In the following guest post, James Sterling, Claims Counsel, Euclid Financial & Professional Risks, and Mike Newham, Partner, RPC, consider the economic and underwriting risks associated with the private credit markets. A version of this article previously was published on LinkedIn and on Euclid’s website. My thanks to James and Mike for allowing me to publish their article as a guest post on this site. Here is the authors’ article.

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With the US leading the way in growing the Private Credit space and the European and AsiaPac markets also on the up, this article outlines the basics of the private credit market, as well as how this may impact the Financial Institutions (PI, D&O and Crime) underwriting space.

What is Private Credit

Private Credit is essentially: “commercial loans extended by traditionally non-bank financial institutions”. A nascent market at the turn of the century, it picked up speed after the GFC (when it was more commonly referred to as “shadow banking”), continued to strengthen during the COVID era and is now very much in vogue.

This is primarily due to commercial borrowers needs not being met by traditional bank loans, more relaxed financial regulations and potentially superior investor returns. Supply and demand is higher than ever (typical borrower enterprise values are between USD 25m – 1bn), with the larger banks also now competing in this space, alongside more traditional institutional investor vehicles (dominated by large-scale fund managers).

The definition is so wide and the market so big that it is impossible to avoid for any FI insurance specialist, with exposure existing across asset management, credit and insurance markets. This is not to say that all Private Credit businesses are risky but, within any expansive market – particularly if applicable regulation is more relaxed – issues will occur, whether misconduct or more ordinary failures.

The Economic Risk

Regulators in major financial centres are looking proactively at the industry, seeking to strike a balance between supporting the economy and innovation but also getting ahead of any systemic financial issues.

Concerns include:

• The current frequency of adverse financial headlines and potential for wider market contagion.
• The development of a secondary trading market and opaque loan portfolio valuations (potentially masking poor or under-performance): remember the GFC sub-prime crash?
• Though default rates seem lower, there is less public information, more investor patience and more willingness to restructure. In particular, the use of Payment in Kind (PIK) notes which allow debtors to defer repayments avoiding default but at an extra cost.
• More traditional lenders being double-parked: both lending to the institutional investors and having their own lending skin directly in the game.
• The growing interrelationship between the investment/growth in AI (another  potential “bubble”) and Private Credit funding of the same.
• And, of course, the increasingly volatile geopolitical and macroeconomic landscape (e.g. the recent war in Iran and the impact on oil prices and interest rates).

Regulators on Watch

ASIC (the Australian Securities and Investments Commission) has probably been the most engaged in this space, with the iProsperity Group collapse one of the most notorious ongoing criminal and civil cases emanating out of ponzi scheme and associated Private Credit fraud. The UK has also been stepping up its oversight, with the FCA (Financial Condict Authority) reviewing net asset (loan) valuation (NAV) processes (March 2025) and the Bank of England announcing plans to stress-test the sector (December 2025). This is seemingly in good time, given the February 2026 insolvency of Market Financial Solutions and purported wider market contagion (including inter-private credit lending).

And US Regulators have also had to increase monitoring and enforcement activity, with their hand forced by the collapses of auto enterprise borrowers First Brands & Tricolor (and the seemingly significant frauds subsequently exposed). There has also been recent high-profile news surrounding liquidity/redemption mechanics and portfolio valuation scrutiny impacting large fund managers such as Blue Owl, Blackstone and Blackrock, not least as a result of the concern over the impact AI may have on borrower software firms.

The Underwriting Opportunity

With risk comes opportunity and this certainly extends to the FI underwriting arena, where theoretically every risk is writeable at the right price and with suitable policy terms and conditions. When evaluating Private Credit risks, relevant underwriting factors might include:

• The Insured:
  • What is the Insured’s role (investment manager, originator, lender, arranger, servicer or other FI)?
  • What asset types are in scope (direct lending, real estate debt, NAV finance, specialty finance, structured credit)?
  • How material is Private Credit to the overall business (AUM, % revenue, concentration by fund)?
  • Are fund investors sophisticated enough to understand the risks?
  • How are loans funded and structured and who are the key counterparties?

• Due Diligence:
  • How diversified is the portfolio by sector, geography, borrower size and sponsor concentration?
  • What are typical leverage metrics and underwriting standards (e.g. EBITDA multiples, covenants, loan to value ratios)?
  • Are loans (or fund interests) sold, syndicated or otherwise traded, and what controls govern pricing and transfer?
  • What stress-testing is performed (rate shocks, recession/default spike, liquidity squeezes) and how are results used in decision-making?

• Portfolio performance:
  • What metrics are applied to arrears, defaults, restructurings and recoveries?
  • To what extent are PIK features used and what is the rationale and monitoring approach?
  • How common are “bullet” repayment structures and what refinancing/liquidity assumptions underpin them?
  • How are loans valued (policy, frequency and governance) and is there independent third-party validation?
  • What is the claims and incident history (including near-misses) and how has underwriting/growth affected controls and reporting?

• Compliance:
  • Is governance clear and documented (tone from the top, committee structure, delegated authorities and MI)?
  • What regulatory regimes apply (by domicile and investor base) and how is compliance with relevant guidance evidenced?
  • What conflicts of interest exist (e.g., “double-parked” lending, affiliated transactions) and what controls/independence safeguards apply?
  • What are the key macro sensitivities (interest rates, inflation, refinancing risk, sanctions, tariffs and other geopolitical factors) and how are they managed?

Policy Response

Whilst FI policies are not written to be a financial backstop to failed investments, coverage is often triggered as a result of the decisions/acts which lead to that failure. For example, when underwriting investment managers (who are increasingly prolific in this space), Private Credit might still be seen as a slightly novel “investment management” activity: do the IMI policies recognise that some managers are directly originating loans? Therefore, consideration should be given as to the scope cover being sought, not least for claims arising out of lending (including failure or refusal to lend) and valuation activity, as well as any restructuring/insolvency liabilities.

Claim Types

These are mainly claim types we have seen before, just with some different FIs now being implicated and potentially evolved policy terms:

• PI
  • Investors: alleging negligent underwriting, monitoring or valuation of loans (including whether reliance on offering materials was reasonable versus investors’ own due diligence).
  • Borrowers: challenging enforcement/recovery/default proceedings (particularly where insurance policies do not exclude  lenders’ liability claims).
  • Versus Service Providers: trustees, fund custodians, accountants, valuers, lawyers, brokers and insolvency specialists can all find themselves targets.

• D&O
  • Investor/shareholders: alleging misrepresentation of strategy, risk appetite, leverage or portfolio composition and for failures of oversight/governance.
  • Insolvency: alleging breach of directors’ duties in the period proceeding entering into an insolvency process.
  • Conflicts of Interest: Actual or perceived conflicts of interest.
  • Regulatory: investigations and enforcement actions.

• Crime
  • Internal/External Fraud: misappropriation of funds, fictitious borrowers/loans, collateral issues (non-existent, misvalued, multiple-pledged).

Concluding Comments

As the law firm RPC highlight: “private credit is not the one-size fits all, low-risk and high-reward panacea that its most enthusiastic proponents promote”.  Insurance market participants should understand that, with the growth of Private Credit, comes risk and opportunity. Clients who demonstrate robust risk management and transparency in their approach to exposures – through diversification, rigorous due diligence and expert delivery – will attract more underwriter competition. Brokers can help Underwriters understand each prospective client’s business model, funding structure, and approach to compliance and ensure coverage is tailored to the specific risks operating in the fast evolving Private Credit industry.                                                                                      

March 2026