Pension funds are sticking to private credit, in some cases doubling their allocations, even as concerns grow over underwriting standards, valuation uncertainty and sector concentration. Cameron Sistermans, head of multi-asset at Mercer Asia, said institutional investors, including pension funds, “generally remain committed to the asset class and many continue to increase their allocations.” Mercer said new institutional inflows into private credit vehicles will total nearly $300 billion in 2025, largely stable from a year ago, and redemptions will be led by retail and high-net-worth investors. As an example, Reuters recently reported that Dutch manager APG, Europe’s largest pension investor, plans to increase its exposure to private markets to more than 30% of its assets, seeing the current volatility in credit markets as an opportunity to buy more. In it, the fund said the private debt allocation could increase from around 1.5% currently to 2-4%. In the UK, the government-backed pension scheme Nest is injecting £450m into US private credit, with the aim of significantly increasing its overall private market allocation to around 30% by 2030, which is well above industry norms. Large institutional investors have the advantage of holding illiquid assets due to their size and long investment horizons. ICPM Network Sebastien Betermier reports that some of North America’s largest pension funds are maintaining their exposure to private credit despite growing turmoil within the sector. Among them is the California Teachers’ Retirement System, which invests in private credit funds managed by companies such as Blue Owl Capital, some of which have caps on redemptions. The pension funds’ continued plans to increase their exposure and allocations come as parts of the private credit market, particularly software-focused lending, are facing increased scrutiny. “Private credit is an illiquid asset class that can offer attractive risk-adjusted returns for these large institutional investors,” said Sébastien Betelmier, executive director of the ICPM Network, a global network of more than 50 pension funds. “We’re seeing increased attention[from pension funds]as banks face stricter capital requirements and reduce their exposure to this market,” he told CNBC. CNBC reached out to more than a dozen pension funds for comment but did not receive a response. Betting on private credit Private credit continues to play a strategic role for pension funds. Industry watchers say pension funds are structurally well-suited to holding illiquid assets because their long-term liabilities are similar to long-term bonds. This allows them to capture an illiquidity premium that is not available in the public market. “Large institutional investors have an advantage. Their size and long investment horizons allow them to hold illiquid assets,” Betermier said. Allocations are still relatively modest, but increasing. Pension funds typically allocate a low to mid-single-digit percentage of their portfolios to private credit, Mercer said, but exposure to broader private markets can be significantly higher. Institutional demand has also been supported by relatively stable fundamentals so far, despite some stress. “Repayments appear to be more of a liquidity issue than a solvency or credit quality issue. Default rates remain low, underlying leverage is stable and corporate profitability is high,” Sistermans said. Private credit players argue that the current stress is not representative of the asset class as a whole. “The stress in the headlines is concentrated in certain parts of the market: large-cap stocks with a lot of software exposure, sponsored and covenant-lite lending,” said Hadley Ma, founder of private credit firm Fergana Investment Partners, who works exclusively with institutional investors. Mr. Ma emphasized that some allocators are increasingly rotating within private credit to middle-market financing, asset-backed strategies, and deals with stronger covenants and loan terms, rather than exiting completely. “There is a growing appetite for differentiated exposure within private credit.” Pension funds are also clinging to private credit. The reason is that allocations are generally long-term and difficult to unwind quickly. “Private market asset allocation is set by signing a commitment letter after the allocation is determined,” said Olaolu Aganga, head of portfolio construction at City Wealth. Even if sentiment changes, financial institutions are often locked into multi-year investment cycles, although not all allocations are made in one tranche. Private credit managers “call in” or withdraw capital gradually over several years as investment opportunities arise. Dangerous behavioral play? Behavioral incentives may also be at play. “Some of these big institutions believe that concerns about private credit are overblown, and those concerns persist,” said Jeffrey Hook, senior lecturer in finance at Johns Hopkins Carey Business School. Hook added that financial institutions have also invested heavily in private credit funds in recent years and may be reluctant to significantly reduce their exposure. This is because doing so could invite scrutiny of previous allocation decisions. You don’t really know how bad your loan will be in five or six years…it’s all a time-delay situation. Jeffrey Hook, Johns Hopkins Carey Business School He also pointed to the lag in the reflection of risks in private markets. “We don’t really know how bad the loans are going to be for five or six years. It’s all a lag situation,” he said, noting that managers have the flexibility to extend or restructure loans before they see losses. This delay, combined with managers’ reported valuations, could lead to better performance in the coming quarters and reduce pressure on institutional investors to respond quickly. Still, risks remain. Amid artificial intelligence-driven industry disruption, software-heavy portfolios have come under particular scrutiny, along with loans with weaker underwriting standards. Opacity also remains a key concern. Private credit lacks the transparency of public markets, making it difficult to assess true default risk and valuation accuracy. “With the increased participation of retail investors, the risks will further increase,” Betermier said, warning of the possibility of money runs and mispricing of assets. Mercers-Sistermans said manager selection has also become more important because “the difference in performance between high-performing and low-performing managers is greater in private markets than in public markets.” For now, experts say pension funds’ push into private credit is helping to stabilize the asset class, even as retail investors exit semi-liquid vehicles.
