Pension funds are sticking with private credit, and in some cases doubling down on allocations even as concerns mount over underwriting standards, valuation opacity and sector concentration. Institutional investors, including pension funds, “generally remain committed to the asset class, with many continuing to build out their allocations,” said Cameron Systermans, head of multi-asset at Mercer Asia. New inflows into private credit vehicles by institutional investors totaled close to $300 billion in 2025, broadly steady from the prior year, according to Mercer, with redemptions being driven by retail and high-net-worth investors. For one, Europe’s largest pension investor, Dutch manager APG, is planning to increase its exposure to private markets to above 30% of assets, viewing current volatility in credit markets as an opportunity to buy more, Reuters recently reported. Within that, the fund said its private debt allocation could increase to between 2% and 4% from roughly 1.5% currently. In the U.K., state-backed pension scheme Nest has committed £450 million to U.S. private credit and is targeting a sharp increase in its overall private markets allocation to around 30% by 2030 — well above industry norms. Large institutional investors have an advantage: their scale and long investment horizons allow them to hold less liquid assets. ICPM Network Sebastien Betermier Several large North American pension funds are reportedly maintaining their exposur e to private credit despite growing turbulence in the sector. Among them is the California State Teachers’ Retirement System, which holds investments in private credit funds managed by firms including Blue Owl Capital that has capped redemptions at some funds. Pension funds’ continued exposure and plans to increase allocations come at a time when parts of the private credit market, particularly software-heavy lending, are facing heightened scrutiny. “Private credit is a less liquid asset class that can offer attractive risk-adjusted returns for these large institutional investors,” said Sebastien Betermier, executive director of the ICPM Network, a global network of over 50 pension funds. “It has gained increasing attention [from pension funds] as banks, facing tighter capital requirements, have reduced their exposure to this market,” he told CNBC. CNBC reached out to more than 10 pension funds for comment but did not receive responses. Private credit bet For pension funds, private credit continues to serve a strategic role. Pension funds are structurally better-suited to hold illiquid assets due to their long-term liabilities, which resemble long-duration bonds, said industry watchers. This allows them to harvest an illiquidity premium unavailable in public markets. “Large institutional investors have an advantage: their scale and long investment horizons allow them to hold less liquid assets,” Betermier said. Allocations remain relatively modest but are rising. Pension funds typically allocate low- to mid-single-digit percentages of their portfolios to private credit, according to Mercer, though broader private markets exposure can be significantly higher. Institutional demand has also been supported by relatively stable fundamentals so far, despite pockets of stress. “Redemptions appear to be more of a liquidity issue than a solvency or credit quality issue, with defaults remaining low, underlying leverage stable and corporate profitability high,” said Systermans. Private credit players argue that current stress is not representative of the entire asset class. “The stress in the headlines is concentrated in a specific part of the market: large-cap, sponsored, covenant-light lending with heavy software exposure,” said Hadley Ma, founder of private credit firm Ferghana Investment Partners, who works exclusively with institutional investors. Some allocators, Ma highlighted, are increasingly rotating within private credit: toward middle-market lending, asset-backed strategies and deals with stronger covenants, or loan terms, rather than exiting altogether. “The appetite for differentiated exposure within private credit is growing.” Pension funds are also sticking with private credit, as allocations are typically long-term and difficult to unwind quickly. “Private market asset allocation … is set up in a way that commitment letters are signed after the allocation is determined,” said Olaolu Aganga, head of portfolio construction at Citi Wealth CIO. While the entire allocation is not made in one tranche, even if sentiment shifts, institutions are often locked into multi-year investment cycles. The private credit manager “calls” or draws the capital gradually over several years as investment opportunities arise. Risky behavioral play? Behavioral incentives may also be at play. “Some of these big institutions think that the private credit concerns are exaggerated, and they just keep on going,” said Jeffrey Hooke, senior lecturer in finance at Johns Hopkins Carey Business School. Hooke added that institutions may also be reluctant to sharply reduce exposure after committing heavily to private credit funds in recent years, as doing so could invite scrutiny over earlier allocation decisions. You really don’t know how bad the loan is for five or six years … it’s all a delayed time situation. Johns Hopkins Carey Business School Jeffrey Hooke He also pointed to a lag in how risks are reflected in private markets. “You really don’t know how bad the loan is for five or six years … it’s all a delayed time situation,” he said, noting that managers have flexibility to extend or restructure loans before losses become visible. That lag, combined with manager-reported valuations, can smooth performance in the next few quarters, reducing pressure on institutional investors to react quickly. Still, risks remain . Software-heavy portfolios have come under particular scrutiny amid artificial intelligence-led industry disruption, alongside loans with weak underwriting standards. Opacity also remains a key concern. Private credit lacks the transparency of public markets, making it harder to assess the true default risk and valuation accuracy. “Growing participation of retail investors further increases risk,” Betermier said, warning of potential fund runs and mispriced assets. Manager selection is also becoming more critical as “The gap in performance between strongly and poorly performing managers is larger in private markets than in public markets,” Mercer’s Systermans said. For now, experts say, pension funds’ commitment to private credit is helping stabilize the asset class, even as retail investors pull back from semi-liquid vehicles .
