Private-Credit Leaders Predict Lower Rates Will Add to Risk Concerns

BY ISAAC TAYLOR

Risk concerns and falling interest rates are top of mind for many nonbank lenders as the private-credit industry looks to the year ahead.

In 2025, credit-fund managers had to contend with high-profile bankruptcies tinged by fraud allegations, which called into question the stability of the asset class. At the same time, macroeconomic trends including rate cuts stand to grease the wheels for transaction activity even as credit spreads narrow.

WSJ Pro spoke to three top executives at private-credit firms about their outlook for the sector in 2026. Responses have been edited for length and clarity.

WSJ Pro: Looking back over 2025, what needs to change heading into the new year?

Mark Jenkins, head of global credit, Carlyle Group:

People have really short memories. We went through a period in 2021-2022 where we were doing unlevered firstlien [loans] at [interest rates of] 12% or 13%, and it was un--sustainable.

We couldn’t continue to have rates at 13% for first-lien debt. That’s like public-equity returns. Normal spreads [to base rates] are around that 450-to-550 [ basis point] range, and so the industry should be inking out unlevered returns between 7.5% and 8.5%.

I think people got anchored on something that was just unrealistic and temporal. And then there was a secular shift and rates rose. With the new math, you couldn’t execute a reasonable buyout anymore because it implied your growth rate on doing a buyout was about 50% or 60% higher than it was the year before to achieve 20% returns to the equity.

Mathieu Chabran, cofounder, Tikehau Capital:

What struck me most this year … with Tricolor and First Brands … people were all confused on credit defaults. It’s credit 1.0. We’re not talking AAA [-rated] government bonds. We’re talking about credit underwriting, so there is some credit risk … That was a very significant misconception. Maybe because the last credit cycle goes back to the [global financial crisis], which is now 17 years ago. I’m sorry to say that maybe some people haven’t had the experience yet of a credit cycle.

Aaron Kless, chief executive, Andalusian Credit Partners:

To me, there are effectively two different private-credit markets. There are the headline- grabbers, the householdname lenders doing massive deals that are really analogous to broadly syndicated loans. That is where you see the “cockroach” examples. The underwriting and negotiation in that upper market are often intermediated, and the diligence can be lighter.

Then there is the core middle market where we operate— companies with $10 million to $50 million in [earnings]. Even when we do sponsor-backed deals, the process is bilateral. It is oldfashioned, get-your-handsdirty private credit. We are negotiating directly with the management team or the private- equity firm, not buying a piece of a syndicated deal. The misconception is assum-

ing the rot in those large, commoditized deals reflects the health of the bilateral middle market.

WSJ Pro: What are the market’s biggest risks in 2026?

JENKINS: I’ve been involved in credit for 35 years. You have defaults. You can’t avoid them. If you find somebody who says they have never had a default, you may have a Bernie Madoff situation— there’s probably fraud, because it’s impossible.

[Regarding foreclosures and restructurings,] there hasn’t been a massive uptick relative to our past nine years.

There are a lot of companies [that borrowed during] that 2020 to 2021 time frame that took on outsized capital structures in a low-rate environment. Those companies … represent a vintage that is never going to grow enough to catch up to their cap structure. They have to be restructured. And the only way to do that is to throw the debtholders the keys.

CHABRAN : I would differentiate two things: existing inventory and new business generation. For existing inventory, particularly for loans originated around Covid five years ago that are now coming due, you need to refinance. Obviously, that is happening at different terms from when interest rates were at zero. How is it going to be refinanced? That is one aspect.

Direct-lending new origination is increasingly becoming commoditized here in the U.S. … as a consequence of two things. Obviously, a lot of capital is still being raised … and in many places, [there is] a great absence of skill in the game. All leading to some potential reasons for concern as to how new origination will be generated now.

KLESS: The top risk is rates and spread compression. We have to be very attuned to risk-adjusted returns as yields come down. Jerome Powell’s term as Federal Reserve chairman ends in [May] 2026. While none of us have a crystal ball, politically one would think a new chairman might be more aggressive with rate cuts.

As spreads compress, there is a temptation in the market to compensate for lower absolute returns by increasing fund-level leverage. That is a risk investors should be cautious about. Trying to make up for yield compression with excess leverage in an uncertain economic environment is dangerous.

WSJ Pro: Where do you expect to find the best opportunities in 2026?

JENKINS: The M&A machine is starting to crank up. You’re seeing these large corporate deals, obviously, but that will lead to other activity, which is good for the ecosystem. We’ve been talking about this for two years now, and it just really hasn’t come to fruition until now. I’m expecting that will amp up the activity, especially on the direct-lending side.

CHABRAN : Where I see the big opportunity getting into 2026 is no longer the primary but the secondary [market]. You’re getting to a maturity phase of the market. People have to rebalance, to arbitrage, to rotate the portfolio. The amount of capital going after secondary direct lending is only a fraction of what is on offer. We’ve always liked the supply/demand imbalance because that’s when you can be a price-setter.

KLESS: We are seeing a real shift toward nonsponsored finance, lending to companies not owned by a private-equity firm. Our portfolio is currently split about 50/50 between sponsored and nonsponsored deals, but I expect that to tilt toward 60% nonsponsored in 2026.

In the nonsponsored channel, we generally see lower leverage, higher spreads and tighter terms. We source these deals through a network of smaller regional advisers or directly through word-of-mouth.