Is market panic about private credit overblown?

Point: Private credit funds are under pressure from higherborrowing costs and transparency concerns.

Counter-point: These funds’ conservative leverage and distinct capital structure provide a buffer that limits the risk of a systemic collapse. At least that’s what Amit Seru, senior fellow at the Hoover Institution and professor of finance at Stanford’s Graduate School of Business argues in a piece for the Financial Times. Seru’s core thesis is that the asset class isn’t what’s going to set off a 2008-style financial crisis.

Private credit funds’ conservatively structured leverage ratio and equity absorption cushion losses, Seru argues. Banking leverage is around 8-to-1, or roughly 12 cents of equity per USD of assets, while private credit has an average ratio of 1.25-to-1. Roughly 65-80 cents of every USD of assets is funded by equity rather than debt for funds that borrow from banks. This means losses are absorbed by long-term equity investors first, making funds more resilient in downturns.

This asset class also holds a strategic advantage by locking in investor capital for long durations. This structure aligns liabilities with the span of underlying loans and reduces the risk of forced liquidation. Meanwhile, banks fund long-term assets with short-term liabilities that can be withdrawn on demand, creating maturity mismatches and fueling financial crises.

Bank ties and investor withdrawals aren’t major threats

Concerns about bank linkages are also overstated: Private credit funds typically only use bank credit lines for short-term needs, such as managing the timing of capital calls, Seru notes. The Federal Reserve even modeled a severe stress scenario in which private credit funds face distress and fully draw down these lines — even then, major banks remain well capitalized.

Rising investor withdrawals are less of a distress sign than a financial safety measure. Investors have rushed to redeem their capital amid transparency and AI-related risks, pushing multiple firms to cap withdrawals and avoid selling illiquid loans at steep reductions. These measures don’t mean that the sector is facing a crisis, but rather a precaution designed to slash losses and protect valuable assets.

MARKETS THIS MORNING-

Asian markets hit record highs in early trading this morning, led by Japan’s Nikkei, which gained around 1.5%, and South Korea’s Kospi, which was up over 2.0%. US futures are set to open mixed later today, with futures swinging between gains and losses.

THE CLOSING BELL-

The ADX rose 0.4% on Friday on turnover of AED 928.1 mn. The index is down 2% YTD.

In the green: Gulf Cement (+4.9%), Ins. House (+4.8%), and Abu Dhabi National Co. for Building Materials (+4.6%).

In the red: National Bank of Fujairah (-4.4%), Hayah Ins. (-4.1%), and Burjeel Holding (-3.5%).

Over on the DFM, the index rose 0.7% on turnover of AED 709.2 mn. Meanwhile, Nasdaq Dubai rose 0.9%.

Corporate actions

Salama says the cleanup is done: DFM-listed takaful insurer Salama completed its capital restructuring program after converting its mandatory sukuk into equity and lifting paid-up capital to AED 820 mn, according to a DFM disclosure (pdf). The move — which comes after Eshraq and Humana Holding fully subscribed to the capital increase — restores solvency to what it described as a “strong and fully compliant level” under Central Bank of the UAE requirements.

IN CONTEXT- The turnaround came in two stages we’ve been tracking. Salama first cut capital to wipe out accumulated losses and meet tighter regulatory thresholds before raising a mandatory convertible sukuk in February as a liquidity bridge. Its conversion now increases the stakes of backers Eshraq Investments and Humana Holding while helping close out more than AED 420 mn in legacy exposures.

What comes next: With the balance sheet repaired, management said the focus now shifts to rebuilding underwriting capacity, reactivating distribution channels, and pursuing growth across life and wealth, health, and property and casualty lines.