Key Takeaways
- • Coutts' Head of Asset Allocation Lilian Chovin says private credit is under pressure from a small number of high-profile defaults and a shift in investor sentiment in 2026, but argues the stress is not yet systemic.
- • Several private credit evergreen vehicles limited first-quarter redemptions after facing sizable redemption requests, following their stated processes to keep funds operating in an orderly manner.
- • Software exposure is the focal point: software often makes up 20% to 30% of private credit fund assets, versus about 5% of the US high-yield universe, and software-linked leveraged loans yield about 4% more than the broader loan market (per PitchBook data).
- • US high yield remains resilient, with EBITDA margins near 22%, debt-to-EBITDA around 4.4x (below the 5.3x reached in 2020), and credit spreads near 320 basis points over Treasuries.
- • Bank exposure to private credit via fund finance and NDFI lending rose from about 4.9% of bank loans in 2015 to about 11.2% in Q3 2025, but Coutts sees no transmission at scale and cites the Fed's 2025 stress test as showing the system can absorb the shock.
- • Coutts remains neutral on public high-yield credit, citing valuation rather than systemic concerns, as credit spreads remain tight.
Summary
Coutts' Head of Asset Allocation, Lilian Chovin, writes that private credit is navigating a more challenging environment in 2026 against a supportive backdrop of positive economic growth. After strong inflows in recent years, investor sentiment shifted this year. Faced with sizable redemption requests, several private credit evergreen vehicles limited the amount investors can redeem in the first quarter, following their stated processes. Coutts characterizes this as a mechanism to keep funds operating in an orderly manner, given the illiquidity of underlying assets. Investor concerns are described as relating predominantly to specific companies and sectors rather than a broader systemic credit event.
The article identifies direct lending, in which non-bank lenders provide loans directly to companies, as the focal point of concern. A small number of high-profile defaults and sizable exposure to the software sector have driven investor alarm. Software often accounts for 20% to 30% of private credit fund assets, compared with about 5% of the US high-yield universe. Coutts notes that software has traditionally been viewed as an attractive private market holding given high margins and recurring revenues, but limited hard-asset collateral means investors can often recover only a small fraction of their investment in a default. Emerging generative and agentic AI tools are also questioning the durability of traditional software models. The market is pricing this sectoral risk: software-linked leveraged loans yield about 4% more than the broader loan market, according to PitchBook data.
Coutts argues that public high-yield markets, which are more liquid and more sensitive to risk sentiment, show no signs of strain. US high-yield fundamentals remain resilient, with EBITDA margins around 22% and debt-to-EBITDA near 4.4x, above post-pandemic lows but below the 5.3x reached in 2020. Default rates remain below long-run averages, and refinancing is available at a higher cost. Credit spreads of roughly 320 basis points over Treasuries remain far below crisis levels.
The banking channel is the main potential route for systemic transmission. Bank exposure to the private credit ecosystem through fund finance and lending to non-depository financial institutions (NDFIs) has risen from about 4.9% of bank loans in 2015 to about 11.2% in Q3 2025. Coutts nonetheless states that current lending, capital, and delinquency data do not indicate transmission at scale. It cites the Federal Reserve's 2025 stress test, which included an adverse NDFI scenario and concluded the shock would be manageable, and notes that banks are better capitalized than before 2008. Delinquency rates have normalized to around 3%, and C&I lending standards are tighter than 2021 but far from crisis levels.
Coutts concludes that the macro implications of outsized redemptions should remain limited. Its balanced view could change if labor market deterioration coincided with materially tighter bank lending and prolonged tighter public refinancing conditions. The firm remains neutral on public market high-yield credit, with its view reflecting valuation rather than systemic concerns, as spreads remain tight.
The article identifies direct lending, in which non-bank lenders provide loans directly to companies, as the focal point of concern. A small number of high-profile defaults and sizable exposure to the software sector have driven investor alarm. Software often accounts for 20% to 30% of private credit fund assets, compared with about 5% of the US high-yield universe. Coutts notes that software has traditionally been viewed as an attractive private market holding given high margins and recurring revenues, but limited hard-asset collateral means investors can often recover only a small fraction of their investment in a default. Emerging generative and agentic AI tools are also questioning the durability of traditional software models. The market is pricing this sectoral risk: software-linked leveraged loans yield about 4% more than the broader loan market, according to PitchBook data.
Coutts argues that public high-yield markets, which are more liquid and more sensitive to risk sentiment, show no signs of strain. US high-yield fundamentals remain resilient, with EBITDA margins around 22% and debt-to-EBITDA near 4.4x, above post-pandemic lows but below the 5.3x reached in 2020. Default rates remain below long-run averages, and refinancing is available at a higher cost. Credit spreads of roughly 320 basis points over Treasuries remain far below crisis levels.
The banking channel is the main potential route for systemic transmission. Bank exposure to the private credit ecosystem through fund finance and lending to non-depository financial institutions (NDFIs) has risen from about 4.9% of bank loans in 2015 to about 11.2% in Q3 2025. Coutts nonetheless states that current lending, capital, and delinquency data do not indicate transmission at scale. It cites the Federal Reserve's 2025 stress test, which included an adverse NDFI scenario and concluded the shock would be manageable, and notes that banks are better capitalized than before 2008. Delinquency rates have normalized to around 3%, and C&I lending standards are tighter than 2021 but far from crisis levels.
Coutts concludes that the macro implications of outsized redemptions should remain limited. Its balanced view could change if labor market deterioration coincided with materially tighter bank lending and prolonged tighter public refinancing conditions. The firm remains neutral on public market high-yield credit, with its view reflecting valuation rather than systemic concerns, as spreads remain tight.
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