Lessons from Tricolor and First Brands

It is easy to see why the collapse of First Brands and Tricolor have provoked flashbacks to 2008 and the dismal descent into the global financial crisis. On the surface, these events seem to have exposed systemic vulnerabilities in the shadow banking web, mirroring the way subprime mortgages and complex derivatives triggered the 2008 crisis.

In particular, these two high profile failures have highlighted the rapid growth of the private credit industry, which now exceeds $2trn globally, raising concerns around a lack of transparency, illiquidity and a growing interconnectedness with the traditional banking system.

In his appearance before the House of Lords’ Financial Services Regulation Committee in October, Bank of England governor, Andrew Bailey, said that the big question is whether these cases are idiosyncratic, or the canary in the coal mine.

However, as the dust has begun to settle, consensus seems to be veering towards the former, with the lion’s share of the blame being levelled at fraud and poor business practice rather than broad market weakness – both Tricolor and First Brands are alleged to have double-pledged loans across multiple credit lines.

Of course, it is not yet clear how isolated such cases of illegality and poor business practice may be. Excessive risk taking and fraudulent behaviour undertaken during periods of market exuberance, are typically only exposed during the ensuing downturn.

Already, new cases are emerging. US prosecutors are currently investigating a group of telecoms companies after BlackRock’s private credit business HPS Investment Partners revealed it had lent hundreds of millions against receivables that appear to be fake. 

But private credit proponents point out that traditional credit markets were equally impacted by the Tricolor and First Brands failures, with public asset-backed securities, broadly syndicated loans and large bank warehouse loans also involved. They add that the majority of high quality private credit managers did in fact identify the warning signs in the form of abnormally high margins, opaque off-balance sheet financings and issues with management credibility, and therefore sidestepped both situations.

After all, the ability of private credit sponsors to conduct deep due diligence and maintain close relationships with borrowers should theoretically provide an advantage when it comes to risk detection and avoidance. 

Irrespective of private credit’s culpability in this cluster of recent incidents, they have nonetheless served as timely reminder of credit risk as the cycle matures. It is clear that the asset class, and its links with the wider financial system, are coming under growing scrutiny, and it’s therefore incumbent on managers to maintain scrupulous underwriting standards and to insist on the highest levels of transparency. 

The overall outlook for private credit remains strong. Default rates remain well below recessionary highs. S&P Global noted that the trailing 12-month default rate for credit-estimated companies was 4.55% at the end of Q3 2025, a decrease from 5.00% at the start of the year [1], while Fitch Ratings reported a US private credit default rate of 5.2% in July 2025, dipping slightly from previous levels [2].

Meanwhile, although private credit has not been immune from a wider fundraising malaise – after a surge in LP commitments since 2020, momentum stalled in 2024 when just 188 funds were closed, the lowest count since 2011 [3]  – appetite for the sector remains strong, given its potential for stable returns and attractive yields. Private Debt Investor’s LP Perspective study reports that 57% of investors plan to increase allocations over the next 12 months and levels of dry powder are high [4]. 

Direct lending deal flow has, of course, been muted, given its close correlation to M&A activity and sponsor-led M&A activity, in particular, leading to heightened competition and spread compression, particularly in the upper mid-market space. But the lower mid-market has remained relatively busy. Private credit investors are also finding ample opportunities to put money into work financing bolt-on acquisitions and refinancings, given a looming maturity wall – Goldman Sachs estimates that 24% of outstanding leveraged loans will mature by the end of this year [5].

Indeed, while dampened M&A activity has stifled senior lending for new deals, the challenges that private equity firms are facing when it comes to exit, are intensifying refinancing demand. It is also driving the proliferation of continuation vehicles, which often require creative debt solutions involving hybrid and junior capital.

In turn, regulators are increasingly concerned about liquidity. New rules introduced in the EU require fund managers to seek approval for any new open-ended fund and for the manager to demonstrate how they will manage liquidity, particularly when invested in assets that may have become impaired. There are also new restrictions on the use of leverage by credit funds, reflecting regulatory concerns that loans are being written backed with bank funded-leverage and other private credit leverage, thus further increasing the leveraged nature of such loans and magnifying potential losses to a broader range of economic stakeholders.

All of these are valid concerns, and ones that private credit firms would do well to monitor. However, we must not forget one crucial detail: this is a market that can stand up to a few headwinds. Consider this: a BlackRock report issued in October, the month after the collapse of First Brands and Tricolor, estimated that the $2.1trn private credit asset class remains on course to double in size by 2030 [6]. This market does and will continue to provide an essential and flexible alternative to diminishing bank finance for corporates, as well as diversification, income and resilience for investor portfolios.

So where do private credit sponsors go from here? We cannot avoid the reality that the state of play in private credit has changed. Lessons need to be learned, and new strategies need to be drawn up. 

First, recent events should provide an impetus to sponsors to look at their internal processes when it comes to diligence, risk assessment, stress testing and valuations. Review your company structure and make sure every protocol is up-to-date and fit for use.

Second, remember that the LP community needs constant reassurance. Be transparent and clear with investors on the risk and reward profile of the portfolios they are investing in. 

Third, engage constructively with policy makers and regulators at the earliest opportunity. Keeping a close line of communication will help avoid a knee jerk reaction while supporting a healthy and appropriate regulatory level of oversight of the asset class.

This is how we can prove the naysayers wrong: sponsors must take full advantage of the inherent alignment of interest and enhanced access to management that the model provides, while also maintaining discipline and rigour throughout the investment and monitoring process.

[1] Tariffs, Slow Growth, And Uncertainty Amplify Ris | S&P Global Ratings

[2] U.S. Private Credit Default Rate Dips to 5.2% in July 2025| Fitch Ratings

[3] Private credit fundraising continues to show signs of fatigue - PitchBook

[4] LP Perspectives 2025 | Private Debt Investor

[5] Facing the refinancing cliff: Why a global maturity wall may drive a surge in corporate restructuring - Legal Cheek

[6] Today’s private credit opportunity | BlackRock