Decrease in Second Successive Quarter for Private Credit Default Rates
In a recent report by Proskauer's Private Credit Default Index, the private credit default rate has shown a significant decrease, falling from 2.42% in Q1 2025 to 1.76% in Q2 2025. This decline reflects a combination of prudent borrower selection, robust investor due diligence, a generally resilient macro credit environment, and ongoing economic stability, despite some headwinds from trade and policy uncertainty.
Stephen A Boyko, co-founder of Proskauer's private credit group, noted that the resilience across private credit markets is reinforced by the data from this quarter. Boyko suggests that the market's ability to navigate evolving macro conditions is demonstrated by the continued flow of capital and disciplined lending practices.
The index encompasses 739 loans representing $143.6bn in original principal amount. Despite a slight uptick in defaults among smaller companies, the overall downward trend indicates effective risk management and stability across the sector. The report did not provide specific reasons for the decrease in default rates.
The stronger private credit returns, despite higher risks, have played a significant role in this trend. Private credit outperforms high yield bonds by about 150 basis points over the past decade, incentivizing careful manager and deal selection, helping to control defaults.
With private credit fundamentals weaker than public markets, selectivity in underwriting and manager quality is crucial. The emphasis on experienced managers with scale and strong track records who can achieve good returns while minimizing impairment supports lower defaults.
Despite an overall cautious macroeconomic environment, credit markets remained relatively resilient with moderate default rates in loans and bonds. Private credit markets remain generally healthy, benefiting from sustained exit activity (IPOs, M&A), which supports underlying company liquidity and reduces stress on credit portfolios.
Although economic growth is slowing and uncertainty about trade policies persists, current forecasts lean more towards a growth pause rather than recession, supporting stable credit performance. This environment, coupled with cautious lending and underwriting practices, contributes to contained default rates.
While some consumer loan delinquency rates (e.g., student loans) have increased, these have not yet caused systemic stress. Commercial real estate delinquencies vary by sector but remain subdued overall, which helps maintain private credit portfolio quality.
However, the report did not discuss the impact of the "retailisation" of evergreen funds on the overall default rate in the private credit market. Boyko did not specify any particular concerns related to this trend in the context of the private credit market.
The Q2 2025 default rate is lower than the rate in the first quarter of 2025 and the final quarter of 2024, indicating a continued downward trend in private credit defaults. The reported figures are from the period of 1 April 2025 to 30 June 2025. The article does not mention any specific industries or sectors affected by the default rates.
Businesses and investors are taking advantage of the ongoing economic stability and resilient macro credit environment, as indicated by the decrease in private credit default rates. The strengthening private credit returns, which outperform high yield bonds, have contributed to effective risk management and lower defaults.
