Pictet AM: Private credit demands greater selectivity

September 23, 2026

Has the market become too negative on private credit, or are investors right to be more cautious today?

‘The prevailing narrative in the media has turned increasingly negative with regards to concerns on software exposure, the potential for an increase in credit events, the intensification of competition on large cap transactions, and the ‘retail-run’ that has led to liquidity pressures faced by unlisted US BDCs. Yet the reality is that large parts of private credit remain extremely robust and continue to attract capital from sophisticated institutional investors. Private credit is not homogenous and there are some important nuances under the surface in terms of vintages, geography, market segment, and strategy. In this context, we will likely see more dispersion in GP performance, and demand from institutional capital will remain strong in areas of the market which are better insulated and continue to offer stable, attractive risk-adjusted returns, such as the European lower mid-market.’

Which concerns about private credit are justified, and which do you believe are overstated?

‘We believe that some of the excess dry powder and exuberance of the asset class have led to some deterioration in underwriting standards, particularly in the context of largercap transactions, where competition is strongest. Furthermore, the observations on the ability of AI to potentially disrupt the status quo, particularly for software vendors, merit further attention.
  

Large parts of private credit remain extremely robust and continue to attract capital from sophisticated institutional investors.

 
Private credit deployment (which closely tracks private equity) is slightly skewed towards higher portfolio allocations in software & technology businesses, which has raised some concerns from investors. While there is a separate debate to be had on how much of an impact AI will actually have (which will of course vary from business to business), the immediate effect is clearly being felt in valuations across both listed and private equity markets. Multiples for software companies have dropped significantly in the space of just a few months amid concerns that AI will disrupt market shares by lowering barriers to entry and weakening of pricing power. While the extinction of software & tech businesses seems unlikely, the current pressure on valuations has had a significant impact on equity returns and may even impair credit collateral. Nevertheless, as first senior secured facilities, private credit loans are best protected. Given equity cushions in the sector are often underwritten at 60%+, even an extreme scenario where valuations drop by a further 20-40%, the risk of senior debt principal impairment is low. We are likely seeing more of a repricing of valuations rather than a collapse of the sector and a full impairment of collateral value.’

Could you give a concrete example of a private credit investment that you currently find particularly attractive, and explain why?

‘Europe is highly attractive due to the heterogeneous nature of each underlying region, particularly in relation to smaller businesses that tend to operate in localised niches. We currently see several themes which are of particular interest.

The diverse set of local legislative and regulatory frameworks can act as a stable tailwind behind the continued growth of mature niche businesses. For example, one of our portfolio companies provides high-value advisory and consultancy services to specialty chemical manufacturers, helping them navigate the complex and intricate web of local legislation and paperwork and bring their products to market more efficiently. The ability for a business like this to thrive is much more nuanced across complex diverse European regions when compared to a much more homogenous market such as the US.

Furthermore, the consolidation activity in certain industry verticals allows private credit to distinguish itself from traditional banking finance and create more value to the management teams and shareholders. One of our early investments was in a service provider of energy diagnostics that was active across the consolidation of energy transition activities. Our growth capital enabled the company to accelerate its consolidation and grow exponentially towards a successful exit, generating significant equity value and high teens returns to us as lenders.

We believe the opportunity set is strongest in the lower mid-market. These businesses tend to have more localised value chains and are thus better insulated from global macroeconomic shocks, such as trade tariffs and cross-border FX volatility. This is not always the case at the larger end of the market, where corporates are structurally more intertwined into the global macroeconomy and where competition amongst private credit managers has pushed terms aggressively in favour of the borrower.’

When evaluating a new private credit opportunity, which factors carry the greatest weight in your investment decision-making process?

In evaluating new opportunities, we apply a ‘no stone unturned’ approach to our diligence by considering a range of factors which typically include: the resilience of the business model and competitive positioning, the stability and visibility of revenues and cash flows, leverage levels and deleveraging capacity under conservative downside scenarios, the robustness of the capital structure (including the covenant framework and security package), and the quality, track record and alignment of management and/or sponsor. As a control investor, we place significant emphasis on documentation, ensuring we can influence the business and act efficiently in our best interest under downside scenarios. For us, preserving full principal value is imperative.’

What will be the key driver of private credit returns and allocations over the next two years?

‘We expect manager dispersion to accelerate across the market over the next two years as we navigate through a more challenging phase of the credit cycle. Those who focus on more insulated corners of the market and favour robust credit discipline will continue to deliver good returns for LPs. Meanwhile, managers that operate in more crowded, competitive segments, and that have legacy assets underwritten in an era of lower interest rates will be more exposed to losses and lower returns. As dispersion increases, LPs are increasingly diversifying their exposure by looking beyond the main incumbent managers in the market and are prioritising strategies that operate in more niche and differentiated segments and geographies that can potentially offer more stable and superior returns.’
  

SUMMARY Private credit remains attractive despite negative sentiment, particularly in the European lower mid-market, where businesses are more resilient and offer compelling risk-adjusted returns. Concerns about weaker underwriting standards and AI-driven pressure on software valuations are valid, but senior secured lenders remain well protected by substantial equity cushions. Attractive opportunities include niche European businesses benefiting from regulatory complexity and sector consolidation trends. Successful investing requires rigorous due diligence, strong documentation, and a focus on capital preservation.

  

Read the full article in Financial Investigator magazine