In our latest Investor Alert, “Private Credit: The Good, the Bad, and the Ugly,” Labaton attorneys Francis P. McConville, William Schervish, and John C. Coyle IV explore what private credit is, where key risks to investors may arise, and the practical and legal steps investors can take to safeguard their interests.

With private credit attracting significant attention in the wake of high-profile bankruptcies involving First Brands Group and Renovo Home Partners, the authors examine the benefits and risks of lending that occurs outside the traditional banking system.  

Highlighting that over the past 15 years U.S. defined benefit pension funds have “doubled their allocations to alternative assets, which include private credit investments, reaching 34% last year,” the authors outline the appealing aspects of this asset class, including greater access to capital, increased flexibility, and attractive returns.  

At the same time, the authors note that the private credit industry’s “rapid growth also poses significant risks for borrowers, investors, and the broader financial system.”  The First Brands Group bankruptcy, for example, raises concerns about diligence and investor visibility across the industry, while the liquidation of Renovo Home Partners illustrates how quickly private credit positions can deteriorate.  “One thing is clear,” the authors contend, “there is no consensus on the state of private credit, or the risks it poses to investors.”

Given the market’s complexity, risk concentration, and limited transparency, the authors stress that “investors can—and should—take practical and legal steps to protect their interests,” concluding that rigorous diligence, active engagement, and readiness to enforce legal remedies can “greatly enhance private credit investors’ ability to safeguard their interests in this opaque and rapidly evolving market.”