Defaults are low, valuations are murky, and the world's biggest pension funds just keep committing
Close to US$300bn flowed into private credit vehicles from institutional investors in 2025, and the money keeps coming — despite the sector's most turbulent stretch in years.
Major pension systems are not just holding their private credit allocations; several are actively expanding them.
Europe's largest pension investor, Dutch manager APG, plans to raise its private markets exposure above 30 percent of assets and could increase its private debt allocation to between 2 and 4 percent from roughly 1.5 percent currently, according to Reuters.
In the UK, Nest has committed £450m to US private credit and is targeting a 30 percent overall private markets allocation by 2030.
In Arizona, the Public Safety Personnel Retirement System holds around 17 percent of its assets in private credit and aims to reach 20 percent, chief investment officer Mark Steed told Reuters.
The structural logic is straightforward.
Pension funds carry long-term liabilities that resemble long-duration bonds, which makes illiquid assets a natural fit.
Sebastien Betermier, executive director of the ICPM Network, a global body of over 50 pension funds, told CNBC that large institutional investors can hold less liquid assets thanks to their "scale and long investment horizons."
Banks pulling back under tighter capital requirements, he added, have opened space that private credit managers have moved to fill.
Allocations are also structurally difficult to unwind, according to Olaolu Aganga, head of portfolio construction at Citi Wealth CIO.
Commitment letters are signed before capital is deployed, and managers draw it gradually over several years, meaning a shift in sentiment does not quickly reduce exposure.
The resilience is being tested.
Blue Owl Capital limited withdrawals in two of its non-traded business development companies after investors submitted record redemption requests.
CalSTRS — a US$402bn system and Blue Owl's largest BDC investor — declined to comment on the specific situation but said it "remain[s] committed to our long-term investment strategy, including investing in private credit," spokesperson Melissa Jones-Ferguson told Reuters.
Not everyone is sanguine.
Arizona's Steed said the volume of pension capital flowing into the space had "got out of hand" in recent years, lowering underwriting standards and raising competition.
"There's going to be a shakeout," he said.
Johns Hopkins Carey Business School finance lecturer Jeffrey Hooke told CNBC the sector carries a built-in lag, with loan quality often unclear for "five or six years."
Manager flexibility to extend or restructure loans can smooth reported performance for several quarters, reducing pressure to act quickly.
The stress, for now, is concentrated.
Hadley Ma, founder of Ferghana Investment Partners, told CNBC it sits in "large-cap, sponsored, covenant-light lending with heavy software exposure" — the segment most exposed to AI-driven disruption of software businesses.
Some allocators are rotating within private credit toward middle-market lending, asset-backed strategies, and deals with stronger covenants rather than exiting altogether.
Fundamentals outside that segment remain broadly stable.
Mercer's Systermans said redemptions reflect a liquidity issue rather than a credit quality problem, with defaults low and corporate profitability high.
Manager selection is growing more consequential, he added, as performance gaps in private markets exceed those in public markets.
