US Private Credit Defaults Surge as Borrowers Flee to Europe
In brief
- US private credit default rate reached 5.8% in January 2026, projected to climb to 8% amid AI disruptions
- Europe raised record $65 billion in private credit funding in first nine months of 2025, up 14% year-over-year
- Borrowers shifting to European lenders due to rising defaults and commoditized US lending market
- European private credit offers lower pricing but carries currency risk and weaker creditor protections
The Default Headwind
The US private credit default rate reached 5.8% as of January 2026, marking a significant stress point for the domestic market. Projections suggest the rate could climb to 8%, driven in part by disruptions that artificial intelligence is causing in the software and SaaS sectors. Private credit portfolios in the US are heavily weighted toward technology and software companies, concentrating risk precisely where competitive disruption is fastest.
A PwC survey found that 93% of credit managers in the US expect flat or declining returns in 2026. That pessimism reflects a harder truth: the US market has become commoditized. Lenders compete on volume, not yield, squeezing margins and forcing allocators to look elsewhere for returns.
The European Opportunity
Europe is capturing that displaced capital. Europe raised a record $65 billion in private credit funding through the first nine months of 2025, a 14% increase over the same period in 2024. The structural reason is clear: non-bank lending in Europe and the UK accounts for just 12% of total lending, compared to 75% in the US. That gap suggests the European market has years of structural growth ahead.
Pricing reflects the market's relative youth. European direct lending transactions are typically priced 25 to 50 basis points higher than their US equivalents, offering better risk-adjusted returns than a commoditized US market can provide.
The Trade-Offs
Diversification into Europe isn't frictionless. European private credit comes with currency risk, different legal frameworks for creditor protections, and less standardized documentation. Allocators gain exposure to a growth market but sacrifice the operational simplicity and regulatory familiarity of the US market.
The shift signals a maturation in global credit markets. US investors can no longer assume domestic returns will outpace international alternatives. Adaptation isn't optional anymore—it's a competitive necessity.
