Private credit should no longer be treated as a separate asset class beyond public investors’ field of view – it is part of the same ecosystem, influencing price discovery, transfer of risk and recovery outcomes.
Read this article to understand:
- How private credit is impacting public bond markets
- How private corporate financing is reshaping price discovery, risk transmission and recoveries for public bond investors
- The five questions public bond investors need to ask
Private debt is not a monolithic asset class and encompasses a broad range of financing, including corporate, infrastructure, real estate debt and asset-based finance. Whereas, in the past, private credit was often treated as a single bucket – mostly direct lending – it has evolved significantly to include many other types of lending.
While “private credit” can be used as a broad umbrella term, this article focuses primarily on one area of private credit where the boundary with public markets is becoming increasingly porous: corporate private credit.
When does a private market become too important for public investors to ignore?
For much of the past decade, public bond investors have been encouraged to think of private debt as a parallel universe: adjacent, but largely irrelevant to the day-to-day functioning of liquid bond markets. That distinction is now breaking down.
Corporate private credit is no longer simply competing with public markets for financing flows. It is increasingly influencing the price discovery, transfer of risk and recovery outcomes on which public bond investors rely.
Public investors therefore need to view private credit not as a separate asset class, but as part of the same credit ecosystem. Within that ecosystem, risk can be warehoused away from public markets, only to re-emerge through refinancing pressure, liquidity needs or corporate restructurings.
Private credit has evolved from a niche response to the post-global financial crisis order, when banks scaled back activities and restructured operations, into a central pillar of the global financing ecosystem. In Europe, it now rivals the high-yield and leveraged-loan markets in scale. Corporate private credit has extended well beyond traditional middle-market lending, increasingly financing issuers that might previously have relied on syndicated bonds or loans. Figure 1 shows how private credit AUM has grown over recent decades.
Figure 1: Private credit growth reaching all-time highs (US$, billion)
Nominal AUM figures. Values shown at end of year. To avoid double counting, totals exclude funds of funds. AUM figures for APAC exclude funds denominated in yuan renminbi. Annual compound growth rates shown for the periods 2012-18, 2018-24 and 2024-2030F.
Source: Aviva Investors, Preqin, Private Credit in 2026 data pack, data as of 2 September 2026.
Public and private credit markets are no longer separate destinations
Public and private credit markets are no longer separate destinations, but increasingly interchangeable points along a continuum of corporate financing. This raises a series of questions public bond investors can no longer afford to ignore.
Is public pricing still telling the full story?
Public bond investors have traditionally relied on market prices to assess changes in risk. But what happens when a growing share of corporate financing takes place in private?
As the private credit market has grown, it has become increasingly capable of accommodating larger borrowers that would traditionally have relied on the leveraged loan or public bond markets. Although smaller companies remain an important part of its borrower base, larger companies have accessed private credit at a considerably higher rate since the global financial crisis, attracted by its speed, certainty of execution and ability to provide bespoke financing.
When public markets become volatile or syndication windows close, corporate private credit can therefore step in as an alternative source of capital. That flexibility supports issuers but can also dampen the disciplining role of public markets.
A company that might otherwise have been required to refinance at a publicly observable market price may instead secure capital privately. This can allow the company to defer public price discovery and obtain financing at a time when public credit spreads may be signalling rising risk.
This can weaken the effectiveness of public spreads as an indicator of credit risk
The risk does not disappear when financing moves into private markets. It is instead warehoused elsewhere in the credit ecosystem, where valuations may adjust more slowly and information may be less widely available. Over time, this can weaken the effectiveness of public spreads as a complete indicator of underlying credit risk and delay the point at which mounting pressures become visible to the broader market.
For public bond investors, the result is a more complex pricing environment. Assessing an issuer’s creditworthiness increasingly requires looking beyond the information contained in public bond spreads. Investors must also understand the company’s private financing arrangements, access to liquidity and ability to move between alternative funding sources.
Where could stress first leak into public markets?
Moving risk away from public markets does not necessarily eliminate it. The more important question is how private credit market stress could ultimately reappear elsewhere in the financial system.
For example, corporate direct-lending portfolios have significant exposure to asset-light industries, notably software and business services. In these sectors, rapid technological or competitive disruption can weaken enterprise values, while the limited availability of tangible assets can make recovery values more difficult to predict if a company defaults.
As stresses emerge, they do not remain neatly contained within illiquid vehicles. Business development companies (BDCs), semi-liquid funds and insurance-linked structures – particularly leveraged loans and collateralised loan obligations (CLOs) – can act as transmission mechanisms into public markets.
The transmission mechanism plays a vital role
The transmission mechanism plays a vital role. Vehicles offering periodic liquidity may face pressure to raise cash to meet investor redemptions. Leveraged vehicles may need to reduce risk or sell assets to remain within their financing constraints. Insurers and other regulated holders may seek to protect their ratings or capital positions.
Because private loans cannot always be sold quickly or at readily observable prices, these investors may turn to their more liquid holdings first. In periods of market stress, selling pressure can therefore reach publicly traded credit even when the original deterioration occurred within private portfolios.
Public bond investors should consequently be cautious about assuming corporate private credit will always behave as a diversifier. Under certain conditions, it may become a source of asymmetric tail risk, with losses or liquidity pressures in private markets amplifying volatility elsewhere in the credit ecosystem.
Are investors underestimating the next loss cycle?
If private credit markets have become an increasingly important source of financing, the next question is whether investors are paying enough attention to how losses may ultimately emerge.
One potential warning sign is the increasing use of payment-in-kind (PIK) structures, which allow borrowers to defer cash interest payments. While this can provide temporary breathing room, it may also mask underlying financial pressure and postpone the recognition of credit stress. In April 2026, S&P Global Ratings reported that since it began tracking this metric in August 2025, roughly ten per cent of the credit estimates (CE) it reviewed included a PIK toggle. Figure 2 shows the increasing use of such structures over the last few years.1
Figure 2: PIK toggle trends (per cent)
Percentages indicate the share of credit estimates (CE) by S&P Global Ratings that include a payment-in-kind (PIK) toggle option.
Source: Aviva Investors, S&P Global Ratings, as of 28 April 2026.
Payment-in-kind structures are not inherently evidence that a borrower will default. However, a sustained increase in their use can indicate that more companies are struggling to meet interest costs from current cash flows. It can also postpone the recognition of underlying stress, allowing leverage to compound while delaying a refinancing, restructuring or default.
Rising payment-in-kind usage, weaker underwriting standards and an increasingly challenging refinancing calendar point to a potentially tougher loss cycle ahead.
While private credit valuations tend to adjust gradually, public markets usually reprice more quickly. Public credit can therefore serve as an early warning system for deterioration elsewhere in the financing structure. At the same time, it may also act as a shock absorber when investors sell liquid assets in response to pressures originating in less liquid markets.
For public bond investors, the consequences could include wider spreads, more frequent liability management exercises and a more challenging restructuring environment.
Could recovery values prove lower than investors expect?
Defaults are only part of the story. Beyond the number of companies that default, investors must also consider how much value can be recovered after a default, where a security sits within the capital structure and whether value has already migrated to more senior or better protected creditors before public bondholders reach the negotiating table.
… the recovery prospects of public bondholders may deteriorate in the process
A company may, for example, raise new secured private financing to address an immediate liquidity need. While that financing can postpone a near-term default, it may also place additional debt ahead of existing unsecured bonds. The company survives for longer, but the recovery prospects of public bondholders may deteriorate in the process.
The risks may be particularly acute for asset-light businesses, where future value often depends more on earnings expectations than tangible collateral. In those, enterprise values can deteriorate quickly, and the absence of substantial tangible assets may result in lower recoveries for creditors.
Private credit can therefore influence not only when credit stress becomes visible, but also where losses ultimately fall.
What does this change for credit analysis?
If private and public credit markets are becoming increasingly interconnected, public bond investors need a broader framework for assessing risk.
Understanding issuer risk today requires insight into where companies are financed, how their capital structures are layered across public and private markets, and how decisions taken in one part of the financing structure can alter outcomes elsewhere.
This means looking beyond publicly issued bonds and syndicated loans. Investors increasingly need to understand the terms, security packages and maturity profiles of private facilities, together with the incentives of the lenders and investment vehicles providing them.
They must also consider whether private financing is resolving an issuer’s underlying problem or simply postponing its recognition. Access to private capital may improve a company’s liquidity and extend its refinancing runway. However, it may also increase leverage, introduce more senior claims or transfer value away from existing public creditors.
… investment opportunities and risks cannot be assessed in isolation
As public and private financing become more interconnected, investment opportunities and risks cannot be assessed in isolation. A company’s ability to refinance, its choice of funding sources and the flexibility of its capital structure increasingly depend on conditions across both markets.
The growth of private financing has expanded funding options for borrowers and investment opportunities for investors. However, while private credit offers clear benefits, investors should also consider the key risks.
Understanding those connections can help public bond investors identify risks earlier, assess recovery prospects more accurately and uncover opportunities that may not yet be reflected in public market pricing.
