Should investors worry about private credit

17 August 2026, 07:35 UTC Chief Investment Office GWM Investment Research

Should investors worry about private credit? UBS House View Briefcase Karim Cherif, Head Alternative Investments, UBS Switzerland AG; Antoinette Zuidweg, Alternative Investments Strategist, UBS Switzerland AG; Richard Huang, CAIA, Private Market Strategist, UBS AG Hong Kong Branch; Matthew Carter, Strategist, UBS AG London Branch

Key message New this week Private credit remains in focus amid managers enforcing contractual Private lenders are tightening standards by liquidity restrictions, continued AI-driven disruption in the software reducing availability of so-called "payment in sector, and defaults from less-robust borrowers. While not necessarily kind" (PIK) arrangements, according to a 12 a direct reflection of loan-book credit quality, investors must be August report from Private Equity Wire. PIK prepared to tolerate illiquidity in both favorable and challenging allows borrowers to postpone cash interest conditions. CIO maintains a Neutral view on direct lending, as we see payments by adding the amount owed to a balanced risk-return outlook in the near term. the outstanding principal. Only 13.5% of new private credit loans originated in 2Q26 included a PIK provision, according to Lincoln

01 Private credit investors have been worried about several recent developments. International, down from 25% at the end of 2025. • Investors have grown concerned that AI developments may disrupt legacy enterprise software companies, including those to which One liner direct lenders have provided loans. We see limited systemic risk from private credit • Smaller borrowers, junior loans, and other over-levered balance but believe selectivity and a focus on quality are sheet businesses—particularly those originated in 2021-22— paramount. continue to face stress, while the upper-middle-market, senior- secured, sponsor-backed segment continues to demonstrate greater resilience. Did you know? • Lending volumes contracted further in 2Q26, 02 Late-cycle dynamics and an increasingly split market support a selective approach. pacing 13% below first-half 2025 levels and down 56% quarter-over-quarter. This • The asset class still offers long-term yield and diversification reflects the more cautious sentiment among benefits, but in the short term, we see a more balanced risk-return lenders amid geopolitical headwinds and AI outlook and moderate returns. disruption headlines. • Since September 2025, we have recommended that investors • Direct loan returns are moderating, coming in consider tilting exposure toward funds focusing on the more flat to slightly up in 1Q26, as lower interest durable senior, sponsor-backed, upper-middle-market loans in non- income and higher unrealized losses weighed cyclical sectors. on performance.

03 Diversifying across alternative assets makes sense amid the current uncertainty. Investment view • Investors with an overallocation to direct lending should consider CIO continues to believe a diversified allocation broadening into diversified alternative strategies, including private to direct lending can add value to a well- infrastructure. Investors who are underallocated may still capture diversified portfolio over the longer term, but attractive yields and diversification benefits over a full cycle. the risk-return outlook for the near term has • Investors must be able and willing to bear the unique risks of become more balanced. investing in private markets, including but not limited to illiquidity.

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