Private Credit’s Investigative Deficit
Why Europe’s Institutional Investors Need More Than Yield
Private credit has become one of the defining growth stories in modern asset allocation. What was once a niche strategy has evolved into a mainstream destination for pension funds, insurers, sovereign institutions, family offices, and endowments seeking income, diversification, and access to less crowded parts of the capital markets. Yet as allocations have grown, so too have concerns around due diligence, transparency, and whether governance frameworks have kept pace with the scale of capital now deployed.
A recent note from Wallbrook, Private Credit’s Investigative Deficit, captures a concern many investors have discussed privately for some time: private credit’s traditional due diligence model was largely built to assess whether a borrower can repay, but not always whether the borrower is exactly what it claims to be, whether collateral genuinely exists, or whether ownership structures obscure related-party risks or fraud. (LinkedIn)
That distinction may sound technical, but it is highly material for institutional investors globally — and especially in Europe, where private market allocations have risen steadily across DB pensions, insurers, wealth platforms, and increasingly DC default strategies.
The Search for Yield Has Changed Portfolio Construction
For more than a decade, low interest rates and compressed public market spreads encouraged institutions to look beyond listed credit. Private debt offered several attractions:
Higher yields
Floating-rate structures
Stronger covenants (at least historically)
Illiquidity premia
Lower mark-to-market volatility
Direct lender influence
In many cases, these benefits were real. Private credit also filled financing gaps left by post-crisis banking retrenchment. In the UK alone, private debt funds expanded significantly after the Global Financial Crisis as banks reduced lending to certain SME and mid-market borrowers. (British Business Bank)
For trustees and CIOs, the case often seemed compelling: earn more income, diversify away from public bond markets, and support productive capital.
But every asset allocation trend eventually reaches the same question: what risks are being paid for?
The Transparency Premium Is Not the Same as an Illiquidity Premium
One of the persistent misunderstandings in alternatives investing is to confuse opacity with value. Illiquidity can sometimes command a premium. Lack of transparency does not.
Private credit portfolios are harder to scrutinise than public bonds because they often involve:
Bilateral loans
Bespoke structures
Limited public disclosure
Valuation judgement rather than market pricing
Complex borrower ownership chains
Fund-level leverage or subscription lines in some vehicles
That does not make the asset class unsafe. But it does mean investors need stronger governance disciplines than in public markets, not weaker ones.
Wallbrook’s argument is particularly relevant here: where a borrower is founder-controlled or lacks an institutional equity sponsor, lenders may effectively be the primary line of external scrutiny. If those checks are narrow, important risks can be missed. (LinkedIn)
For institutional allocators, that should resonate.
Why This Matters Particularly in Europe
Europe’s investment ecosystem has several characteristics that heighten the importance of robust oversight:
1. Pension Schemes Need Dependable Income
Many European DB schemes and insurers rely on stable cashflows and downside control. Unexpected impairments or fraud events can have outsized consequences for funding plans and solvency assumptions.
2. Cross-Border Complexity
European lending often spans multiple jurisdictions, legal systems, tax regimes, and collateral frameworks. Recoverability can differ dramatically between countries.
3. Governance Delegation
Many schemes access private credit through pooled vehicles, fiduciary managers, OCIO providers, or multi-manager structures. That can dilute direct line-of-sight unless reporting is strong.
4. DC and Retail Creep
As private markets move gradually into defined contribution and wealth channels, transparency standards become even more important.
Regulation: Not a Popular Word, But a Necessary Tool
“Regulation” is not always celebrated in markets. Nor is “transparency.” Yet both are essential tools of modern portfolio construction.
Good regulation should not suppress innovation. It should help investors compare risk properly, understand leverage, assess liquidity promises, and identify concentrations before stress reveals them.
Likewise, transparency is not about demanding every proprietary detail. It is about giving fiduciaries enough information to make informed decisions.
That can include:
Standardised portfolio reporting
Clear valuation methodologies
Default and recovery histories
Sector and sponsor concentrations
Use of leverage at fund level
Covenant quality trends
Liquidity terms versus underlying assets
Independent verification of collateral and structures where relevant
These are not bureaucratic burdens. They are the raw materials of prudent oversight.
The Mark-to-Model Comfort Trap
One reason private credit has appealed to many boards is smoother reported volatility than listed markets. Public bonds can fall sharply when rates rise or spreads widen. Private assets often reprice more gradually.
But investors should be careful not to mistake pricing frequency for lower risk.
If assets are difficult to value, if secondaries are thin, or if credit deterioration emerges slowly, reported stability may partly reflect methodology rather than economics.
That matters in strategic asset allocation. A portfolio that appears diversified and low-volatility may still be carrying hidden correlations to recession, refinancing stress, or sponsor weakness.
What Institutional Investors Should Be Asking Now
Europe’s leading allocators are already becoming more sophisticated. The next phase should involve sharper questioning:
How is borrower quality independently verified?
What percentage of exposure is sponsor-backed vs founder-owned?
How are valuations challenged?
What is the realised default and recovery experience?
Where are concentrations by manager, sector, geography, or sponsor?
How quickly can capital truly be returned under stress?
What operational due diligence exists beyond credit underwriting?
These are not anti-private credit questions. They are pro-fiduciary ones.
Private Credit Still Has a Place
None of this means private credit should be dismissed. The asset class can play a valuable role in diversified portfolios, particularly for long-term investors able to harvest complexity and illiquidity premia with skilled managers.
But the era of “yield first, questions later” should be over.
As allocations mature, governance must mature with them.
Final Thought
Institutional investing is ultimately about converting uncertainty into manageable risk. That requires information, discipline, and honest appraisal.
Transparency and regulation may not be glamorous words in finance. But they remain two of the most important tools we have for building resilient portfolios.
And in private credit, where so much depends on what cannot be seen at first glance, they may prove more valuable than an extra 150 basis points of yield.
