Private credit risks in focus: Insights from 2025

Over 2025, we spent a considerable amount of time investigating potential signs of risk in private credit markets.  

Toward the end of the year, Andrew Bailey, Governor of the Bank of England, raised public awareness of some of these risks in his speech to the House of Lords, noting that a system-wide exploration was being considered. 

Here’s what we found when we looked into those potential system-wide risks: 

• Signs of loosening credit standards: There are clear signs of loosening credit standards across both public and private markets. Tight credit spreads in public markets and strong inflows into private credit are driving risk-taking. The lack of transparency around the extent of this risk-taking remains a concern.
• Risk containment: Our overarching view is that the risks highlighted by Andrew Bailey are largely contained within private market assets.
• Manager selection matters: Not all market participants are responding to these incentives in the same way. Manager selection is critical.
• Trade finance: This asset class has gained traction recently. While it may suit some portfolios, we question whether the yield pick-up justifies the additional governance burden for most schemes.
• ABS & CLOs: With the right manager, we continue to believe Asset-Backed Securities (ABS) and Collateralised Loan Obligations (CLOs) can add value for many clients.

We’ve included more detailed thoughts below. 

Risks in private markets 

We’ve been exploring potential systemic risks in private markets, such as high leverage, opaque valuations, and complex bank-linked financing, as highlighted in Andrew Bailey’s recent speech. 

While these risks exist, our analysis suggests they’re largely contained within private markets. Areas of increased risk, be it default or concentration, remain siloed and individually identifiable. Prudent and appropriately researched allocation to private markets remains compelling.

In our broader paper, we provide detailed rationale for this view and highlight individual risks that investors should be aware of. 

Working capital finance (a type of trade finance) 

Trade finance is a term that covers a variety of debt instruments within the private lending market; on the shorter-duration, lower-risk end of the spectrum is Working Capital Finance (WCF). Most loans in this sector are originated by banks, and it is the most competitive market within trade finance. Credit ratings are private, and loans cannot be traded. Fund performance will vary a great deal between the most and the least experienced.

WCF offers some spread pick up over cash but is significantly more complex than publicly traded, more diversified alternatives such as asset-backed securities (ABS). 

What about ABS and CLO? 

A natural follow-on from clients is whether the above changes our views on the levels of risk within ABS and Collateral Loan Obligations (CLO). 

Our views on this remain unchanged – that is that with the right manager in place these can add value for lots of our clients.

At a high level:

• Over half of ABS issuance is publicly rated investment-grade and traded, offering transparency and liquidity. 
• ABS managers we recommend to our clients go beyond ratings. Stress testing and loss analysis are standard, giving them a clear view of credit protection and loan quality. 
• Fraud risk remains (e.g. Tricolor), but assets are tested against Global Financial Crisis (GFC)-style shocks, and information on the assets is more readily available. Indeed, for the managers we rate and spoke with, red flags in Tricolor loans were evident, and they steered clear.
• Diversification in ABS portfolios adds resilience. First brands exposure in global CLOs is under 0.2%, with many holding none. Senior CLO investors won’t take losses from its default. 
• First brands loans came from a bank known for riskier (distressed and lower rated borrowers) lending. Our preferred CLO managers focus on loans they or other private lenders originate directly, ensuring stronger credit standards through aligned reputational and financial incentives.

However, not all market participants respond equally to these incentives. Manager selection is likely to become even more important going forward, as the risk on environment will drive a divergence between best and worst market players. We focus on asset managers with a proven, conservative approach, backed by strong internal credit analysis and deep market insight across multiple credit cycles.

If you’d like to know more, please contact Olga, Sarah or your BW contact for our full papers, which will provide more info on the topics discussed above.