US private credit "blazing across the camp": Subprime-like financial packaging, absorbing $1 trillion in "American pension funds"

The private credit market is reenacting a familiar financial trick—layering high-risk assets, labeling them with top ratings, and selling them to insurance companies holding Americans’ retirement savings. This logic has approached $1 trillion in size, and the growing fragmentation of regulatory systems and severe lack of transparency have made warnings from market observers and rating agencies increasingly hard to ignore.

According to The Wall Street Journal, U.S. life insurance companies now hold nearly $1 trillion in private credit assets—about a quarter of their total fixed income holdings. Of that, around $280 billion is at the lowest investment grade, with another $70 billion at speculative or junk grade. A Federal Reserve study directly refers to insurance companies as “new shadow banks.”

Meanwhile, the Financial Times reports that a type of structured product known as “rated note feeder funds” is proliferating in the private credit market—professional rating agency KBRA rated $17 billion of such products last year, more than doubling from $8 billion in 2024.

This trend is emerging as the private credit market comes under pressure. Retail investors have withdrawn from several large private credit funds, and pension and endowment funds are reconsidering their private debt holdings, partly due to concerns about funds’ exposure to software companies at risk from the AI wave. Regulators at the state level are facing unprecedented pressure to substantively review these increasingly complex structures.

How High-Risk Assets Become “Top Bonds”

The operational logic of rated note feeder funds is structurally similar to subprime loan securitization before the 2008 financial crisis.

According to the Financial Times, the core mechanism involves setting up a Special Purpose Vehicle (SPV) between the insurance company and the underlying private credit fund. The SPV issues bonds, which are rated by KBRA or Morningstar DBRS, and then sold to insurance companies and other investors. The SPV invests the raised funds into the underlying private credit fund, and insurance companies receive returns in the form of note interest and principal repayments.

The appeal of this structure is capital arbitrage. According to NAIC (National Association of Insurance Commissioners) data, this structure can reduce the capital requirements for insurance companies to back their underlying investments from 30% to 10–15%. In other words, insurance companies can gain exposure equivalent to directly holding private credit by putting up much less capital.

Major firms like Ares, Carlyle, and KKR have for years used this structure to finance themselves from the multi-trillion-dollar U.S. insurance industry. But according to investment executives quoted by Financial Times, a flood of sales pitches lately is coming from smaller and newer credit management firms. The chief investment officer of a large U.S. life insurer said: “Calling it ‘pitched’ is an understatement—I have received hundreds of emails about rated notes.”

Even Rating Agencies Can’t See the Underlying Assets Clearly

There is one core issue with these products: serious lack of transparency, making it difficult for rating agencies and buyers to conduct substantive due diligence on underlying assets.

According to the Financial Times, S&P structured finance analyst Thierry Grunspan admitted that in some cases the underlying assets are “almost a blank sheet.” Rating agencies rely on fund managers’ track records and vague descriptions of future investment directions, rather than a detailed assessment of individual loans or borrowers. Fitch Ratings’ Peter Gargiulo said candidly: “On day one, the fund might have no assets or very few assets. All you can look at is the manager’s history.”

An insurance asset management executive told the Financial Times that buying rated notes is like “walking into a big multi-strategy management firm and giving them a loan.” “This isn’t an asset I can do due diligence on—it's not even a fund I can do due diligence on, because it invests in future, hypothetical funds. You just don’t know what’s happening inside.”

Fitch issued a warning in October last year, pointing out rising credit risks from rated note feeder funds and similar structures. The agency's global head of fund ratings, Greg Fayvilevich, said leverage levels have quietly climbed: “We’re starting to see more proposals for rated feeder funds aimed at equity funds,” which have even less stable cash flows. KBRA chief ratings officer Bill Cox said they have rejected some applications, including structures collateralized by single aircraft lease contracts. S&P said it has rated only a few of these funds and rejected some that it did not consider “rateable.”

Risks Have Penetrated Retirement Savings Systems

This risk is not abstract—it has penetrated Americans’ retirement savings.

According to the Wall Street Journal, private equity firms now control around 20% of annuity reserves—the funds set aside to pay future insurance claims, compared to just 2% in 2011. Over a decade of ultra-low interest rates, insurance companies owned by private equity have outperformed traditional insurers by investing policy premiums in higher-risk private credit, prompting others to follow suit. In the first half of 2025, a quarter of assets purchased by insurance companies are illiquid, hard-to-value private investments.

Data from rating agency A.M. Best show that “affiliated investments”—assets bought by insurers from institutions owned or partly controlled by their investment managers—now account for an average of 76% of surplus at insurance companies controlled by private equity. Such high affiliation is prompting regulators to question whether the “arm’s length principle” is really being enforced.

Among buyers of rated note feeder funds, according to analysis by S&P Global Market Intelligence of regulatory filings, private capital group-backed insurers are the largest buyer group in 2024 and 2025, including Brookfield Wealth Solutions (under Brookfield), Delaware Life (controlled by billionaire sports investor Mark Walter), and Silac (a unit of hedge fund Hildene Capital Management). Brookfield and Hildene declined to comment, and Delaware Life did not respond.

Can Fragmented State Regulation Handle Systemic Risk?

The insurance industry in the U.S. operates under state-level regulation, unlike uniform federal standards for banking. This means state insurance departments, which once scrutinized home and health insurance policies, now must deal with the nation’s most complex financial products. States follow national standards set by NAIC but have wide discretion in legislation, and regulators can adjust rules for individual companies.

NAIC has taken steps to tighten arbitrage, such as raising capital requirements for the equity portion of these investments. In December last year, NAIC proposed setting up a separate reporting category for rated note feeder funds, and this topic is expected to be discussed soon at NAIC’s spring meeting in California.

According to the Wall Street Journal, NAIC stated it is “proactively adjusting to protect life and annuity policyholders.” The American Council of Life Insurers said it “supports NAIC’s efforts to enhance insurance supervisory oversight.” But with the private credit market expanding and structures becoming increasingly complex, no one can say for sure whether this decentralized regulatory system can guard against systemic risk.

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