Investor sentiment around global private debt has moved away from the underlying credit fundamentals, and that gap itself is becoming a risk for the sector, Rodney Sebire, head of alternatives and global fixed income at Zenith Investment Partners, says.
“The sector has been under pressure over the past year. AI disruption, fears of rising defaults, and media coverage of redemption requests in the US have all weighed on sentiment,” Sebire says.
“The sector has been under pressure over the past year. AI disruption, fears of rising defaults, and media coverage of redemption requests in the US have all weighed on sentiment,” Sebire says.
“But when you look at the actual credit data, the sector remains in relatively good shape. Borrowers are generally still meeting their obligations, problem loans remain contained, and key measures of credit quality are broadly in line with long-term averages.
“The danger is that if investors treat the situation as a crisis, it can start to become one.”
In the US direct lending market, loans that have stopped paying interest are sitting at around 2.2 per cent. This is broadly in line with long-term averages and remains below the 3.1 per cent default rate seen in the public high-yield market in 2025.
Among managers rated by Zenith, problem loans remain below 3 per cent of net asset value. Some borrowers are capitalising interest payments rather than paying in cash - a practice known as payment-in-kind. Total exposures are below 10 per cent across rated managers, but the more telling figure is the 5 per cent attributable to borrowers switching to this arrangement due to genuine cashflow pressure, rather than as a planned financing tool.
Sebire says borrowers remain in reasonable financial shape. On average, earnings are still around twice the level needed to cover interest payments, while debt levels have remained stable at around five to six times earnings.
“In plain terms, we are not seeing the kind of deterioration that would point to broad stress across private debt portfolios,” Sebire says.
“There are always weaker borrowers in any credit cycle, but the bigger picture is much more stable than some of the market commentary would suggest.”
One of the key concerns for investors has been the sector’s exposure to software and SaaS businesses, which may face disruption from generative AI.
Sebire says while some weaker companies may come under pressure, many software and SaaS businesses remain attractive to private equity because they have regular revenue and loyal customers. Senior lenders are also well protected in many cases, because private equity owners typically have significant capital invested ahead of the debt. This means company values would need to fall materially before lenders are at risk of losses.
Zenith modelled a hypothetical private equity-backed SaaS business with debt at six times earnings, interest coverage of 2.2 times and a 60 per cent equity cushion. The analysis found the company’s earnings would need to fall by around 60 per cent over 12 months before it could no longer meet its interest payments.
Sebire says such a severe decline would be unlikely to happen overnight, giving lenders time to work with borrowers and private equity sponsors to manage the situation.
“AI disruption is a real issue for lenders to monitor, particularly for companies with weaker competitive positions,” Sebire says.
“But assuming every software borrower is suddenly a bad credit risk is far too simple. Many of these businesses still have meaningful protection beneath the debt.”
Sebire says the current environment is a reminder that private debt should be treated as a long-term investment, not a cash-like product.
“The key is education,” Sebire says. “Most Australian investors access these funds through structures that are linked to US master vehicles, so what happens in the US matters. Investors need to understand that private debt should generally be held for at least five years, and that access to capital may be restricted in some market conditions.
“For investors with the right time horizon, global private debt can still offer attractive risk-adjusted returns"
“But it’s not an asset class where investors should simply follow the headline yield. The quality of the manager, the strength of the loan protections and the liquidity structure all matter.”
