressed borrowers.
The article says market participants are entering a more challenging phase of the credit cycle. The collapse of Market Financial Solutions Limited and Godwin Capital has drawn attention to collateral management, creditor rights and governance, while rising borrower distress is pressuring portfolios. Default rates are rising across sectors, particularly industrials/manufacturing and healthcare. The UK Financial Conduct Authority has identified governance, conflicts of interest, valuation practices and investor protection as areas of focus.
Lender-on-lender disputes are a principal risk where a borrower enters distress. Conflicts may arise over security priority, recovery entitlements and creditor treatment, including where preferential security is granted to one lender. Restructuring plans under Part 26A of the Companies Act 2006 may also prompt challenges to valuation assumptions, voting arrangements or creditor class treatment.
Banks acting as co-investors alongside private credit funds may pursue claims against fund managers after poor performance. Potential challenges include valuation methodologies, decisions to support distressed borrowers, restructuring strategies and conflict management. The article notes that information asymmetry in GP-led continuation vehicle transactions could generate pricing disputes. Where banks become closely involved in fund management or investment decisions, investors may bring negligence, fiduciary duty or misrepresentation claims, particularly where fraud is alleged. The article describes such claims as relatively uncommon but more likely as lending and fund management roles blur.
In insolvency, possible claims include failure to protect customers from authorised push payment fraud, breach of the Quincecare duty of care, asset tracing applications, and claims under sections 235-236 and 423 of the Insolvency Act 1986.
The authors recommend that banks assess exposure across the ecosystem, including upstream lending to funds, midstream co-investment and downstream lending to borrowers. They advise regular monitoring of covenants, liquidity and collateral, independent collateral reviews, periodic review of transaction documentation, and comprehensive contemporaneous records of decisions on restructurings, valuations and distressed borrowers.
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