US Private Credit Market Suffers as AI Disruption and Rising Defaults Drive European Demand

The $1 trillion US private credit market is experiencing a significant shift as borrowers increasingly seek better financing deals in Europe. One factor driving this trend is the rising default rate, which hit 5.8% as of January 2026 and could climb to 8%, particularly due to disruptions caused by artificial intelligence (AI) in the software and SaaS sectors.

A PwC survey found that 93% of US credit managers expect flat or declining returns in 2026, a stark contrast to Europe's private credit market. The region raised a record $65 billion in funding through the first nine months of 2025, a 14% increase over the same period in 2024.

Non-bank lending accounts for just 12% of total lending in Europe and the UK, whereas it makes up 75% of lending in the US. European direct lending transactions typically come with prices 25 to 50 basis points higher than their US equivalents, partially compensating for currency risk, different legal frameworks, and less standardized documentation.

As investors with heavy allocations to US private credit should be aware, a significant deterioration in portfolio returns could occur if the default rate reaches 8%. The shift has real implications for portfolio construction, and European private credit offers a genuine diversification benefit but comes with its own complexities and considerations.