Build upon your organization's resilience and support your sponsored funds’ success by understanding the market’s challenges.
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The state of the private credit market
Private credit has grown from a niche financing solution to a dominant presence within the global capital markets. Following the retreat of traditional banks in the wake of the 2008 financial crisis, non-bank lenders stepped in and filled the credit gap, particularly for small and mid-sized businesses. Since then, various credit strategies, including direct lending, asset-based finance, distressed debt and mezzanine financing, have driven global private credit assets under management to over $3 trillion, with such assets projected to reach $4.5 trillion by 2030.
What is the current risk landscape?
While the private credit market has created significant growth opportunities for lenders, concern around the transparency, resiliency and regulatory oversight of these strategies is growing. The recent bankruptcies of First Brands Group and Tricolor have exacerbated these concerns and further intensified scrutiny of non-bank financing. This ripple effect is now catching the attention of the insurance community, particularly those that underwrite the management and professional liability policies that protect lenders’ balance sheet assets, their sponsored funds, and their directors and officers.
Key risks for private credit funds
Private credit managers face multifaceted risks that can lead to financial loss, legal exposure and reputational damage. These include, but are not limited to, the following:
Credit and investment risk
Underwriting and due diligence failures: Missed red flags or loosened credit standards leading to defaults and claims.
Valuation risk: Inflated or inaccurate net asset values causing fee disputes and reputational harm.
Interest rate sensitivity: Rising rates leading to borrower defaults and inadequate risk assessment claims by investors.
Concentration and leverage: Sector overexposure and layered leverage increasing systemic and litigation risk.
Operational and compliance risk
Servicing errors: Procedural mistakes or regulatory filing issues resulting in liability claims.
Double-pledging: Reuse of collateral across loans, undermining protection and increasing fraud risk.
Regulatory scrutiny: Heightened oversight leading to investigations and costly enforcement actions.
Mandate breaches: Lending outside fund strategy or leverage limits, triggering mismanagement liability claims.
Technology and emerging risk
AI-driven risks: Errors, misrepresentations, or cyber vulnerabilities from AI use, potentially triggering multiple types of claims.
Insurance coverage considerations and solutions for private credit funds
These risks often give rise to claims that can trigger coverage under one or more insurance policies, such as the management and professional liability coverages. These matters are often complex and costly, so maintaining a working knowledge of these coverages is recommended. With an insurance broker’s guidance, initial areas to review include:
Insurance portfolio: Insureds who understand their insurance policies — including scope and breadth of coverage, exclusions, and limitations — are better equipped to navigate the claims process and effectively manage internal stakeholder expectations during times of crisis.
Limits of liability: Reassess adequacy of policy limits, especially in the context of a heightened risk environment. Incorporating analytics into the decision making process, such as Willis’ D&O Liability Quantified model, instills greater confidence that the limits maintained are adequate and represent the most efficient use of capital.
Terms and conditions: Conduct an annual review of policy language, ensuring each program contains the most competitive terms available in the market, such as adequate coverage for formal and informal regulatory investigations and lenders’ liability.
Reporting requirements: Understand the reporting and notification obligations of each policy, including the claims reporting procedures, to avoid jeopardizing coverage due to late notice to the insurers.
Remain prepared to face challenges that lay ahead
As you continue to evaluate the private credit market, consider these recommendations in your risk and insurance strategy. Considering these solutions and preparing for future challenges may make a significant difference in your organization's long-term growth. By proactively addressing potential risks, you can help ensure that your financial strategies remain robust and adaptable, ultimately safeguarding your investments and enhancing your competitive edge.
Disclaimer
WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
