Key points
Private credit's appeal rests on diversification. Investors are told it adds a new source of income, less tied to listed markets, spread across many private borrowers. In much of the market that holds. But the fastest-growing part, sponsor-backed lending to mid-sized companies, has become crowded enough that the diversification many investors think they own is thinner than it looks.
The problem is hidden concentration. An allocation spread across several funds can still rest on a narrow group of similar companies, in similar sectors, backed by similar sponsors, all needing to refinance in the same few years. In benign conditions, that does not show. Under stress, the exposures move together.
This article explains what concentration risk in private credit is, how it builds in the mid-market, how to measure it, and how to reduce it.
What is concentration risk in private credit?
Concentration risk is the risk that a small number of exposures drive a large share of a portfolio's losses. In a public bond index with thousands of issuers, one default barely registers. In a private credit fund with a few dozen loans, one default can move the return for the year.
It also comes in less obvious forms. Two loans to different companies can share the same private equity sponsor, the same sector or the same refinancing date. A portfolio can hold 50 names and still be exposed to one theme, such as software valuations or the health of the leveraged loan market.
How mid-market direct lending became crowded
Direct lending is now roughly a $1.5 to 2 trillion market, about the size of the broadly syndicated loan market, according to Cleary Gottlieb. Buyout financing makes up roughly half of origination, William Blair estimates, and many managers compete for the same sponsor-backed deals.
Competition shows up in price. Median spreads on new direct loans fell from 716 basis points in March 2023 to 544 basis points at the end of 2025, according to Kroll StepStone data cited by ABF Journal. It also shows up in shared exposure. As deals grow larger, they are split across many lenders. CreditSights found a single $4.6bn Zendesk financing held across 20 business development companies, and average portfolio overlap of 9.2% among BDCs with more than $5bn of assets.
Sector weights have converged too. William Blair estimates software makes up around 20% of direct lending across the market, with some funds materially higher, and flags 2028 as the year refinancing pressure builds for loans written in 2020 and 2021.
The six dimensions of concentration
Concentration in mid-market private credit can be broken into six dimensions. Each needs its own check.
| Dimension | How it appears in mid-market lending | What to measure |
|---|---|---|
| Borrower | A few dozen similar sponsor-backed companies | Top-ten exposures as a share of the portfolio |
| Sector | Heavy weights in software, healthcare services and business services | Sector weights against limits |
| Sponsor | Many loans backed by the same private equity firms | Exposure by sponsor |
| Capital structure | Unitranche loans that blend senior and junior risk | Share that is first-lien senior secured |
| Vintage and maturity | Loans written in the same years, refinancing together | Maturities by year |
| Manager overlap | Different funds holding the same loans | Look-through overlap between managers |
Geography adds a seventh layer for some investors. Most mid-market direct lending sits in the US and Western Europe, so it is exposed to similar rate and growth cycles.
The numbers behind the concern
Stress in the mid-market is now visible in the data. Fitch's US private credit default rate reached 6.3% in August 2026, a new high. It fell unevenly: healthcare providers and industrial borrowers ran at 9.9%, while smaller companies with EBITDA below $25m defaulted at 12%.
Much of the stress is deferred rather than realised. Lincoln International reports that 58% of loans paying interest in kind at the end of 2025 had switched to it after closing, a sign of borrowers struggling to pay cash interest.
When defaults cluster in one sector or one vintage, a concentrated portfolio takes the losses together, recoveries fall because many lenders are selling similar assets, and liquidity disappears at the same time. That is the point at which hidden concentration becomes visible.
How to measure concentration in a private credit portfolio
Most concentration can be found with simple questions to managers, asked at the look-through level:
- Top-ten exposure: what share of the portfolio do the ten largest borrowers represent?
- Sector and sponsor weights: which sectors and sponsors account for more than 10% each?
- Overlap: how many of your managers hold the same borrowers? Callan's Francis Griffin told CreditSights that a 10% overlap with multiple parties is meaningful.
- Maturity ladder: how much of the portfolio needs refinancing in any one year?
- Payment-in-kind share: what share of income is accrued rather than paid in cash, and how much was added after closing?
- Seniority: how much is genuinely first-lien senior secured, and what sits beneath it? Our guide to the capital stack explains why that matters.
These are the same tests we suggest for any private credit allocation in Diversification in Private Credit.
Asset-based credit as a counterweight
The most effective counterweight to mid-market concentration is credit whose returns depend on different drivers. Asset-based credit is repaid from defined pools of assets, such as receivables, consumer and SME loans, inventory or trade flows, rather than the cash flow of one leveraged company.
It counters concentration in four ways:
- Granularity: a single facility can rest on thousands of underlying obligors, so no one default dominates.
- Collateral: the lender's recourse is to identifiable, ring-fenced assets, which can be monitored and, if needed, sold.
- Shorter duration: receivables turn over in 30 to 180 days and many facilities revolve, so capital is recycled faster and refinancing walls matter less.
- Transparency: pool data on arrears, defaults and collections arrives monthly or faster, giving early warning.
One caution: granularity is different from small size. Fitch's data shows small corporate borrowers default more often, so the protection comes from many independent payers and real collateral; borrower size alone offers none. Our investor's guide to asset-based lending covers the structures in more detail.
How Kingsbury & Partners approaches concentration
At Kingsbury & Partners, we lend to lenders. We provide senior secured facilities to non-bank and specialty lenders and growth-stage businesses, secured on pools of underlying loans and receivables. Each facility is held in a bankruptcy-remote compartment of our Luxembourg vehicle, issued as credit linked notes with ISINs and settled through Euroclear and Clearstream. Our Credit Committee, formerly the Product & Risk Committee, stress-tests each exposure before approval. The aim is protection by design: defined collateral, senior ranking and reporting that shows investors what they own.
What this means for investors
Mid-market direct lending still has a place in a private credit portfolio. The risk lies in letting it become the whole portfolio, through several funds that turn out to own the same borrowers.
For CIOs, family office principals and wealth managers, the response is practical. Measure concentration at the look-through level, set limits on borrowers, sectors, sponsors and vintages, and add strategies whose returns come from different sources. We look at the family office angle in the mid-market allocation trap, and at the loan-level risks in the emerging risks of direct corporate lending.
Frequently Asked Questions
What is concentration risk in private credit?
It is the risk that a small number of borrowers, sectors, sponsors or maturity dates account for a large share of a portfolio's potential losses, so a few defaults hurt the whole allocation.
Why is mid-market direct lending concentrated?
Large inflows of capital have pushed many managers into the same sponsor-backed deals and sectors, and larger loans are now shared across many funds, so portfolios increasingly overlap.
How do you measure concentration in a private credit portfolio?
Look through to the underlying loans and check top-ten borrower exposure, sector and sponsor weights, overlap between managers, maturities by year and the share of income paid in kind.
How can investors reduce concentration risk in private credit?
Set exposure limits and add strategies with different return drivers, such as asset-based lending secured on large pools of receivables or consumer and SME loans.
What is manager overlap in private credit?
It is the share of loans held in common by different funds. High overlap means an investor using several managers may own the same borrowers several times.
Is asset-based lending less risky than direct lending?
It carries different risks. Returns depend on the performance of large collateral pools and on servicing quality, which tends to make losses more gradual and easier to monitor than single-company defaults.