Why Concentration Matters Now

Private credit has grown into a US$2 trillion asset class (Preqin, 2025), cementing its role as a core allocation within institutional private markets. Yet, much of that growth has been concentrated in mid-market direct lending—the provision of senior and unitranche loans to sponsor-backed companies in the US and Europe. While these strategies have historically delivered attractive yields, the crowding of capital into a narrow set of borrowers, sectors, and deal structures now presents material concentration risk. Rising base rates, tighter refinancing channels, and increasing default activity only amplify that exposure.

For CIOs, family office principals, and wealth managers, the challenge is not whether to allocate to private credit, but how to avoid over-reliance on mid-market direct lending as the sole expression of the theme. Concentration in manager exposures, loan vintages, and sector profiles can undermine the diversification benefits that originally drew institutions into private credit.

Kingsbury & Partners takes a differentiated approach. Our focus is on asset-based, growth-stage credit - receivables, loan books, trade finance, real-asset-backed facilities - structured through Luxembourg securitisation and Credit-Linked Notes (CLNs). These exposures are collateral-anchored, cash-flowing, and packaged in institutional formats. The aim is to provide investors with portfolio diversification away from concentrated mid-market direct lending, underpinned by governance, transparency, and risk discipline.

Market Trends: Growth of Mid-Market Direct Lending

Crowding and Overlap

Mid-market direct lending has grown at an annualised rate of 15–18% over the last decade (Bain & Co, 2024). The vast majority of this growth is concentrated in sponsor-backed leveraged buyouts, where multiple managers compete to finance similar deals. According to Fitch, default rates in private mid-market credit rose to 5.5% in Q2 2025, up from 4.5% the prior quarter, signalling growing strain among borrowers exposed to higher financing costs.

Structural Similarities

Despite the number of managers in the space, portfolio composition often looks strikingly similar:

  • Sector overlap in cyclical industries (software, healthcare services, industrials).
  • Unitranche prevalence, blending senior and subordinated risk without clear structural subordination.
  • Sponsor-driven deal terms, where competition for allocations erodes covenant quality and tightens spreads.

Macroeconomic Pressure

Higher-for-longer rates compress interest coverage ratios (averaging 2.1× in mid-market private borrowers versus 3.5× in public comparables, JPMorgan 2024). Refinancing walls loom in 2026–2028, where a significant portion of sponsor-backed loans mature into tighter credit conditions. For concentrated portfolios, this sets up correlation risk across multiple borrowers at once.

Concentration Risk: How It Manifests

Concentration risk in mid-market private credit can be analysed across several dimensions:

Dimension How It Appears in Mid-Market Direct Lending
Borrower / Issuer Exposure clustered in a small group of similarly sized sponsor-backed companies.
Sector Overweight to cyclical or growth sectors reliant on stable financing conditions.
Capital Structure Unitranche loans blur seniority; weaker covenants increase loss-given-default.
Geography Predominantly US and Western Europe, exposing investors to similar macro cycles.
Vintage Heavy deployment in specific years increases exposure to one macro environment.

In stressed scenarios, these factors converge: defaults cluster, recovery rates fall, and liquidity evaporates, undermining portfolio resilience.

Asset-Based Credit as a Counterweight

The most effective antidote to concentration risk in mid-market direct lending is the deliberate incorporation of asset-based credit into portfolio construction. Unlike sponsor-led unitranche facilities, asset-based exposures are anchored in identifiable collateral and granular cash-flow streams, offering allocators both diversification and structural downside protection.

What Is Asset-Based Credit?

Asset-based credit refers to lending where repayment capacity is underpinned by specific pools of assets—receivables, inventory, loan portfolios, real estate, or trade flows—rather than the leveraged cash flows of a private equity-backed borrower. The lender’s recourse is to these ring-fenced asset pools, which can be monitored, stress-tested, and liquidated with greater transparency than enterprise-value-dependent mid-market loans.

Why It Matters in Institutional Portfolios

Collateralisation and Recovery

  • Asset-based lending creates a direct link between investor capital and defined asset pools. This improves recovery rates in the event of borrower stress and reduces reliance on sponsor equity cushions.
  • For example, SME receivables or performing loan portfolios can be sold at predictable discounts in secondary markets, providing realisable collateral even in downturns.

Granularity and De-Correlation

  • Unlike direct lending exposures, where a single company represents a concentrated bet, asset-based portfolios are naturally diversified across thousands of obligors.
  • Consumer loan books, trade receivables, or invoice finance pools disperse risk, lowering correlation to sponsor-led defaults.

Shorter Duration and Liquidity Alignment

  • Many asset-based facilities revolve around short-term collateral (30–180 days for receivables, 12–24 months for trade finance). This creates faster principal amortisation and recycling of risk compared to 5–7 year buyout loans.
  • For allocators, this short duration improves liability matching and reduces exposure to refinancing walls.

Transparency and Monitoring

  • Asset pools can be monitored with real-time or monthly performance data—delinquency rates, default ratios, recovery speed—providing visibility rarely available in traditional mid-market loans.
  • This transparency enables more proactive governance and stress testing.

Diversified Yield Drivers

  • Returns in asset-based credit are not solely a function of leverage multiples or sponsor exit dynamics. They derive from credit performance of underlying borrowers, collateral coverage, and transaction structuring.
  • This creates differentiated yield streams that are uncorrelated to private equity cycles and public credit spreads.

Institutional Examples

  • Consumer Receivables: Credit secured against pools of performing consumer loans (auto, student, credit card). These exhibit high granularity and stable statistical performance data.
  • SME Loan Portfolios: Lending to fintech or alternative lenders, collateralised by diversified SME loans. Provides indirect exposure to the real economy with defined cash-flow monitoring.
  • Trade Finance: Short-tenor credit linked to import/export flows, often backed by invoices or letters of credit. Offers short duration and collateral that self-liquidates.
  • Real Estate-Backed Facilities: Senior secured exposure to stabilised income-generating assets or construction receivables, with clear collateral enforceability.

Kingsbury & Partners’ Approach

At Kingsbury & Partners, we address concentration risk by focusing exclusively on asset-based, growth-stage private credit, structured in institutional formats with embedded governance. Our framework includes:

  • Capital Stack Discipline: Prioritising senior secured exposure, with selective mezzanine allocations only where collateral and cash flows provide sufficient downside protection.
  • Portfolio Diversification: Spreading exposures across receivables, student loans, real-estate debt, and trade finance, reducing reliance on single borrowers or sectors.
  • Luxembourg Securitisation: Using compartmentalised vehicles under the Luxembourg Securitisation Law (2004), providing bankruptcy remoteness, transparent reporting, and investor protections.
  • Institutional Market Access: Issuing CLNs with ISINs, Euroclear/Clearstream settlement, and Bloomberg listings, ensuring accessibility, tradability, and governance standards.
  • Risk Committee Oversight: Our Product & Risk Committee (PRC) applies stress testing, downside scenario modelling, and covenant validation across all exposures.

This approach provides uncorrelated yield streams while mitigating concentration in the mid-market direct lending segment.

Practical Considerations for CIOs and Family Offices

For institutional allocators, the central challenge is calibrating exposure to private credit in a way that preserves diversification and meets fiduciary obligations. Concentration in mid-market direct lending is not merely a technical detail — it is a portfolio-level risk that can erode the resilience of long-term allocations.

Position Sizing and Portfolio Construction

Mid-market direct lending portfolios often overlap heavily across managers, sponsors, and sectors. This creates hidden concentration even when allocations appear diversified on paper. Disciplined position sizing, exposure caps, and sectoral limits are essential to ensure that private credit remains additive rather than correlated risk disguised as diversification.

Correlation in Stressed Environments

Historical data show that defaults among sponsor-backed borrowers tend to cluster during downturns. This correlation is often underestimated in modelled portfolios. Asset-based credit, with exposures spread across thousands of underlying obligors, introduces a different risk dynamic that can reduce sensitivity to sponsor cycles.

Liability Matching and Duration

Family offices, endowments, and institutional allocators vary in their liquidity needs. Direct lending exposures with 5–7 year maturities can create liquidity mismatches if not carefully integrated. By contrast, asset-based credit facilities with shorter tenors and revolving collateral provide faster capital recycling and more flexible liability alignment.

Governance and Transparency

Reputation is closely linked to governance. Allocators require structures that demonstrate institutional discipline — independent oversight, transparent reporting, enforceable covenants, and third-party validation. Luxembourg securitisation vehicles and CLNs with ISINs, Euroclear/Clearstream settlement, and Bloomberg listings deliver the transparency and infrastructure necessary for fiduciary confidence.

Scalability and Repeatability

Finally, scalability is crucial. Direct lending deals are often large and binary in their impact on portfolios. Asset-based credit, when structured through securitisation platforms, enables incremental scaling across receivable pools, loan books, and trade assets. This transforms credit allocation from an opportunistic exposure into a repeatable, programmatic strategy.

Conclusion: From Concentration to Constructive Allocation

Private credit has matured into an institutional mainstay, yet the scale of capital directed into mid-market direct lending has created an unintended vulnerability: concentration risk. Rising defaults and compressed interest coverage ratios highlight how crowded exposures can undermine portfolio resilience.

Diversification is therefore not optional — it is a fiduciary requirement. By incorporating asset-based, growth-stage credit structured through Luxembourg securitisation and Credit-Linked Notes, allocators can introduce collateral-anchored, shorter-duration exposures that behave differently under stress. For CIOs and family office principals, this is less about chasing yield and more about constructing portfolios that withstand correlation shocks, protect reputational capital, and scale in a repeatable, disciplined manner.

Kingsbury & Partners’ mandate is to sit on the diversification side of the private credit equation: providing access to growth-stage, asset-backed strategies with governance, transparency, and institutional infrastructure at their core.