Shifts, myths and monoliths:
A clearer view on private debt

Read this article to understand:

• The common myths about private debt
• The depth and diversity of the private debt universe
• The importance of expertise in investment selection

There are two narratives associated with private debt (often used interchangeably with private credit) today. In the first, it is argued that the asset class is facing its first big challenge: capped redemptions, gated funds, stressed borrowers, listed business development companies (BDCs) trading at steep discounts to net asset value (NAV), fraud allegations in direct lending and regulators voicing concerns over systemic risk.

In the second, investors continue to add to their allocations. In our recent Private Markets Study, which surveyed 500 institutional investors holding $6.5 trillion in assets, private corporate debt ranks among the asset classes commanding the strongest return conviction over the next five years, with almost a third of respondents planning to increase allocations against less than ten per cent planning to reduce them.¹

There is truth to both narratives. There is stress. But it is not evident in all segments of the market, a distinction much of the recent commentary has failed to make.

In short, private debt is not a monolith. It is a broad and differentiated universe. Across the various strategies, the underlying borrowers are different, as are transaction structures, collateral, liquidity profiles and sensitivities to economic cycles. Treating them as interchangeable is what gives rise to myths.

Here are four of the biggest myths in the market today, along with data that tells a contrasting story.

Myth 1: “Private debt is solely risky corporate lending”

The global private debt market is estimated at $3.5 trillion or more,² with an addressable market that may extend to over $30 trillion.³ The US direct lending market – home to BDCs, sponsor-backed middle-market loans and the subject of recent scrutiny – accounts for approximately $1.3 trillion.⁴ Publicly traded vehicles represent roughly $300 billion of US direct lending. While not insignificant, it is one segment among many.

Private debt also encompasses long-established markets: investment-grade private placements, infrastructure debt and real estate lending, whose histories stretch back decades. It also includes structured finance, which can include collateralised loan obligations (CLOs), asset-based finance and fund financing. In the fast-growing world of asset-based finance, lending can be collateralised against tangible assets, pools of loans, and contractual cashflows rather than being reliant on corporate earnings.

Moreover, structure matters more than labels. Risk in private debt is not simply a function of whether a borrower carries an investment-grade rating. It is also shaped by underlying asset security, seniority in the capital stack and the structural protections negotiated at the point of origination. A senior infrastructure loan to a regulated utility and a second-lien loan to a private equity-backed software company share an asset-class categorisation. Their risk profiles couldn’t be further apart.

This is well understood by sophisticated allocators. Our 2026 private markets study showed investors moving beyond sponsor-backed direct lending toward lending against tangible assets and contractual cashflows, where underwriting is anchored in collateral quality and cashflow resilience.

The “complexity premium” – the additional spread generated through bespoke structuring, covenant packages and collateral-led underwriting – is a distinct and increasingly sought-after return driver as headline yields in direct lending compress.¹

Figure 1: Private debt – a wide and evolving opportunity set

Source: Aviva Investors, April 2026.

Even so, it is worth examining sub-IG corporate direct lending in closer detail. The sector has delivered average annual total returns of 9.3 per cent since 2007,⁵ compared with 6.5 per cent for publicly listed US high yield corporate debt,⁶ a difference of 2.8 percentage points, attributable primarily to illiquidity premia.

Credit losses have been broadly comparable between the two markets. Using Cliffwater & JP Morgan data from 2010-2025, the average annual credit loss for US direct lending has been approximately 1 per cent per annum against 1.2 per cent for US public high yield.⁷

Furthermore, higher recovery rates available on first-lien loans largely offset the weaker average rating profile and fatter tail of CCC-to-C credit in the direct lending universe. The well-cited benefit of covenants, early warning signs, the ability to negotiate workouts, structural intervention before defaults crystallise, is harder to quantify in aggregate data but represents a genuine advantage in the hands of managers with the operational platform and experience to act on it.

Myth 2: “Private debt is overexposed to the software sector”

The software sector concentration issue is real, but it is not uniformly distributed across private debt. It is concentrated in one specific corner of the market: US sub-IG corporate direct lending. Even there, the picture is not uniform.

US direct lending does carry a high concentration in software and technology borrowers, approximately 20-30 per cent of portfolios,⁸ compared with roughly 8-10 per cent for publicly listed high-yield bonds.⁹

Private equity activity in software acquisitions over the past decade has been a significant driver of that concentration, with direct lending providing the debt to fund those transactions. In the US broadly syndicated loan market, a useful, comparable indicator for direct lending, technology spreads have widened by around 185 basis points this year, versus approximately 40 basis points for the broader loan index. Around 15 per cent of technology loans are currently trading at distressed levels (below 80 per cent of par).¹⁰

These are not trivial readings, and the 2028-2029 maturity wall for the software sector remains a focal risk.

But software concentration is not reflective of the broader private debt asset class. Infrastructure debt, real estate debt and asset-based finance carry negligible direct exposure to software borrowers. Even within sub-IG private debt, a multi-sector approach that allocates across corporate lending, structured finance, infrastructure and real estate debt can reduce software exposure to well below nine per cent in a US-oriented portfolio and well below six per cent in a European one. So, while the risk is real, it is specific and manageable through a multi sector, or diversified approach.

Myth 3: “You can have an illiquidity premium and liquidity”

The most visible stress in private debt has emanated from US BDCs, particularly the publicly traded variety. BDCs hold bilateral, typically unrated (sub-IG risk profile) loans to middle-market corporates, often with private equity sponsors, and are structured, like real estate investment trusts (REITs), to offer intraday liquidity over an underlying pool of fundamentally illiquid assets. That trade-off creates a specific and well-documented dynamic.

The Cliffwater public BDC index trades at a discount of approximately 25 per cent to NAV in March 2026.¹¹ Some of that reflects genuine concerns about underlying loan quality. Some reflects elevated software sector exposure. And some reflects the simple and persistent cost of providing intraday liquidity in a market where the underlying assets are bilateral, illiquid and typically valued quarterly.

Figure 3: Public BDCs – NAV premium/discount (per cent)

Source: Cliffwater Public BDC Index (CWBDC), March 2026.

Recent events in the non-traded BDC market are also illustrative. Several vehicles marketed as semi-liquid via quarterly tender offers have faced material redemption pressure, leading to capping of redemptions, and in some cases gating, proposed fund mergers and managed run-offs. Where merger attempts have been made to provide investors with an exit, objections to implied NAV discounts have, in some instances, caused those proposals to collapse.¹²

In several cases, loan sales by affected vehicles have been executed at close to par, providing some confidence in valuations for higher-quality assets. The Houlihan Lokey Direct Lending Monitor, tracking around $550 billion of US BDC assets, showed, as of Q4 2025, that approximately three per cent of loans traded below 80 cents in the dollar and 1.4 per cent were non-accrual (90 days or more in arrears).¹³ These are not systemic readings. What these episodes illustrate, above all, is the liquidity mismatch between the structure of BDCs and the behaviour of their investor base.

At the same time, a number of high-profile losses in US direct lending have focused further attention on underwriting standards. The most serious cases have involved allegations of fraud – specifically, collateral being pledged against multiple loans simultaneously.

These events have been headline-grabbing, but are not representative of the broader asset class. The aggregate default rate for sub-IG private debt is not currently elevated. The takeaway is not that the market is systemically impaired; it is that collateral verification, governance and investment process matter enormously in bilateral lending, and that the rapid growth of private debt has brought with it new entrants whose track records have not yet been tested through full credit cycles.

Myth 4: “The illiquidity premia is not visible”

One of the most significant findings in our 2026 private markets study was the shift in how institutional investors think about illiquidity compensation. The proportion of investors citing the illiquidity premium as a primary motivation for private markets allocations has grown from 25 per cent in 2023 to 55 per cent in 2025.¹

In our view, this shift reflects the accumulation of data. Private markets now have longer track records, more consistent reporting and the lived experience of a full interest-rate cycle, including a period during which the floating-rate nature of sub-IG direct lending delivered meaningful returns over fixed-coupon public debt. The premium for illiquidity can increasingly be observed, quantified and compared across sectors rather than merely assumed.

Illiquidity premia on IG private debt averaged approximately 100 basis points in 2025, above long-term average levels. Private debt spreads have tightened since 2022, but less aggressively than public IG credit spreads, resulting in higher observed premia on a relative basis.¹⁴ For sub-IG private debt, we observed illiquidity premia to be around 100 to 400 basis points during 2025 depending on the sector.

Premia are not uniform across sectors, however; infrastructure debt tends to offer a more stable spread and modest premium, anchored in the regulated cashflow profile of the underlying assets, while structured finance commands a complexity premium for the more demanding underwriting it entails.

Another key tenet of private debt illiquidity premia is the assumption that investors hold assets to maturity. If investors seek to exit private debt assets or vehicles early, whether via intra-day pricing in BDCs or through secondary market trades, there is no guarantee that the illiquidity premium will be realised. In such cases, investors may instead incur a “cost of liquidity”.

Figure 4: IG private debt illiquidity premia over time (bps pa)

Past performance is not a reliable indicator of future returns.

For illustrative purposes only. The value of an investment can go down as well as up and there is no guarantee that the forecasted return will be achieved. 

Based on internal and external (ID only) transaction data, transactions equally weighted, IG only, rating band (not notch) matched and not duration matched to relevant public index data. The Illiquidity Premium is defined as the private asset class spread less comparable public debt credit spread (RED v Public RE public debt, ID v Public Utilities, PCD&SF v Public NFC).

Source: Aviva Investors as of 31 March 2026 and ICE BofAML index data for EUR & GBP deals. 

 

Return expectations data in the study were also striking. Private debt attracts the strongest return conviction of any private market asset class, with 48 per cent of North American investors, 45 per cent of European investors and 46 per cent of Asia-Pacific investors expecting it to deliver the strongest risk-adjusted returns over the next five years.¹ That conviction reflects both the yields available and a growing appreciation that returns are not solely a function of taking more credit risk, but of accepting structural complexity that many investors cannot access or price effectively on their own.

Is private debt a systemic risk?

The growth of private debt over the past fifteen years has, in large part, been the result of the post-financial crisis regulatory requirements pushing a significant amount of lending off bank balance sheets. Private debt funds have moved in to fill the gap.

Today, private debt has developed into a more selective, structurally differentiated investment discipline. Asset-based finance is growing rapidly as a sub-strategy, requiring deeper underwriting capabilities while offering access to complexity premia that traditional corporate lending cannot replicate. Tools such as tranching, robust covenant packages and tailored cashflow waterfalls allow investors to target specific risk and return outcomes without simply extending duration or moving down the credit spectrum.

We see this as particularly relevant to the systemic risk question. Firstly, fund-level leverage in private debt is of a completely different quantum to that carried by banks at the height of the financial crisis and today. Just prior to the global financial crisis, banks were 20-35 times levered, compared to around 16 times today.¹⁵ Compare that to BDCs, which typically operate with around 1 times leverage and have a regulatory cap of 2 times.¹⁶

If there is a credit event, the people who bear the losses are fund investors, who took on these exposures knowingly. Private debt funds and their connection to the wider banking system has been increasing, but in our view, at its current size is not large enough to be systemic.

Of course, private debt could amplify stress during a dislocation, rather than necessarily being the primary trigger for it, which matters for how regulators and investors think about the asset class going forward. The current debate often conflates two things that are not the same: credit risk and systemic fragility. Credit losses are an expected feature of lending markets. Systemic crises occur when those losses become amplified through leverage, liquidity mismatches and interconnected balance sheets. Private debt has the former; it does not, at present, have the latter on a scale that in our view is systemic.

The insurance sector's growing participation introduces a related but separate dimension. Long-duration insurance capital is structurally well suited to harvesting illiquidity premia, and the allocation has tended to be IG-focused – lending that closely matches the risk profile of insurers’ liabilities.

The broader point is that private debt is increasingly defined by structure, selectivity and the disciplined pricing of complexity. Managers with the analytical depth, track record and operational infrastructure to underwrite and monitor bespoke bilateral lending are better positioned to navigate the current environment than those who arrived during the years when simply participating in the asset class was sufficient to generate required returns. When easy yields disappear, manager skill matters more.

In closing

Liquidity management was the most consistently cited concern across the 2026 study – 55 per cent of investors globally describing it as the single most significant barrier to further private markets growth.¹

The lesson from recent events is not that private debt is illiquid when you expected it to be liquid. The assets were always illiquid. The lesson is that the vehicle you use to access them needs to be designed with the liquidity of the underlying assets in mind, and that investors need to understand what they signed up to. Redemption-capping mechanisms triggered in recent months have, in almost every case, operated exactly as the documentation said they would. The gap was between investor expectations and the reality of private debt investment vehicles, which are designed to protect exiting investors from disorderly selling of underlying illiquid assets.

Private debt has not yet been tested through a severe credit cycle in its current form and at its current scale. That is a genuine unknown, and investors are right to focus on it.

But available data, on credit loss rates, recovery rates, illiquidity premia and manager track records across multiple market cycles, supports the view that private debt, properly understood and properly accessed, continues to offer institutional investors a return profile that is difficult to replicate elsewhere. The question is whether investors are looking at the full map or just the postcode making the news.