Managing risk in private credit as the market matures

How private credit participants can adapt as exposure evolves

Private credit has grown into a $1.6 trillion market in the U.S. over the past 16 years, becoming a central pillar of the financial ecosystem. With that scale, however, comes a new set of pressures reshaping how insureds think about risk.

Higher interest rates are squeezing borrowers and testing deal structures built in a different environment. Regulatory scrutiny around valuation practices is intensifying. Additionally, concentration in sectors like software is introducing new forms of downside risk, while the threat of investor litigation grows.

Together, these pressures are fundamentally changing the risk management calculus for private credit investors and the businesses they invest in. In this environment, insurance is no longer simply a backstop. It is an active component of how firms manage downside exposure, protect valuation integrity and respond to legal and regulatory risk.

Three places where exposure materializes

As pressures build across the private credit landscape, exposure is increasingly snowballing into claims, disputes, and regulatory action.

Investor litigation is a key driver. When funds underperform relative to expectations, the risk of legal action increases. In a market where return assumptions were set during a low-rate environment, the gap between expected and actual performance is widening. Investors who feel misled –– or who find themselves unable to access their capital due to redemption restrictions –– turn to legal remedies. Recent cases involving BDCs and private credit funds reflect this, with claims centering on how portfolio assets were valued and communicated to investors, and undisclosed liquidity issues.

TIP: Insurance plays a critical role here, and the right carrier will cover defense costs and help navigate toward a resolution, whether through settlement or dismissal.

Regulatory scrutiny around valuation and reporting is intensifying. The SEC and DOJ are paying closer attention to how private credit funds value their portfolios and communicate with investors. The SEC's 2026 examination priorities specifically flag private credit, with a focus on valuation methodologies, risk disclosures to investors, and adherence to fiduciary duties. Inconsistent or poorly supported valuation practices can quickly escalate into investigations or enforcement actions, particularly in periods of market stress.

TIP: Share your valuation methodologies with your insurer to reduce risk.

Concentration in software introduces new risks. When a traditional manufacturer defaults, lenders can pursue recovery through physical assets such as machinery, inventory and real estate. When a software company fails, there’s no such recourse. It creates direct losses with little ability to recover them, which can quickly become a source of investor dissatisfaction and, ultimately, legal exposure. The fear that AI will make traditional software companies obsolete has put a lot of pressure on valuations for that sector. However, it is probably still too early to tell if that fear is overblown. The counter point is that some of these companies will adapt with the new technology or reinvent themselves to stay relevant, with only a subset of software companies not surviving.

TIP: Private credit lenders will want to scrutinize their portfolio concentration in the software and tech lending space to determine how much stress the portfolio can handle if all of the credits had to be marked down significantly.

Portfolio transparency is critical

As private credit portfolios grow, transparency becomes a key differentiator. Investors, regulators and insurers are seeking clearer visibility into underlying exposures, including borrower performance, sector concentration and geographic risk.

Without this visibility, emerging issues are harder to identify before they escalate and harder to defend against when they do. From an insurance perspective, a lack of clarity around valuation practices, lending decisions, and investor agreements creates significant exposure. All fund structures are not created equally. It’s important to recognize how the fund details redemption gates and how that ties in how liquid the fund really is. When a claim or regulatory action arises, documentation becomes the first line of defense.

Enhanced reporting, data analytics and ongoing monitoring are essential tools for managing this risk. Firms that invest in these capabilities are better positioned to respond proactively rather than reactively.

What to look for in an insurance partner

Not all insurers approach private credit the same, and in a more complex and scrutinized market, those differences matter. Here are several considerations to use when evaluating an insurance partner:

• Effective underwriters understand how private credit portfolios are constructed, including where concentrations exist across sectors, geographies and borrower profiles. They also stay current on regulatory developments and how shifting enforcement priorities may affect the borrowers and funds they insure. A surface-level view of the market can lead to mispricing or sudden shifts in appetite.
  
• Leading insurers actively segment their own private credit exposure by severity. This allows them to engage confidently and structure coverage appropriately, rather than pulling back broadly when market conditions tighten.
  
• When their view of a risk changes, the right insurer adjusts rather than retreats. That means leveraging available tools — modifying limits, retentions or capacity — to remain engaged instead of exiting relationships at the first sign of stress.
  

A more resilient future

As private credit continues to evolve, it presents both opportunity and responsibility. The firms that thrive will be those that embrace a more sophisticated approach to risk — one that balances innovation with prudence.

In this environment, insurers play a vital role. By providing insight, structure and stability, they can help ensure that private credit remains not only a source of capital, but also a sustainable component of the financial landscape.

To learn more about how we’re making a difference for our customers and partners, please visit https://www.bhspecialty.com/

By Christopher Polechronis, Senior Vice President, Head of Financial Institutions, BHSI  

Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, transactional liability, surety, marine, travel, programs, accident and health, employer stop loss, homeowners, and multinational insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway's National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor's. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Columbia, Dallas, Houston, Indianapolis, Irvine, Los Angeles, New York, Plymouth Meeting, San Francisco, San Ramon, Seattle, Stevens Point, Adelaide, Auckland, Barcelona, Brisbane, Brussels, Calgary, Cologne, Dubai, Dublin, Frankfurt, Hamburg, Hong Kong, Kuala Lumpur, London, Lyon, Macau, Madrid, Manchester, Melbourne, Milan, Munich, Paris, Perth, Singapore, Stockholm, Sydney, Toronto, and Zurich.

For more information, contact info@bhspecialty.com.

The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein must not be relied upon as coverage and does not include all policy terms, conditions, and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.