Getting to grips with private credit

By: Joy Macknight

The rapid rise – and potential fall – of private credit (currently estimated at $3.5 trillion in assets under management) has attracted much attention in recent months. Liquidity pressures and recent high-profile collapses, such as First Brands Group (FBG), Market Financial Solutions and Tricolor, have fuelled regulatory scrutiny and investor concerns.

Many are wondering if this is a crisis in the making akin to the 2008 global financial crisis (GFC).

In a recent speech, Sarah Breeden, Bank of England’s (BoE) Deputy Governor for Financial Stability, highlighted several issues including leverage, concentration, opacity, complexity, and weakened underwriting standards. She also called out the way private credit loans are being “sliced and diced” into collaterised loan obligations.

But it’s the complex and opaque connections to the rest of the financial system, including banks, insurers and reinsurers, that is driving speculation around systemic ramifications if private credit gets into trouble.

“While probably not systemically critical, there is a co-dependency between banking and private credit, in as much as banks fund private credit and private credit helps remove risk from the banks. If the risk goes bad because of poor credit decisions, inappropriate or inadequate operational controls, then there is a counterparty credit issue, which could become contagious,” says Tony Brown, Founder and CEO of The Trade Advisory, an international trade consultancy. “If the private credit industry catches a cold, then the banks are not immune.”

Several central banks are conducting stress tests to see how risks in the non-bank private credit sector could spread to the banking system. For example, the US Federal Reserve’s 2025 stress tests revealed that large US banks are well capitalised enough to absorb shocks from private credit, although the results of the early 2026 indicate emerging vulnerabilities. The BoE launched its most recent stress test at the end of 2025, with the final report expected in early 2027.

In a note of optimism, Breeden argued that banks have more capacity to absorb shocks than they did in 2008. “Banks now hold significantly more, and higher‑quality, capital and liquidity, and we are much better prepared for a failure,” she said.

However, many believe that it’s the result of post-GFC regulations, particularly Basel III, that has pushed banks to offload risk from their balance sheets by lending to private credit firms that, in turn, lend to riskier market segments.

The trade finance nexus

While much of the regulatory scrutiny has been on the direct lending side of private credit, the area of asset-based lending or speciality lending – specifically trade and supply chain finance – has also hit the headlines as a result of the downfall of FBG and Tricolor.

Private credit has become increasingly involved in the trade finance space, attracted by its conservative risk profile, fairly consistent yield and good track record of repayment. Trade finance also provides an opportunity for investors seeking assets that offer a differentiated and competitive risk-adjusted return.

Over the past decade private credit has gradually shifted from longer-term commodity- and project finance-based deals to the flow side of trade finance, including short-term, unsecured exposures, according to Bhaswati Mallik, Head of Portfolio Syndications, Trade Finance and Lending, Deutsche Bank.

In this space, banks and private funds have successfully partnered together, with funds taking the riskier portion in a trade, while banks focus on a trade flow segment aligned to their risk appetite.

For commercial banks like Deutsche Bank, partnering with private credit is beneficial because it helps the bank diversify funding and risk partnerships. “Private credit’s involvement in trade finance provides additional liquidity, which can be useful for some of our clients. They are often able to consider tougher credits including if trade finance structures are more complex compared to what most commercial banks might be able to look at,” Mallik says.

Plus, as trade finance facilities are traditionally uncommitted, it’s not practical for a company to rely on one bank or a small pool of banks to manage all of their trade finance requirements. “To survive in the longer term through tougher cycles, [companies] need diversification,” Mallik adds.

As a result, hybrid structures involving both banks and funds are becoming more common, with banks originating trade finance assets that are then distributed to private credit funds.

On TRAFIN, Deutsche Bank’s trade finance securitisation platform which originates client exposures on an ongoing basis, private credit investors come in on a first-loss basis on a portfolio. This enables the bank to facilitate trade finance business with its clients. “Hence indirectly and in specific pockets, private credit is supporting business within the trade finance market,” says Mallik.

“We don’t see private credit as competition,” adds Boris Jaquet, Global Head of Syndications, Trade Finance and Lending, Deutsche Bank. “They are providing a funded source of liquidity that complement what more traditional commercial banks are either less keen to do or have less capacity to do.”

In addition to commercial banks, credit insurance companies have become active participants in facilitating private credit’s involvement in trade finance, reshaping how deals are structured, funded and de-risked.

“Unlike the traditional bank activity, we needed to solve for several new and different issues: investors want returns, a diversified pool, etc. We started seeing an evolution in the ask,” says Akshay Sood, Financial Institutions Practice Leader within the US Credit Specialties Practice at Marsh Risk, a global insurance brokerage and risk advisory firm.

“Importantly, the historically conservative credit insurance sector was receptive to these evolving structures, which ultimately led to potential solutions, safeguards, etc. More creative solutions have popped up due to this collaboration that will remain even when private credit is no longer booming, which bodes well for this space,” he adds.

Proper due diligence

According to Andre Casterman, Founder, Casterman Advisory, which advises fintech, companies and financial institutions, trade finance assets represent a “fundamentally sound, self-liquidating, short-duration asset with compelling risk-return characteristics” for private credit investors. It also offers a level of transparency not typically seen in private credit direct lending.

“In private credit lending, they don’t know how the money will be used; whereas in trade finance, we know exactly how it will be deployed because we know the buyer, supplier, product, purchase order, invoice, bill of lading – all the documentation is clear,” he explains.

Yet opaque structures persist in parts of the market, as illustrated by FBG’s complex financing and off-balance sheet obligations. Well documented in a separate TTP article, Brown has suggested that FBG may be the “canary in the coal mine for the private credit boom”.

“The industry prides itself on rigorous structuring and risk-adjusted returns uncorrelated to equities. But if investors find themselves financing labyrinthine entities at 30% interest — and questioning whether collateral is even singular — the promise of ‘uncorrelated yield’ may give way to the reality of correlated losses,” he wrote.

While FBG and Tricolor are considered by many industry experts as one-off occurrences rather than reflecting broader market weakness, such cases reinforce the importance of fundamental research in assessing credit. They also point to a lack of due diligence on the side of private credit.

“Classic private credit players don’t have the risk aversion of trade bankers. The former are looking for high volume, so the level of scrutiny is not the same. Therefore, they must learn to perform better due diligence,” says Casterman. “In trade finance, the originators are much more advanced in terms of due diligence.” He adds that cases like FBG and Tricolor prove once again that the top risk is fraud.

Krishnan Ramadurai, CEO, Global Credit Data, a global source for benchmarking defaults, losses and recoveries on commercial loans, also points to the elements of fraud in the cases of FBG and Tricolor. “Anyone who was looking could have seen the red flags a long time ago – on the First Brands website, for example, there were no financials, limited and opaque information, small-time auditors, and rapid growth,” he says.

“Their business models were high risk and – the simplest test of it all – they were making over 10% margins. The trade finance industry knows those returns are possible only if you are bottom fishing, because such exposures tend to have shorter maturities,” explains Ramadurai.

Colin Bennett, Managing Director, Capital Markets, GSCF, a working-capital-as-a-service platform with a funding base backed by Blackstone, calls FBG’s collapse a “wake-up call” for the industry. “That, coupled with some of the securitisation issues that arose around the same time in the subprime auto space, led many banks – as well as non-bank partners – to second guess what they always thought was true: that the information they were receiving was accurate and valid,” he says.

GSCF performs all of the decisioning, credit underwriting, risk mitigation, treasury, capital markets, and leverage facility monitoring on Blackstone’s behalf, as well as services alternative asset managers and banks. It completes a comprehensive due diligence process as part of onboarding new customers.

When doing due diligence on FBG, GSCF requested a forensic audit of a sampling of invoices to validate that the invoices were paid on their due date into the correct bank accounts. “We were told no [FBG wouldn’t provide the information]. That was a red flag for us and we didn’t proceed, which turned out to be the right call,” says Bennett.

Undoubtedly such high-profile failures has caused a ripple effect across the industry, but the immediate reaction was caution, not a widespread pullback, according to Sood. “Transactions in that sector are being vetted more heavily, but we have continued to market and work on deals with a private credit focus in those segments and subsegments,” he says. “That shows a lot of resilience and thoughtfulness, both from the funding side and the unfunded solution side.”

Sood believes that the private credit market is in an interesting place from a credit insurance perspective. “Normal economics would suggest that when a challenging event happens, we need to reassess risk which leads to higher costs. The flip side is that the credit insurance market is competitive and remains very soft, especially in trade finance,” he explains.

He says that each year for the past four years in the US, there have been one to two well-known insurance names entering the credit insurance space, with some being open to private credit. “Effectively, that is several hundred millions of dollars in fresh unutilised capacity coming online,” he adds. As such, several insurers have found that there’s room to support and grow private credit.

“Similar to a K-shaped recovery, while the risk profile seems to be getting more challenging, pricing continues to be flat to down a bit. That’s not uniform across the board, as there’s many non-investment grade names that might be priced higher. But we’re not seeing a whiplash that one would have seen in this space, at least not yet,” Sood explains.

According to Sood, the trade finance industry “got through the worst of it” in August through December last year, so a market pivot now would be surprising. “One thing that would potentially cause a pivot would be if another event occurred in a similar vein, because then many would think it’s more of a structural issue. But so far, it’s been a net learning event more than anything else,” he says.

Growing banks’ trade finance business

While private credit’s involvement in trade finance has yet to scale, it has become a noteworthy player in the market – filling a gap left by banks as they pared back operations due to strict capital requirements and risk concerns. But concerns are emerging as to private credit’s commitment to this space when things get tough and what it means if they pull back.

“While [private credit’s involvement] has increased access to capital and flexibility for SMEs [small and medium-sized enterprises], it has the potential to create instability in supply chains in the event of a change in private credit strategy around this asset class,” says Jason Benson, Global Head of Structured Working Capital at J.P. Morgan Payments, adding that the bank is ready to support clients and SMEs in their supply chains “should the need arise”.

Jaquet, for one, doesn’t believe a private credit crunch would significantly impact the trade finance space. Like Benson, however, he emphasises that Deutsche Bank will be listening to clients’ needs and trying to provide solutions. “If a segment of the market is becoming more complicated, more difficult, pricier or disappearing, we will attempt to fill the gap if it falls within our strategy, current appetite and client relationship parameters,” he says.

Brown from The Trade Advisory believes that a private credit retreat could provide an opportunity for banks to reclaim the trade finance space because of their traditional panoply of capabilities, including due diligence. “The monitoring and field visits are absolutely critical; without them, we end up with failures like First Brands,” he says.

He also points to the customary flight to credit quality in times of crisis. Brown believes that banks have an advantage if this happens due to their permanence, stability and low counterparty risk, albeit at a higher cost, as well as the infrastructural support they have proven to be leaders in.

“Acclaiming the differentiated advantages and stability of banks versus private credit is a potent message from a business development perspective. This message resonates with the larger mid-size corporates who may have had a dalliance with private credit, but now feel that it’s best to stay put with the bank that they know. The banks are likely to play that relationship card more strongly to retain the business that might have been under attack by private credit,” Brown says.

However, the final set of international banking reforms designed in response to the GFC may make it more difficult for banks to capitalise on this opportunity.

Basel 3.1, commonly called Basel IV, will make trade finance materially more expensive for banks to provide due to higher capital requirements, according to Casterman.

“This is likely to accelerate disintermediation toward non-bank providers and deepen the existing trade finance gap, with the burden falling hardest on emerging market borrowers and non-investment-grade corporates,” he adds.