Many UK pension funds have exposure to private credit, an asset category that promises higher income for those who can lock up their money – but are there skeletons in the cupboard or are investors overreacting? 

Defaults of US private credit reached a new high of 9.2% last year, up from 8.1% in 2024, Fitch Ratings reported earlier this month. However, the ratings provider said realised losses for first lien lenders were “limited”, with six of eight cases with recoveries leading to par paydowns for lenders, while it estimated that the other two still recovered 70% to 90%. 

Despite this, every week seems to bring fresh headlines of private credit funds being gated – BlackRock, Morgan Stanley, Cliffwater and Blue Owl among them – as investors are rushing to the door at the same time.

For pension professionals, this is a sign that investors have been reminded of the importance of liquidity.

When everyone wants liquidity at once, gates are to be expected, says Emma Pittaway, professional trustee at Law Debenture. “As uncomfortable as that is, it is the reality of investing in inherently illiquid assets through structures that offer periodic dealing,” she observes. 

However, “the more interesting question is whether the rush to the exit is actually justified”, she says. 

 

Private credit fundamentals have not disappeared; what has shifted is sentiment, she argues, driven possibly by a reassessment of valuations, concerns about refinancing risk in a higher-rate environment, and investors reassessing their tolerance for illiquidity. 

“For UK pension schemes, the enduring lesson from the gilts crisis remains: cash is king,” she says, particularly where schemes target buy-in or buyout. “That does not mean illiquid allocations have no place. Many schemes still need returns, and some have the runway to benefit from longer term illiquidity premiums, but the sequencing and sizing decisions matter enormously,” she believes. 

Pittaway is seeing UK pension schemes taking stock of their private credit holdings, driven partly by recent market headlines along with longer-term strategic considerations. 

“For those with buyout as a longer term target, there's a growing recognition that illiquid assets will need to be looked at before they get there. That being said, schemes that are looking to run on are rightly exploring new opportunities, in the space and others. It's a genuinely mixed picture,” she says.

She advises trustees looking at private credit to be clear about what they are buying and how quickly they might need access to cash – assessing whether the fund structure lines up with those needs.
 

So-called ‘semi-liquid’ structures providing periodic dealing windows are sometimes offered to investors, but Pittaway notes that this does not change the nature of the underlying assets. 

 

“When redemption pressure builds, the gap between perceived and actual liquidity can close quickly, as we have seen,” she says. However, structures with “sensible notice periods, adequate cash buffers and clear valuation policies” can work, she finds.

 

For Pittaway, Long-Term Asset Funds – the first of these structures now goes back three years – might represent a more considered approach, where access terms are designed around the underlying assets and investor protections built in from the outset. 

The problems being witnessed in private credit could be partly down to high demand for a limited pool of assets. The market is estimated to have grown to more than $2tn (£1.5tn), but this is still small in the context of global capital markets.  

 

Recent record inflows into private credit can bring the risk of managers compromising on quality and due diligence standards, suggests Emma Coleman, who heads up credit research at consultancy XPS.

High profile defaults in the securitised or syndicated loan market – subprime auto lender Tricolor and parts supplier First Brands – have shaken the wider private credit sector, she acknowledges.

 

“This has yet to translate into a material increase in default rates, but we are monitoring this closely – particularly in the software sector, which could be under pressure as AI develops,” Coleman says.

 

“We think pension investors who are invested in high quality, senior secured funds managed by experienced players in the private market space should not have cause for immediate concern but should continue to closely monitor their underlying sector exposure and any ‘problem’ assets in their portfolios,” she advises.

 

The rush to the exit is driven primarily by retail investors and reflects wider nervousness across the market and recent news flow, not a material uptick in default rates or other materially worsening credit quality metrics, she remarks.

 

Institutional investors who need to sell their private credit assets for liquidity can do so in the secondary market, “where there are often a range of buyers happy to pick up high quality portfolios at a discount to NAV”, she notes.

 

This typically involves a haircut for the seller, so the need to sell should be weighed up against the valuation and prospects of the specific assets in the portfolio, she adds.