The stock market has been volatile this year as investors weigh up various threats. And there’s one that might be getting less attention than it deserves.
It’s been impossible to miss the emergence of artificial intelligence (AI). But there’s another dimension beyond OpenAI, software, and data centres.
One of the areas that has been seeing pressure recently is private credit. In recent years, private equity firms have bought a lot of software companies.
A lot of this has been done using loans – from private credit companies. There’s nothing wrong with this, but those loans are starting to mature.
The trouble is, interest rates are higher than they were five years ago so refinancing is more expensive. And there’s another issue.
Software stocks have been under pressure. So the assets bought with those loans might not be worth enough to cover the outstanding debt.
That’s not a good situation. And while it sounds like an isolated issue, it might have major implications for the stock market as a whole.
Uncertainty in the private credit market is leading to higher redemptions. In some cases, funds have had to limit withdrawals.
That, however, only increases the sense that there’s a problem. And the effects reach much further than just private equity.
One issue is that institutions like insurance companies often own private credit firms. So a wave of defaults might create issues for annuities.
Another concern is the potential for tighter lending standards. The trouble with this is that less credit availability could well lead to a recession.
In that situation, the stock market in general might well be vulnerable. And this is something I’m not sure ordinary investors are paying attention to.
This is one of the reasons I tend to stay away from stocks like Legal & General (LSE:LGEN). Investing is hard enough without making things worse.
The FTSE 100 company has been growing its annuity book recently. But a lot of this has been invested in private credit funds in the US.
In 2025, the firm signed a deal to invest in private credit with Blackstone. So there’s definitely a risk that’s very hard for investors to assess accurately.
Legal & General does have big solvency reserves to cover losses. And a dividend yield above 8% means investors get some compensation for the risks.
Ultimately, though, I think investors should tread very carefully here. When the risk is hard to evaluate, there are usually better opportunities elsewhere.
Figuring out what to make of private credit right now is very difficult. But the good news for investors is that they don’t need to.
