This is a cyclical normalization of credit conditions, not a crisis.
Private credit is a key pillar of global capital formation, but it’s less transparent than public-market equivalents. Its rapid growth and widening scope invite scrutiny, as it should. But we don’t think concerns about AI disruption and default risk should define the asset class as a whole.
Along with banks and public credit, private credit plays an important role in financing corporations and the real economy. But private assets are illiquid, borrowers are private companies and there’s no daily market pricing. In the absence of real-time data, other narratives can fill the vacuum.
Lately, those narratives have centered around concern about AI-driven disruption and worries about default risk and liquidity. These developments may create bumps along the way, but they don’t change the role private credit plays in the economy or the value it can provide in investor portfolios. Credit—public and private—is cyclical. When liquidity tightens and economic fundamentals weaken, weaker credits surface. That’s not unusual.
In Private Markets, Credit Cycles Still Matter
There have been some isolated credit losses in recent months and a few high-profile bankruptcies at companies financed by public, private and bank credit. Some of these cases involved allegations of fraud and misappropriating collateral. But these aren’t unique to private credit or to the broader economic cycle.
In our view, what we’re seeing amounts to a cyclical normalization in credit conditions. As liquidity tightens and economic fundamentals moderate, weaker underwriting can come to light. That isn’t evidence, in our view, of structural problems. Rather, it has more to do with where we are in the credit cycle.
Underwriting standards tend to weaken in the later stages of a cycle. That’s not new, and it’s not unique to private lending. Risks tied to AI-driven disruption, geopolitical uncertainty and an uncertain policy outlook add to investor concerns. But private credit, in our view, is designed in part to help manage these types of risks.
Careful underwriting and the ability to structure financing arrangements appropriately may give private lenders an advantage—whether deals are with private equity owned middle market companies, non-bank loan originators or private real estate investors.
In corporate direct lending, for example, loans typically sit at the top of the capital structure, which offers built-in risk mitigation and enables investors to proactively address concerns. They also may benefit from a large equity cushion that’s first to absorb losses tied to declines in a borrower’s value. Overall, we believe negotiated loan structures, strong lender protections and other features make private credit uniquely resilient.
Putting Risk in Context
None of this is to say there aren’t potential risks on the horizon. In markets, there always are. The trick is knowing how to invest around them and structure investments in a way that can help to limit that risk. In asset-based finance, for instance, the ability to minimize default risk through disciplined asset selection and effective structuring is an important feature.
Generative AI can be seen as a risk and a potential benefit. Take software-as-a-service (SaaS) companies, many of which are owned by private equity sponsors and financed by private credit. Markets have focused intensely on AI’s potential to disrupt business models in the sector. For some companies, it probably will.
But markets can often paint entire industries with a single broad brush. We think the strongest SaaS companies that provide “mission-critical” services to corporate clients are likely to remain essential partners for their clients. And many of these companies are embracing AI in a way that may have the potential to increase their growth potential and profitability.
For companies that meet those criteria, we see near-term tailwinds. These companies tend to specialize in certain key areas. They’re also embedded in customer workflows and are very difficult to replace.
Private Assets: Illiquidity By Design
Liquidity, of course, is often limited in private assets—and often by design. Long-term private assets aren’t meant to provide daily liquidity. Part of the value proposition for investors, as we see it, is that investors are compensated for liquidity constraints with higher yields, stronger potential returns and the downside mitigation potential that comes from custom structuring, strong borrower-lender relationships, lender control and reduced volatility.
Even so, the ecosystem for private assets is evolving to provide some limited-liquidity tools such as secondary markets and structured financing options. This may make it easier for investors to manage exposures over time.
Remember, media narratives in financial markets often emphasize risk without context. Defaults happen in all credit markets—public and private—and risks often involve isolated situations or stresses tied to specific borrowers, not systemic market failures. We believe that structural features, underwriting discipline and manager skill shape real outcomes. That’s why private credit plays such an important role in investors’ portfolios today. We don’t expect that to change.
