Private Credit, A Play in Four Acts (the Cliff Notes version)
Ask A CIO #62
I hesitated to take on this week’s question. So much, too much, has already been written about private credit. But since you asked…
Why is private credit blowing up right now? Why is it constantly in the news?
I think part of what you’re hitting on is how private credit as a topic has jumped from a niche subject in trade publications to an area of general interest covered by all sorts of media outlets. It’s in the news a lot these days. Or more precisely, it’s getting criticized in the news a lot these days.
Private credit can be a pretty dry topic, so to spice things up ever so marginally, I’ll frame my answer below as Private Credit, A Play in Four Acts (the Cliff Notes version). Why not?
Check out our podcast, The Investment Office!
Available on YouTube, Apple Podcasts, and Spotify
Act I – Private Credit Takes the Spotlight
Private credit as an asset class is broad and varied, but it tends to be most often associated with corporate direct lending, the largest and most prevalent strategy. That’s the strategy where lenders provide senior secured loans to privately held companies. More specifically, these loans are generally provided to private equity backed companies (direct lending puts the leverage in leveraged buyouts, literally). Much of the media coverage has centered on direct lending, so that’s where we’ll focus too.
Pre-2022, private equity strategies, from buyouts to venture, were major beneficiaries of the low interest rate environment.1 Direct lending has been the largest and fastest growing part of the private credit market in no small part because their major customers – private equity firms – grew so rapidly.
2022 was an inflection point. When the Fed raised rates, private equity’s appeal dimmed, as higher borrowing costs weighed on prospective returns. But private credit strategies, which frequently lend at floating rates, were positioned to benefit from the new higher rate environment. Before you could say SOFR+550, private credit became the new private market darling.
The appeal was simple. Private credit offered an income-oriented strategy with a historical track record of consistent returns and low correlation to equities. Post-2022, higher base rates meant potentially higher returns. And private credit delivered on these expectations, at least initially. Eventually, too much capital flowed in, compressing spreads, lowering total returns, and loosening credit standards.
So to sum up, private equity fundraising stalled post-2022, and private credit stepped into the limelight. Private credit managers capitalized on the moment, capturing a lot of new investment dollars. Of course, private credit didn’t just take in new funds from institutional investors (though it did plenty of that too), it was also enormously successful in raising capital from retail investors.
Act II – Retail Funds Look Different
Raising capital from retail investors looks different in all sorts of ways compared to raising capital from institutional investors. But in this context, the difference that matters is one of fund structures.
Retail fund structures look different from institutional fund structures. Institutional fund structures are typically private drawdown funds with defined terms – say, 7 to 10 years – and no intermittent liquidity. Private credit funds for retail investors tend to fall under one of two categories: business development companies (“BDCs”) and interval funds, also known as evergreen funds. Both types typically offer investors a limited amount of intermittent liquidity, offered quarterly and capped at 5% of total fund assets.2
Compared to being fully locked up in a drawdown fund with no option for partial liquidity, the quarterly liquidity feature of interval funds and BDCs is generous. Compared to the daily liquidity mutual funds and ETFs used to invest in publicly traded credit, the quarterly liquidity feature for private credit evergreen funds is onerous. Especially since it isn’t a quarterly option to redeem all assets, but instead a quarterly option to redeem up to 5% of a fund’s total assets.
Ultimately, these tradeoffs are reasonable. Private credit loans are, as the name suggests, private. They don’t trade freely on secondary exchanges. But they do have known maturities and are usually structured with consistent cash flow yield profiles. Across a portfolio of these loans, a private credit fund could responsibly offer limited liquidity at known intervals – say up to 5% of the fund on a quarterly basis. Of all the private market strategies, private credit arguably fits most neatly into evergreen structures, and these structures offer an access point for strategies that would otherwise be inaccessible.
The caveat, however, is that investors have to truly understand the limited liquidity profiles. In hindsight, it seems that investors in BDCs and interval funds may have anchored more on the “quarterly” part and less on the “up to 5% of fund assets” part.
Act III – Investors Question Private Credit Valuations
What is a loan worth? You might say, a loan is worth the balance to be repaid, or par value, plus remaining interest.
Unfortunately, sometimes lenders can’t collect all of what they’re owed. If a borrower’s financial position weakens, they may not be able to repay their loan. You might say: a loan that is at risk of not being fully paid back is no longer worth that par value. It should probably be marked down to whatever amount is likely to be paid back.
In public credit, markets enforce this pricing discipline. If leveraged loan investors expect a borrower to default, that publicly listed loan will trade down. But in private credit, where a single lender, or perhaps a handful of lenders, own entire loans, lenders have far more discretion in pricing their loans.
In an ideal world, private lenders would meticulously adjust the values of any potentially impaired loans. We do not live in an ideal world. But even so, there is an expectation that private lenders will reflect some measure of reality when loans are clearly impaired. If only to maintain credibility with their investors.
Lately though, everybody seems to be questioning whether private lenders are reflecting any measure of reality at all. Private credit’s reputation is being dragged in real time due to a combination of headline grabbing credit events, sudden write-downs, and macro concerns around software companies.
Let’s start with the concerns about software companies.
For over a decade, private equity loved software companies, touting their “mission critical” products and sticky recurring revenue. As private equity investors increasingly allocated to software companies, private credit lenders also allocated correspondingly larger portions of their portfolios to software companies.
The narrative flip from software companies being asset-light, high-margin businesses to software companies facing an AI-driven SaaSpocalypse has been abrupt. As with many rapid shifts in sentiment, assessments are being made in broad strokes, with limited nuance. The current consensus is more or less: software exposure = bad. And as noted above, direct lending funds have software exposure, because for years their private equity customers were investing in software.
Then there are the sudden write-downs. There haven’t actually been that many to date, but in a market that is already spooked, any instance is one too many.3
And finally, there have been headline grabbing credit events. First Brands, Tricolor, Market Financial Solutions, to name the biggest ones. It matters that these were idiosyncratic frauds, and it matters that these happened primarily in the asset based lending side of private credit. But it also doesn’t matter in the sense that again, investors are nervous about private credit, and direct lending is a stand-in for all things private credit.
Act IV – Everything Comes to a Head
What do investors do when they’re nervous about an investment? They probably sell. It’s a perfectly reasonable thing to do. In fact, from a game theory perspective, if you’re worried that others are also going to sell, it’s the rational thing to do.
Which leads us to today.
Investors, most notably private credit’s newest retail clientele, are selling their investments. Several of the largest retail-oriented BDCs and interval funds are seeing investor redemptions in excess of their quarterly liquidity provisions. For the first time, these quarterly 5% thresholds are being tested almost across the board in a big way.
And private credit fund managers are choosing very different responses.
Some managers are maneuvering to honor all redemptions, regardless of stated caps.4 Those in favor of this approach would say it signals confidence in a fund’s underlying strength and maintains goodwill among investors.
Other managers have drawn a bright line in the sand.5 They’re making it clear that 5% is the ceiling and reiterating that redemption limits serve to protect all investors in the long run. Those in favor of this approach would say that it is the most responsible way to manage portfolios and safeguard remaining investors. Certainty of capital is what enables private credit funds to execute their strategies.
When the dust settles, which approach will be regarded as the right one? Which evergreen structures will survive this period? How does private credit regain its footing with retail investors, assuming it can be done?
It’s anyone’s guess how this story goes, and so we have private credit blowing up all over the news.
Epilogue
I think the unforgiving nature of credit payoff profiles is, to some extent, contributing to the negativity. Performing credit investments have capped upside. Invest in credit long enough, and some amount of credit defaults are inevitable. But if there is a risk that default rates are higher than expected and/or recoveries are lower than expected, there’s not really a way to make up for those excess losses. It’s not like an equity portfolio, where the upside in any given investment is theoretically unlimited, and outperforming investments could potentially offset underperforming investments.
I’m also seeing some folks raise concerns that private credit troubles potentially pose a systemic risk to financial markets. I’m open minded in a worst case scenario, but I’m not convinced. The restricted liquidity feature of private credit funds limits the possibility of bank run scenarios. There isn’t a massive asset-liability mismatch, because private credit BDCs and interval funds don’t actually take in short term assets (as some investors are learning the hard way).6 I don’t think we’ll see a fire sale of private credit assets, much less a disorderly unwinding of private credit portfolios.
If I had to wager, I’d say that private credit, from direct lending to specialty finance, will ultimately be just fine. These non-bank lenders fill a need in capital markets, and if anything, that need is more likely to grow over time. If stress in this market resets spreads and risk premiums, well, that might be a good outcome in the long run, even if it causes short term pain.
I don’t know what happens next, except that it’ll probably continue to be bumpy. And we should probably expect many more news articles on private credit ahead.
Thanks for the question! As always, reach out to: askacio@ivyinvest.co.
See you in two weeks,
Wendy
If you enjoyed this post, you might also enjoy the Ivy Invest app!
Click below to create an account and learn more about our endowment-style fund:
They benefited for very different reasons though. Leveraged buyout returns are impacted by the cost of leverage. When borrowing costs are low, the benefits of that low-cost borrowing accrue to equity investors. In a low or zero interest rate environment, future growth potential becomes enormously valuable, and few things offer potential for growth like venture capital.
There are technical exceptions that allow funds to offer more than 5%, but let’s just say 5%.
Bloomberg: BlackRock Slashed Private Loan Value From 100 to Zero, March 5, 2026.
Bloomberg: Oaktree to Meet 8.5% Private Credit Fund Redemptions in Full, March 27, 2026.
Bloomberg: Private Credit’s Gate Crashers Are Forcing Funds Into a Brutal Spot, March 8, 2026.
I also don’t buy the latest narrative floating around, that if investors can’t sell what they want to sell, they’ll sell what they’re able to sell. And so because investors aren’t getting as much capital back as they want from private credit, we’ll start to see selloffs in other more liquid assets. This narrative only works if investors are desperate for liquidity broadly. It doesn’t apply if investors are specifically trying to pull dollars out of private credit. All evidence seems to point to investors looking to sell private credit, specifically.