The global private credit market has been growing significantly. The rise of private credit raises interesting D&O insurance underwriting concerns. In the following guest post, Sarah Abrams, Head of Claims Baleen Specialty, a division of Bowhead Specialty, explores these D&O issues. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to the blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
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The global private credit market has experienced significant growth over the past two years, reaching approximately $3 trillion in assets under management (AUM) by late 2024, up from around $1.7 trillion at the end of 2023. Private credit refers to non-bank lending, where investors fund loans directly to businesses or individuals. Persistent inflation, rising interest rates, and heightened market volatility in early 2025 have given private credit a reputation as an attractive portfolio opportunity more resilient to macroeconomic shocks.
D&O underwriters should be aware, however, that insureds like Private Equity (PE) funds directly participating in the private credit marketplace may soon face the risk of lawsuits and claims resulting from increased bankruptcies. Stagnation of interest rates and tariff uncertainties have put economic stress on private credit borrowers, leading to increased adjustments to loan terms and valuations.
The IMF’s 2024 Global Financial Stability Report warned that the sector had “never experienced a severe economic downturn at its current size and scope” and that with “limited prudential oversight, the vulnerabilities of the private credit industry could become systemic.” D&O insurers experienced the impact of a severe economic downturn caused by a “wave of bad debt [that] swamped companies” in 2009. Whether history is now repeating itself remains to be seen, but recognizing red flags may allow for more prudent underwriting decisions.
The first step is to admit that there is no economic certainty at this moment in time. A flurry of initiatives introduced during the first 100 days of the Trump presidency—including cuts to federal grants and rapidly shifting tariffs—is severely undermining the ability of businesses to engage in long-term planning. Financial analysts have put the odds of the economy entering a recession within the next 12 months at close to 50%.
Given the unpredictable US financial environment, is there cause for concern that the private credit market will collapse like the subprime mortgage market, which set off the Global Financial Crisis (GFC)? Private credit lending is not, at least yet, subprime mortgage lending. Even so, appreciating the history of private credit as an investment vehicle and the strategies PE funds use to issue private credit during economic uncertainty may shed light on future D&O claim exposure.
Before 2008, the private credit market primarily consisted of mezzanine and distressed debt funds. After the GFC, regulatory reforms prompted traditional banks to scale back corporate lending activities. This retreat opened the door for private credit, particularly direct lending, to expand rapidly, filling the gap left by banks. Unlike bank-issued loans, direct lending through private credit is not FDIC-insured. In private equity-sponsored private credit deals, the general partner (GP) typically originates the loan and assumes responsibility for managing the associated risks. The GP acts on behalf of the limited partners (LPs), who are effectively their clients, with the goal of securing the most favorable loan terms for the fund.
Private credit loans are attractive because they often have a contractual maturity date, benefit from collateral, and are senior to the equity in the capital structure. Reasons why the already competitive landscape has become broader and more crowded, with increasing direct participation from insurance companies, traditional asset managers, and even banks. The recent record inflows into private credit funds may lead to direct loans being made to less attractive targets, including highly leveraged companies.
It is important to note that PE lenders are active and flexible in managing distressed portfolio companies compared to traditional banks. PE funds regularly restructure loans by extending maturity, reducing interest, or restructuring covenants to keep the company afloat. Even so, the anticipated downside scenario of potential inflation caused by tariffs is challenging the traditional PE playbook. If inflation flares, higher defaults by levered companies without free cash flow may occur, resulting in bankruptcy.
This scenario has already begun to unfold. There have been a marked increase in corporate bankruptcy filings over the past year. Bankruptcy filings rose 13.1 percent during the 12 months ending March 31, 2025, a similar rate of acceleration as the December 31, 2024, quarterly report published by the Administrative Office of the U.S. Court. Total bankruptcy filings had been falling steadily for more than a decade, from a high of nearly 1.6 million in September 2010 to a low of 380,634 in June 2022. Since then filings have increased.
As readers of the D&O Diary know, a bankruptcy filing is often followed by claims against the bankrupt company’s directors and officers. Securities lawsuits brought against individuals by the bankrupt company’s shareholders are also filed. In addition, creditors may bring breach of fiduciary duty claims through derivative claims when the company is deemed insolvent.
Underwriters and private equity firms involved in issuing or facilitating private credit loans may also face D&O exposure if the borrowing company defaults. Claims can be brought by investors (LPs) against the GP who secured a private credit deal with a distressed company. Allegations of poor underwriting and breach of fiduciary duty can be made against a GP, including wrongful acts in a managerial capacity.
Given the surge of private credit lenders seeking loan opportunities and the likelihood that many target companies are distressed, important lessons from the GFC should be considered. First, D&O underwriters on both sides of a private credit deal involving PE have potential exposure. Second, various D&O insurance coverage parts may be triggered when a company files for bankruptcy. Ultimately, D&O underwriter awareness of private equity underwriting practices and strategies for managing potential defaults in private credit deals can help mitigate claims exposure, whether through more restrictive policy terms or adjusted pricing. Even amid market uncertainty, this approach can offer underwriters a measure of predictability.
The views expressed in this article are exclusively those of the author, and all of the content on this article has been created solely in the author’s individual capacity. This article is not affiliated with her company, colleagues, or clients. The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any subject matter.