By Pirkko Juntunen
Private credit has moved decisively from a niche allocation to a core holding in institutional portfolios. Yield, diversification and floating-rate exposure continue to attract investors, but the fundraising environment in 2025 has become markedly more demanding. Origination capability alone is no longer sufficient. Instead, investors are applying far greater scrutiny to downside protection, underwriting discipline and the ability to manage portfolios through stress.
Fundraising momentum, but with conditions
While the asset class has continued to grow, capital raising has become more concentrated. Large, established platforms such as Ares Management, Blackstone, Goldman Sachs Asset Management and HPS Investment Partners have dominated fundraising in recent years, benefiting from scale, deep origination networks and institutional-grade infrastructure. For smaller and mid-sized managers, differentiation has become essential rather than optional.
This cautious optimism is reflected in our most recent Private Capital Survey. While the overall fundraising outlook has improved from challenging to cautiously optimistic, private credit funds stand out, with 42% reporting a more positive fundraising outlook.
Governance, operational transparency and repeatability now sit at the heart of fundraising discussions. Institutional investors are increasingly focused on how managers protect capital when conditions deteriorate, rather than how aggressively they can deploy it in benign markets.
James Oussedik, partner at Proskauer, a global law firm, says standing out in a crowded market requires clarity of purpose.
Differentiation, he argues, can be expressed through geography, sector focus or return targets, but success ultimately depends on whether the manager can assemble a product that is both coherent and compelling.
In private credit, that credibility is increasingly judged through the lens of risk management. Oussedik notes that allocators are paying closer attention to downside controls, although expectations differ across investors.
Some push for detailed risk constraints and enhanced reporting, while others allow managers greater flexibility, provided governance standards are strong. The challenge, he says, lies in striking the right balance between transparency for investors and autonomy for managers.
Covenants return to centre stage
Covenants have re-emerged as a focal point in fundraising conversations. After years of borrower-friendly terms, investors are reassessing how much protection they truly have in downside scenarios. Oussedik’s colleague Andrew Payne, also partner at Proskauer, observes that covenant intensity often reflects market conditions: more structured deals can offer greater protection and potentially stronger risk-adjusted returns, while covenant-light transactions may require more frequent reporting and higher levels of investor confidence. In practice, discussions are often less about whether covenants exist and more about what information is reasonable to request, and how often.
Managers that can clearly articulate their advantage across sourcing, structuring and risk mitigation are better positioned to attract commitments. Investors increasingly want evidence that a manager’s approach is not only repeatable, but resilient.
Proving performance under pressure
For many institutions, the critical test is performance under pressure. Oussedik points out that allocators are asking for tangible proof, including historical loss data, recovery outcomes and documentation standards.
The ability to navigate stress is also central to investor confidence. Peter Williams, co-head, private credit practice at Cahill Gordon, the law firm focused on leveraged finance, capital markets and high-stakes litigation, argues that private credit’s most compelling proposition remains at the senior end of the capital structure. He suggests that well-structured senior secured strategies can still deliver attractive returns while offering a level of downside protection that resonates with institutional investors.
Williams also highlights the importance of scale. As funds grow larger, managers must show that they can deploy capital without diluting underwriting standards or drifting into riskier segments of the market. This, he argues, is often the dividing line between firms that consistently raise capital and those that struggle to do so.
Looking ahead, Williams expects private credit to continue expanding, led by platforms capable of underwriting larger transactions while maintaining discipline. However, he cautions that the asset class is not immune to broader economic shocks. A sustained deterioration in loan performance could challenge assumptions about resilience and recovery.
Allocators raise the bar
From the allocator and advisory perspective, expectations have also sharpened. Alec Lingorski, managing director at Alvine Capital, a specialist investment advisor and fund placement boutique, says clarity of strategy has become non-negotiable. Managers, he argues, must be explicit about where they sit in the capital structure and how they protect the downside, supported by clear playbooks and evidence of how they manage stress when covenants are breached, liquidity tightens or assets underperform.
Lingorski adds that investors increasingly favour managers with consistent cash yields, realised returns and low loss rates, particularly those that have demonstrated an ability to navigate restructurings. As a result, firm-level capabilities have come under closer scrutiny, including the strength of credit committees and genuine proven in-house restructuring expertise.
Discipline in deployment is another differentiator. Lingorski notes that the managers he has the most confidence in are willing to walk away from over-levered transactions, covenant-lite deals or overheated sectors, even at the cost of slower deployment. Refinancing risk is also front of mind, given higher interest rates and more modest EBITDA growth assumptions for many borrowers.
Covenants remain central to Alvine’s risk assessment framework. Maintenance tests, meaningful equity cushions, cash interest coverage, caps on capex and minimum liquidity thresholds are viewed as essential protections. At the same time, Lingorski says investors are increasingly focused on the quality of yield, with payment-in-kind structures raising concerns about the reliability and sustainability of income.
Despite these challenges, he believes private credit will remain an important component of institutional portfolios, offering liability-matching and diversification benefits. However, as market stress increases, dispersion between managers is likely to widen, with execution and discipline proving more important than scale alone.
Inside an institutional selection process
The perspective of a large Italian pension fund illustrates how allocator expectations have evolved. A spokesperson for the fund says that managers at the top of their peer group have adapted well to a more complex environment, showing resilience, discipline and continued alignment with investor interests. As a result, they have remained dependable partners for long-term allocations.
The fund’s selection process is highly structured. It begins with a comprehensive mapping of the investable universe, aiming to capture the full range of managers actively raising capital. This is followed by an extensive screening and due diligence phase, incorporating financial, legal and tax analysis.
Team quality and performance consistency are central to the assessment. The spokesperson emphasises the importance of stable teams, coherent investment processes and the ability to deliver consistent outcomes across vintages and market cycles. The fund places particular weight on demonstrated alpha generation and the capacity to return capital, viewing DPI as a non-negotiable requirement.
Risk management underpins the fund’s private credit strategy. Disciplined deal structuring, covenant strength, seniority, collateral quality and other downside protection mechanisms are critical evaluation criteria. Elevated default rates, optimistic recovery assumptions, excessive borrower leverage and poor transparency are cited as warning signs.
Ongoing monitoring is equally rigorous, with continuous oversight of credit quality, concentration, leverage and covenant compliance. Diversification across strategies, geographies and sectors is combined with proactive engagement where risks emerge. Exposure to higher-risk strategies is limited and only considered where the rationale for enhanced returns is compelling.
Looking ahead
As 2026 unfolds, the message from investors is clear: private credit fundraising will continue to reward managers that combine performance, innovation and governance with a demonstrable ability to protect capital when markets turn.
