Structure, not risk, driving US and European private credit divergence

Recent private credit repricing within the software sector has prompted wider questions about the asset class. However, amidst this repricing, the European market has proven far more resilient than the US. Why has this been the case? We suggest the answer lies in the structural, not risk-based differences that exist between these markets.

In early 2026, the repricing of private credit exposed to the software sector has prompted renewed scrutiny of the asset class. However, the contrast between the United States and Europe has been striking. While segments of the US market experienced sharp volatility and liquidity pressure, European private credit, particularly that held on insurance balance sheets, has proven materially more resilient.

Importantly, this divergence does not reflect superior foresight, lower risk appetite, or regulatory conservatism. European insurers remain active buyers of unitranche, including sponsor backed transactions, and compete directly with US lenders on underwriting and pricing. The difference lies elsewhere: principally in how risk is owned, funded, levered, and transmitted through the financial system. Europe’s private credit market has shown resilience not because it avoids risk, but because its structure tends to absorb volatility rather than amplify it.

A repricing: triggered by AI, amplified by structure

The pricing adjustment began with renewed concern around artificial intelligence (AI) and automation risk in parts of the software sector following major technological advances earlier in the year. Growth assumptions were reassessed, particularly for highly levered, sponsor owned software businesses with limited tangible asset backing.

“It is crucial to understand this was not a wider credit crisis, with the repricing clearly sector specific, not systemic.”

In the United States, this valuation shock did not remain contained. Business Development Companies (BDCs) with concentrated exposure to these credits experienced disproportionate stress as valuation uncertainty interacted with periodic liquidity, frequent NAV reporting, and leverage. What began as an AI driven reassessment of business models rapidly grew into broader concerns around redemptions, NAV volatility, and broader confidence overall.

It is crucial to understand this was not a wider credit crisis, with the repricing clearly sector specific, not systemic. Diversified portfolios were far less affected, and underlying asset level markdowns, once leverage was stripped out, were modest by historical standards. What the episode exposed was not a collapse in private credit fundamentals, but structural fragilities in how certain risks are packaged and distributed.

Same assets, different behaviour

European insurers did not avoid the areas under pressure, actively owning unitranche and sponsor backed credits, and often accepting similar underwriting risk. The difference lies in ownership and transmission. In Europe, private credit assets typically sit directly on insurance balance sheets. Capital is long term, committed, and liability matched. Further, mark-to-market volatility does not force selling, and loans are managed for carry and realised loss experience, not short term NAV optics.

In the United States, by contrast, a material share of private credit exposure, conservatively around 40%, sits in BDCs and other semi liquid vehicles. These structures combine fund level leverage with periodic liquidity and frequent NAV reporting. And this matters. When NAVs are reported on a frequent basis with investors having regular opportunities to redeem, valuation changes cease to be passive information. They become decision triggers, shaping investor behaviour and manager actions alike.

Retail and intermediary distribution adds reflexivity: valuation moves influence flows, these in-turn force portfolio actions, with these actions feeding back into subsequent valuations. Fund level leverage magnifies the effect, turning modest price adjustments into amplified volatility. The result is that the same loan can behave very differently depending not on its credit quality, but on the structure that owns it.

Leverage – a key fault line

An increasingly important differentiator between the two markets is leverage. European insurers and institutional Limited Partners (LPs) are showing a growing preference for unlevered direct lending strategies or leverage neutral outcomes within unitranche structures. This is reflective of long dated liabilities and a desire to avoid volatility unrelated to credit fundamentals.

By contrast, US markets operate with greater regulatory scope and a greater reliance on leverage to enhance returns. While this is economically rational, this does introduce a vulnerability: moderate shocks can become destabilising once filtered through leverage, liquidity promises, and NAV based confidence dynamics.

Regulation shapes behaviour, not risk appetite

It is important to remember that Solvency II does not define insurers’ investment philosophy, nor does it prevent them from taking credit risk or using complex structures. Instead, it shapes the regulatory lens through which risk ownership is assessed and capitalised at the balance sheet level.

Within that framework, insurers naturally focus on downside loss behaviour, refinancing resilience across cycles, and clarity of seniority and legal enforceability. This does not necessarily reflect a more conservative approach, but the reality that risks are held against long dated liabilities on regulated balance sheets. The consequence of this has structural implications: insurers are positioned to carry risk through valuation volatility rather than transmit it through flow driven mechanics.

Europe: a stability anchor, not a safe haven

At the beginning of this year Europe did not escape the repricing, with sentiment softening and spreads widening modestly. What Europe did avoid however (at least so far) were forced flows driven by liquidity or leverage constraints. And again, that is a distinction that matters.

As US lenders retrench from flow sensitive segments, European insurers and asset managers are increasingly positioned to provide stable capital to high quality borrowers, refinance assets abandoned for structural rather than fundamental reasons, and play a larger role in cross border financing.

Conclusion: ownership still matters most

The 2026 repricing did not reveal excessive risk taking in European private credit, what it did reveal was that risk is transformed by the structures that own it. European private credit proved more resilient because capital is patient, leverage is controlled, liquidity promises are limited, and volatility is absorbed rather than transmitted.

The lesson is straightforward: in private credit, what matters most is not whether you own unitranche or software exposure, but who owns it, and whether the structure turns volatility into either instability or opportunity.