The Private Credit Panic Is Overblown — But the Real Risk Is What Firms Are Doing About It

The headlines about private credit defaults and BDC redemption queues have been loud enough to rattle advisors and clients alike. Christy Loop thinks the noise is obscuring the signal. As senior director and head of U.S. Wealth and Strategic Initiatives at WTW, a firm that advised on $27.5 billion in wealth assets as of Q4 2025, Loop spends her days helping wealth management firms evaluate asset managers, address client concerns, and expand access to institutional-quality private market solutions.

Loop’s view on the current moment is measured but pointed: private credit remains a compelling asset class, the recent headlines overstate the risks, and the firms most likely to get hurt aren’t the ones with too much exposure — they’re the ones that abandoned a selective, diversified approach the moment volatility surfaced.

Loop discusses how advisors should be talking to clients right now, where the real structural risks lie, and what a disciplined approach to private markets looks like in practice.

CM: Recent media coverage has focused heavily on private credit defaults and fund lockups. From your vantage point, how accurate—or overstated—do you find those headline risks?

CL: These are actually two distinct points that are often conflated from my experience.

First, from a performance standpoint, particularly as it relates to defaults / losses, private credit (and here we are referring to direct lending) continues to perform in-line with expectations and we have not seen a meaningful increase in defaults or non-accruals despite the well-publicized concerns over software valuations.

Second, where concerns over software valuations are showing up is arguably in the redemption queues for certain evergreen structures. Many of these vehicles have received redemption requests in excess of the 5% quarterly redemption option and are gating withdrawals accordingly.

While frustrating for investors who are looking for a return of capital in excess of that 5% quarterly amount, that is how these vehicles are intended to work. The underlying assets are illiquid in nature, and the gating mechanism is in place to protect existing investors.

If anything, this highlights the importance of investor education from a client’s advisor rather than any particular flaw with the vehicle or investment approach.

CM: You’ve said the greater threat may be failing to consider a selective, diversified approach rather than the risks the headlines are focused on. Can you explain what you mean — what specifically are firms missing when they react to the noise?

CL: Many of the headlines on private credit are focused on software and redemption queues. These are two issues that for the most part are limited to a very specific segment of the private credit universe – direct lending.

The direct lending universe is composed of sub-Investment Grade corporate borrowers and as a result, is very highly correlated to the public High Yield and Loan market.

Additionally, the private credit universe offers a range of exposures beyond this – including asset backed, real estate, infrastructure and specialty finance where investors can access a range of unique risk/return profiles less correlated to public markets.

Private credit has been one of the most crowded trades in alternatives for the past three years. Does crowding change the risk profile in ways that aren’t yet reflected in the default statistics?

Where WTW has observed some crowding is in the core / upper middle market direct lending universe, resulting in an erosion of investor protections (e.g. few covenants, etc.) and tighter spreads differentials vs. public markets relative to history. Both of those elements can have a negative impact on return potential.

However, other areas of the private credit universe remain less crowded and continue to offer strong structural protections and attractive spreads. These areas tend to be more fragmented and capacity constrained.

CM: Where do you think the realistic default risk actually sits in the current private credit market — and which segments concern you most?

CL: There is always an element of default risk within any credit market. The key is whether or not you are being sufficiently compensated for that risk.

WTW has largely avoided core and upper-middle-market direct lending, not because we anticipated a “SaaSpocalypse,” but because compressed spreads and elevated leverage levels had already diminished the illiquidity premium and increased downside risk.

One area we have recently avoided has been lower-quality consumer exposure given the expectation of elevated defaults as inflation pressures flow through and post Covid excess savings are depleted.

CM: What does a conversation between a financial advisor and a client in a gated BDC look like right now — and how should advisors be approaching it?

CL: The conversation should begin by revisiting the investment’s original objectives and role within the portfolio. Advisors should help clients assess whether the strategy’s expected risk-return profile continues to align with their goals and whether the allocation remains appropriate within the context of their broader portfolio.

Importantly, these investments should not be evaluated in isolation. For most investors, private market allocations represent only a portion of their overall liquidity budget, while traditional assets continue to provide ample liquidity to support ongoing income needs, withdrawals, and portfolio rebalancing activities.

Advisors should also help clients understand the purpose of gating mechanisms. While access restrictions can be frustrating, gates are generally designed to protect investors by limiting the need for forced asset sales during periods of elevated redemption activity. In that sense, they serve as a portfolio protection feature rather than an indication that the underlying investment thesis has changed.

CM: You caution that the asset class’s complexity and illiquidity can create expectations that don’t always align with advisor or client reality. What’s the most common misalignment you see?

CL: Certainly, the most common misalignment we see at WTW is the conflation of a quarterly liquidity window with a fund being “quarterly liquid”.

It’s important for clients to understand the true liquidity profile of the underlying assets, as the underlying loans typically have terms ranging from three to seven years.

Position sizing should be considered within the context of the client’s overall liquidity requirements and broader portfolio objectives.

CM: What does good due diligence on a private credit manager look like in the current environment — what questions should advisors be asking that they aren’t?

CL: We believe there are three questions that advisors may wish to underscore around good due diligence in this current environment:

Relative value: on an unlevered, risk-adjusted basis – what premium or incremental return am I receiving relative to public market equivalents?

Fees: related to the above – how much of that excess return is retained by investors after fees and expenses?

Operational risks: has the manager demonstrated robust operational controls and risk management capabilities through a strong governance culture, well-documented and transparent policies and procedures, independent valuation practices, and proactive oversight?

CM: If you had to identify the one thing that would most change the private credit landscape over the next 18 months — in either direction — what would it be?

CL: Increased investor understanding of the private credit opportunity set, appropriate holding period expectations for evergreen vehicles, and resilience of the underlying assets should support broader adoption. While short-term headlines may create uncertainty, the long-term investment case remains compelling from WTW’s point of view.