US private credit borrowers are increasingly turning their sights to Europe, chasing more favorable financing options as default rates climb domestically. The US private credit market, valued at $1 trillion, now faces a significant challenge as the default rate hit 5.8% by early 2026 and could rise to 8%, largely due to turbulence in software and SaaS sectors shaken by artificial intelligence advancements.
Europe’s private credit scene is quietly gaining momentum. Through the first three quarters of 2025, private credit fundraising in Europe surged by 14%, reaching a record $65 billion. Despite making up just 12% of total lending compared to 75% in the US, Europe is becoming a compelling alternative for US borrowers. European direct lending typically commands a 25 to 50 basis points premium over US deals, reflecting structural differences but offering diversification benefits.
The AI revolution is hitting US private credit portfolios hard since technology and software firms once the safest bets thanks to steady revenues and high margins are now exposed to rapidly changing market dynamics. Many credit models struggle to adapt fast enough, prompting investors to re-evaluate exposure in these sectors. AI innovations like those driving robotics shows the speed of change in related industries.
For investors, this shift demands careful risk assessment. European private credit carries its own challenges including currency risks, varied legal protections, and less standardized documentation, justifying the higher pricing. However, structural growth in Europe’s non-bank lending market signals long-term opportunities. Meanwhile, US credit markets brace for the impact of widening defaults and borrower migration offshore.
The market reaction to these developments has already materialized as US credit spreads widened notably in recent weeks.
This content is for informational purposes and does not constitute financial advice.
