Has the Private Credit Maelstrom Arrived? – Webinar Recap

The rapid growth of private credit into a $1.6 trillion market is generating new and evolving sources of professional liability exposure across insurance lines. Here are a few key takeaways from the discussion:

What Is Private Credit and Why It Grew

Private credit is non-bank lending in which companies, typically middle-market firm, borrow from private funds or other non-bank lenders rather than banks or public debt markets. The two main vehicles are direct lending, where a manager negotiates and holds a loan, and business development companies, or BDCs which were created by the Small Business Investment Incentive Act of 1980. The market grew from about $200 billion before the 2008 financial crisis to $1.6 trillion in assets by 2024, a 14% compounded annual growth rate. This rise could be attributed to post-2008 bank regulation that pulled banks back from middle-market lending, private equity firms building direct lending arms, faster deal execution (two to four weeks versus two to three months for banks), and private credit’s earlier and steadier fee/interest income compared to private equity’s reliance on exits. Private credit loans are opaque and illiquid by design, valued using internal models rather than market prices, which classifies them as Level Three assets.

Emerging Red Flags and Valuation Concerns

Rising interest rates starting in 2022 increased borrowing costs, tightened borrower margins, and led to covenant violations, defaults, restructurings, and some bankruptcies. Entering 2025, private credit faced a genuine liquidity stress test: redemption requests on semi-liquid BDC structures, typically capped at 5% of NAV via quarterly redemptions, began exceeding those caps, creating a cycle of unfulfilled requests and eroding confidence in reported NAVs. Redemption requests have been moderating somewhat, but still above 5% at some larger funds, with underlying liquidity and valuation concerns not yet resolved. Payment-in-kind (PIK) loans, where borrowers pay interest by issuing more debt instead of cash, were also cited as a factor that may obscure underlying credit deterioration.

Litigation and Regulatory Risk

Several types of litigation are emerging around private credit. Securities class actions against BDCs allege overstated NAV or failure to disclose loan portfolio deterioration, though these cases are still few and early, with motions to dismiss not yet decided. Section 36(b) claims target fiduciary duty over compensation, shaped by the Supreme Court’s Jones decision and the FS Credit Opportunity/Saba case, which rejected new implied private rights of action under the Investment Company Act. Fraudulent transfer and lender-on-lender litigation are using New York’s collapsing doctrine, as seen in the STG Logistics restructuring case, and claims against broker-dealers and advisors are growing as retail investor exposure increases. On the regulatory side, the SEC and Treasury Department are examining valuation practices, conflicts of interest, and captive funding structures, where a sponsor-controlled life insurer’s premiums fund the same sponsor’s loans. A 2025 Chicago Fed paper found life insurers held roughly $849 billion in private credit, about 14% of their balance sheets, in 2024. Former U.S. Attorney, Jay Clayton, has raised concerns about valuation practices used to inflate fees, and Treasury Secretary, Scott Bessent, has met with NAIC insurance commissioners on related issues.

ERISA Exposure

As private credit investments increasingly enter 401(k) plans, they raise potential ERISA fiduciary-duty exposure tied to the multiple layers of fees involved, including fund fees and management fees. Plans with excessive or poorly documented fee structures are likely to become attractive targets for plaintiffs’ attorneys, since the private credit investments held within them lack the transparency and observable pricing of traditional plan assets. The pending U.S. Supreme Court case Andersen v. Intel, which addresses whether ERISA plaintiffs must plead a meaningful benchmark to survive a motion to dismiss, is pivotal to how easily such claims could proceed. Lower courts have so far ruled that complaints must identify a proper, similar alternative investment rather than simply alleging poor performance. The Supreme Court’s decision will determine how readily plaintiffs can challenge private credit allocations within retirement plans based on performance alone.

Why This Webinar Matters to Professional Liability Professionals

Claims professionals are seeing early-stage securities class actions against BDCs, Section 36(b) fiduciary duty claims, fraudulent transfer and lender-on-lender litigation, emerging broker-dealer and advisor claims tied to retail investor exposure. At the same time, heightened SEC, DOJ, and Treasury scrutiny of valuation practices and captive fund structures, along with potential ERISA claims as private credit enters 401(k) plans, signals that regulatory and litigation risk in this space is likely to keep expanding. Understanding these developments is essential for accurately assessing underwriting risk, anticipating claims trends, and advising clients exposed to private credit through funds, advisory relationships, or retirement plans.