US pension funds double down on private credit despite deepening cracks

Major US public pension systems continue to push more capital into private credit, citing the asset class's persistent yield premium of two to three percentage points over public bonds. Trustees say the income is critical to meeting long-dated benefit obligations.

The expansion comes as warning signs accumulate. Default rates in middle-market direct lending portfolios have edged higher, according to Moody's and KBRA, and the share of restructured loans is rising. Critics flag opacity, mark-to-model valuations, and concentrated exposure to a handful of large managers.

Apollo Global Management, Blackstone and Ares Management together hold the bulk of assets in the segment. Regulators have intensified scrutiny of non-bank lending and its potential systemic risks. For pension investors, the central question is whether the yield premium still adequately compensates for tightening underwriting and liquidity risks.