A new academic study from Columbia Business School has raised concerns that a growing portion of the $1.8tn private credit market may be supported by credit ratings that materially understate underlying risk, according to a report by Bloomberg.
The research suggests that so-called private-letter ratings – widely used by insurers and other institutional investors but not publicly disclosed in the same way as traditional ratings – tend to assign higher grades than warranted when compared with public benchmarks. As a result, debt instruments with identical risk profiles may receive meaningfully different ratings depending on the methodology used.
According to the study, assets carrying private ratings are roughly twice as likely to experience credit losses as similarly rated securities with public ratings, even in relatively stable market conditions. The authors also argue that private ratings can be equivalent to being two to three notches higher on the rating scale than comparable public ratings for the same level of risk.
The findings add to ongoing scrutiny of the role of credit ratings in the rapidly expanding private credit ecosystem, particularly as life insurance companies have increased allocations to privately rated debt in search of higher yields and asset-liability matching benefits.
The study highlights that insurers’ exposure to privately rated assets has expanded significantly in recent years, rising from a negligible share of portfolios to roughly 12% of rated credit holdings, or around $481bn. The shift has been especially pronounced among insurers affiliated with large alternative asset managers such as Blackstone, Apollo Global Management, and KKR.
Private ratings are primarily provided by firms including Egan-Jones, Kroll Bond Rating Agency and Morningstar DBRS. While some of these agencies dispute the study’s methodology and argue that private and public ratings are constructed using consistent frameworks, the Columbia researchers contend that the absence of market transparency and comparability may weaken investor discipline.
The paper also raises potential implications for regulatory capital frameworks, noting that rating-based capital requirements for insurers can materially influence portfolio construction. Lower-rated assets require firms to hold more capital, while higher-rated securities reduce capital charges—creating incentives for more favourable ratings where possible.
Industry groups and insurers have pushed back against concerns, arguing that private credit strategies have been successfully managed over multiple decades and have performed across market cycles. Some insurers also emphasise that privately rated portfolios are subject to internal risk management and regulatory oversight, even if methodologies differ from public bond markets.
Regulators, including US state insurance authorities and the National Association of Insurance Commissioners (NAIC), have been examining the growing use of private ratings as insurers expand into more complex and less liquid credit instruments. The NAIC has previously acknowledged discrepancies in limited sample reviews and is working on updated approaches to assess rating reliability.
While the Columbia study has not yet been peer-reviewed, it adds to a growing body of analysis questioning whether current rating practices fully capture risk in opaque segments of the credit markets, particularly as private credit becomes more deeply embedded in institutional portfolios.
