US Private Credit "Spreading Wildfire": Packaging Techniques Similar to "Subprime," Absorbing 1 Trillion Dollars of "American Retirement Funds"

The private credit market is reenacting a familiar financial trick—bundling high-risk assets, assigning top-tier ratings, and selling them to insurance companies that hold Americans’ retirement savings. This logic has grown to nearly a trillion dollars, but the fractured regulatory system and severe lack of transparency are making it increasingly difficult for market observers and rating agencies to ignore the warnings.

According to The Wall Street Journal, U.S. life insurance companies currently hold nearly $1 trillion in private credit assets, accounting for about a quarter of their total fixed income holdings. Of these, approximately $280 billion are at the lowest investment grade, with another $70 billion already rated as speculative or junk. A Federal Reserve study directly referred to insurance companies as “new shadow banks.”

Meanwhile, the Financial Times reports that a structural product called “rating note feed into funds” is flooding the private credit market—last year, the specialized rating agency KBRA rated these products at $17 billion, more than doubling the $8 billion expected in 2024.

This trend emerges at a time when the private credit market is under pressure. Retail investors have withdrawn from several large private credit funds, and pension funds and endowments are re-evaluating their private debt holdings, partly due to concerns that exposure to software companies could be damaged during the AI boom. Regulators are also under unprecedented pressure to scrutinize these increasingly complex structured products.

How High-Risk Assets Are Transformed into “Top-Tier Bonds”

The operation of rating note feed into funds is structurally similar to the securitization of subprime loans before the 2008 financial crisis.

The FT reports that the core mechanism involves establishing a special purpose vehicle (SPV) between insurance companies and underlying private credit funds. The SPV issues bonds, which are then rated by agencies like KBRA or Morningstar DBRS, and sold to insurance companies and other investors. The SPV invests the raised funds into the underlying private credit funds, and insurance companies receive returns through note interest and principal repayments.

The appeal of this structure lies in capital arbitrage. According to the National Association of Insurance Commissioners (NAIC), such structures can reduce the capital requirement for insurance companies’ investments in underlying assets from 30% to between 10% and 15%. In other words, insurance companies can take on the same risk exposure with much less capital.

Major firms like Ares, Carlyle, and KKR have used these structures for years to finance the U.S. insurance industry, which manages trillions of dollars. However, according to investment executives speaking to the FT, much of the recent marketing material flooding the market comes from smaller, newer credit management firms. One chief investment officer of a large U.S. life insurer said, “Saying ‘receiving pitches’ is an understatement—I’ve received hundreds of emails about rating note feed into funds.”

Rating Agencies Can’t See the Underlying Assets Clearly

A key issue with these products is severe lack of transparency, making it difficult for rating agencies and buyers to conduct substantive due diligence on the underlying assets.

The FT reports that S&P structured finance analyst Thierry Grunspan admits that in some cases, the underlying assets are “almost a blank sheet.” Ratings are based on the fund manager’s track record and vague descriptions of future investment strategies, rather than detailed assessments of individual loans or borrowers. Fitch Ratings’ Peter Gargiulo bluntly states, “On day one, the fund might have no assets at all, or very few. You can only look at the manager’s history.”

An executive from an insurance asset management firm told the FT that buying rating notes is like “walking into a large multi-strategy management firm and giving them a loan.” “It’s not a single asset I can do due diligence on, not even a single fund I can evaluate, because it’s investing in a future, hypothetical fund. You have no idea what’s happening inside.”

Fitch issued a warning last October, highlighting the rising credit risks associated with rating note feed into funds and similar structures. Greg Fayvilevich, head of global fund ratings at Fitch, said leverage levels have quietly increased, and “we’re seeing more proposals for rating note feed into equity funds,” which tend to have less stable cash flows. KBRA’s chief rating officer Bill Cox said the agency has rejected some applications, including those backed by single aircraft leasing contracts. S&P states it has rated only a small number of such funds and has declined some business it deemed “not suitable for rating.”

Risks Have Penetrated Retirement Savings

This risk is not abstract; it has already infiltrated Americans’ retirement savings.

The WSJ reports that private equity firms now control about 20% of pension reserves—funds used to pay future policy claims—up from just 2% in 2011. During the decade of ultra-low interest rates, insurers owned by private equity have outperformed traditional insurers by investing policy premiums into higher-risk private credit, prompting others to follow suit. By the first half of 2025, a quarter of the assets purchased by insurers are in illiquid, hard-to-valuate private investments.

According to ratings agency A.M. Best, among insurers controlled by private equity, “related investments”—assets purchased from affiliated investment managers—have on average accounted for 76% of surplus. This high level of relatedness has raised concerns among regulators about whether the “arm’s length principle” is truly being enforced.

Among buyers of rating note feed into funds, S&P Global Market Intelligence’s analysis of regulatory filings shows that in 2024 and 2025, the largest buyers are insurance companies supported by private capital groups, including Brookfield’s Brookfield Wealth Solutions, billionaire sports investor Mark Walter’s Delaware Life, and hedge fund Hildene Capital Management’s Silac. Both Brookfield and Hildene declined to comment; Delaware Life did not respond.

Can Dispersed State-Level Regulation Handle Systemic Risks?

The U.S. insurance industry is regulated at the state level, unlike banking, which has federal standards. This means that state insurance departments, which traditionally oversee home, health, and auto policies, now face the challenge of regulating some of the most complex financial products in the country. While they follow NAIC standards, state legislatures have significant discretion, and regulators can adjust rules for individual companies.

NAIC has taken some steps to tighten arbitrage opportunities, such as increasing capital requirements for equity portions of these investments. In December, NAIC proposed establishing a separate reporting category for rating note feed into funds, which is expected to be discussed at the upcoming NAIC spring meeting in California.

The WSJ reports that NAIC states it is “proactively adjusting to protect life and annuity policyholders.” The American Council of Life Insurers supports efforts to strengthen insurance regulation. However, with the private credit market continuing to expand and product structures becoming more complex, whether this decentralized regulatory system can prevent systemic risks remains uncertain.

Risk Warnings and Disclaimers

Market risks are present; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should determine whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.