I have written about this before (here and here) in relation to the concentration building in mid-market corporate lending. I return to it now because what has changed is pace. Capital is being gathered and redeployed more quickly, often through evergreen funds and digital platforms that resell similar strategies to high-net-worth and retail-adjacent investors. These are the investors with the least capacity to absorb drawdowns, yet the shift is framed as “democratisation”.

Private credit has reached a point where its internal structure matters as much as its growth. What was once a relatively varied market has become increasingly concentrated around a narrow set of strategies, most notably sponsor-backed mid-market corporate lending. This concentration did not emerge from excess or novelty. It emerged because the segment was long viewed as the dependable centre ground of private credit.

For much of the past decade, mid-market lending occupied an almost unchallenged position in allocator portfolios. It sat between leveraged finance and more specialised asset-backed strategies, offering scale without obvious fragility and yield without overt complexity. For many institutions, it became the anchor allocation around which everything else was sized.

This shift coincided with a broader political and regulatory backdrop that quietly reinforced concentration. Post-crisis banking reforms pushed credit creation away from bank balance sheets and into private markets. Governments welcomed the result. Non-bank lenders filled gaps left by retrenching banks, supporting employment and small-to-medium enterprises without adding to public balance-sheet risk. Mid-market private credit became not just a financial solution, but a politically convenient one.

That tolerance mattered. It allowed private credit to scale with limited scrutiny of where risk was building, so long as capital continued to flow and defaults remained contained. In this environment, mid-market lending benefited from both institutional inertia and regulatory indifference. It was easier to expand what already existed than to develop new credit channels that required different oversight, legal frameworks, or operational controls.

Why mid-market corporate lending became dominant

Mid-market corporate lending became central to private credit for understandable reasons. It offered scale, predictable structures, and returns that compared favourably with public markets. Borrowers were established businesses. Sponsors provided oversight. Documentation was private and negotiated. For institutional investors, this made it a practical way to deploy capital in size.

Over time, familiarity turned into default behaviour. As more capital entered the market, similar deals were repeated across managers. Leverage increased gradually. Refinancing assumptions became routine. Portfolios still appeared diversified by name, but they were increasingly exposed to the same underlying risks.

At smaller scale, this concentration was manageable. At today’s scale, it deserves closer attention.

Diversification starts with borrower numbers

One of the clearest ways to think about diversification in private credit is to look at how many borrowers ultimately support investor returns. Many corporate credit strategies rely on a relatively small number of loans. Even large funds may hold only a few dozen credits.

This structure produces a particular risk profile. Performance is stable most of the time, but outcomes can change quickly when individual borrowers deteriorate. Defaults are infrequent, but when they occur, they matter. Recoveries depend on timing, negotiation, and refinancing conditions.

Other areas of private credit behave differently. Invoice finance, trade finance, consumer credit, and some forms of SME lending are built around large pools of small exposures. Returns are generated from thousands of payment streams rather than from a limited number of balance sheets. Stress tends to emerge gradually, through data and performance trends, rather than suddenly through covenant breaches.

This distinction is central. A portfolio backed by many borrowers absorbs pressure in a very different way from one backed by a few, even when headline yields look similar.

Sector exposure changes how portfolios behave

Different lending sectors respond differently when conditions change. Corporate borrowers are sensitive to earnings pressure, leverage, and refinancing markets. Receivables and trade finance depend more on turnover, payment behaviour, and operational controls. Consumer and SME credit is influenced by employment trends, seasoning, and servicing quality.

Because these drivers are not the same, combining sectors can reduce correlation in a way that adding more managers within a single segment cannot. This is where diversification actually comes from. It is not achieved by spreading capital across similar strategies. It comes from holding exposures that fail, recover, and amortise in different ways.

When portfolios are built around one lending model, stress tends to arrive everywhere at once.

Why recent distribution trends increase the risk

The recent push to broaden access to private credit has made these dynamics more visible. Mid-market corporate lending is increasingly being repackaged into evergreen funds and distributed through platforms aimed at high-net-worth and retail-adjacent clients. The focus is on access and continuity rather than on how risk is concentrated.

The underlying assets, however, have not changed. Borrower numbers have not increased. Dependence on refinancing remains. What has changed is who holds the exposure. As these strategies move into portfolios with lower tolerance for drawdowns or delayed liquidity, stress travels more quickly when performance weakens.

Politically, broader access to private markets is easy to support. Structurally, it places more weight on strategies designed for institutional balance sheets.

What diversification looks like in practice

In practice, diversified private credit exposure is built by combining sectors with different borrower profiles and cash-flow behaviour. That often means accepting smaller deal sizes and greater operational involvement. It also requires attention to how assets are monitored, serviced, and legally protected.

Structured transactions are often used because they allow investors to take exposure to defined pools of assets rather than to a manager’s balance sheet. The structure matters because it determines how cash flows are controlled and what happens when performance deteriorates.

The objective is not complexity. It is understanding.

A more disciplined approach to private credit

Private credit remains a powerful source of income and diversification, but it no longer delivers those benefits by default. Portfolios built around a single lending model, even when widely distributed, tend to behave in similar ways under stress.

A more resilient approach focuses on sector exposure, borrower breadth, and cash-flow behaviour. That discipline requires more work upfront, but it produces portfolios better suited to the environment private credit now operates in. At this stage of the cycle, that matters more than scale.