Over the past several months, private credit has been the subject of increasingly anxious headlines. Stories about slowing deal volumes, stress in software lending, competition from public credit markets, and concerns around redemptions have led some investors to question whether this asset class has become riskier. The short answer is no: the risk is largely the same, but investors now have larger allocations and are learning the details for the first time. It reminds me of the early days of ETFs, when investors accustomed to active mutual funds stressed over every aspect of the ETF structure, given their unfamiliarity with it.
It’s understandable to feel uneasy reading private credit headlines and trying to understand these topics for the first time. But when we step back and look at what is actually happening inside private credit portfolios, rather than what captures attention in a short article, the picture that emerges doesn’t paint a crisis. Instead, it shows an asset class digesting global economic changes in a largely constructive way (just like other asset classes; for example, the rotation away from tech within the stock market).
The Current Environment: Slower, but Healthier
One of the most common concerns investors see in the press is that private credit activity is slowing. That is technically true, but the reason matters.
Deal volume in direct lending has declined meaningfully year‑over‑year. Importantly, this is not being driven by widespread distress. Instead, it reflects lenders becoming more selective: walking away from aggressive structures, tightening underwriting standards, and insisting on better protections and better compensation for risk. In short, private credit lenders are willing to lose business to more public credit markets if they are asked to give up too much, which we view as a good thing.
At the same time, where capital is being deployed has shifted. New lending has increasingly favored more defensive, cash‑flow‑resilient sectors such as healthcare, while exposure to technology has declined. This rotation is consistent with what we would expect at this stage of the credit cycle, and with what is happening in the equity markets. It is a positive development for long-term portfolio quality.
So, What’s the Main Worry for Investors?
Across client conversations and media articles, we bucket the concerns we hear into four categories:
1. Software Exposure
Recent weakness in public software equities has spilled over into worries about private credit portfolios, particularly those that leaned heavily into growth‑oriented software lending during the prior cycle.
This concern is understandable, but it is highly uneven across managers. Some private credit vehicles pursued aggressive software exposure using structures such as ARR‑based loans (loans priced off annual recurring revenue, not earnings, even for unprofitable companies) or PIK features (payment in kind: loans that accrue income instead of paying cash). Others did not.
Within the LEO Wealth private credit allocation, we gravitated toward managers whose technology exposure is modest and diversified (sub-10% in total), with software representing only a small portion. ARR and PIK loans make up a relatively small portion of our portfolio as well, with multiple managers at 0 exposure for both. The vast majority of loans sit at the top of the capital structure (90%+), which significantly improves downside protection compared to more junior debt that results in equity-like risk and thus the headlines investors are seeing.
2. Competition From More Public Credit
Another frequent narrative is that broadly syndicated loans (more public loans) have become more competitive, compressing spreads and crowding out private lenders.
That dynamic does exist, but it tends to pressure weaker or less differentiated lenders first. Strong managers respond by becoming more selective rather than forcing capital into unattractive deals. Historically, periods like this tend to improve future loan quality rather than undermine long-term returns.
The biggest challenge from broadly syndicated loans is to those managers who lend at the upper end of the private credit market, i.e., to companies that generate 100m+ in earnings each year. These borrowers have a choice – they can go to the private credit lender, the broadly syndicated loan market, an individual bank, or even simply issue a bond. As a result, the borrower often goes for the lowest-cost, most flexible lender, forcing the private credit guys to match or lose the deal.
Within our portfolio, we long ago moved away from the upper end of the market, so it now represents less than 15% of our allocation. Most of our new capital has gone to lenders who specialize in the lower end of the market, asset-backed and specialty lending areas in which there is a lot less competition and, as a result, better risk reward.
3. Macro Policy Noise and Lower Rates
Questions around tariffs, legal rulings, and political uncertainty have also contributed to investor anxiety. In practice, diversified private credit portfolios tend to have limited direct exposure to these issues, and clearer legal frameworks can actually be constructive by reducing uncertainty for lenders.
Worries about lower rates and distribution cuts also often come up in media articles, but these are not problems. They are simply the characteristics, or features, of private credit that investors should already be aware of. Private credit is largely a floating-rate asset class. It is expected that distributions will be cut when rates come down! But 2 things are important to understand about such changes. 1) Lower payments mean higher interest coverage, so companies are more likely to pay their interest and less likely to default. 2) The spread vs cash remains the same despite lower yields.
Our private credit allocations continue to pay us ~5-6% more than we can get from cash, despite taking the same amount of interest rate risk. So we are getting paid ~5-6% for the credit and illiquidity risk we are taking. This compares to a spread of ~1% for investment-grade bonds, ~2-3% for high-yield bonds, and 3-4% for broadly syndicated loans. In short, private credit continues to offer better returns and better manage illiquidity risk than the alternatives, despite lower overall yields. BlackRock shows this well in the chart below:
4. Redemptions and “Liquidity Headlines”
This is where recent headlines have been the loudest and often most misleading. News around certain large platforms, including recent headlines involving Blue Owl and Blackstone, have fueled fears that private credit is facing a broader liquidity crisis. In reality, these situations are highly vehicle‑specific. They reflect the structure, investor base, and portfolio composition of individual funds, not the health of the asset class overall.
In Blue Owl’s case, the company announced that one of its investment vehicles will wind down. It’s important to note that this vehicle had a contractual end date and a mandate to return capital to investors. It was never meant to be perpetual and until now it has met all investor redemption requests for years. In an effort to keep the AUM, Blue Owl tried to merge the fund with another, but when investors rejected that offer and put in more redemption requests than the contractual 5% per quarter limit, Blue Owl had a choice to make. Rather than gating and making investors wait for pro-rata redemptions for multiple quarters, they sold 30% of the portfolio to a combination of 3rd party and internal vehicles at nearly par and returned that cash to investors. Blue Owl plans to return the rest as future sales occur. Contrary to the alarmist headlines, investors got 30% of their money back in one go, instead of waiting for 1.5 years at 5% a quarter to get the same amount.
Similarly, Blackstone is the owner of the world’s largest private credit vehicle and also received a lot of redemptions this quarter. Thanks to their brand and early entry into the wealth channel, they have more retail investors than any other manager in the asset class. But retail investors can be fickle, so after many years of inflows, Blackstone saw an 8% redemption request for March 31. Their standard limit was 5% per quarter and the docs allowed up to 7%, so they too had a choice. Instead of gating the fund and paying out only 5% or 7% in redemptions, Blackstone partners got together and invested 1% so that the net redemption was only 7%. All investors who wanted out, totaling 8%, are getting their cash.
In both instances, investors got all the money they asked for, and the management teams put their own capital at risk to own more of these products. It suggests that executives at both firms believe the loans are money good, and are putting their wallets where their mouths are. Yet headlines focus on the redemption requests and not the fact that all redemptions were filled.
What often gets lost in the headlines is that private credit as an asset class was never designed to offer daily liquidity, nor is it meant to behave like a public bond fund. Distributors who gloss over this when marketing the asset class are now paying the price. Vehicles with clearly articulated liquidity terms are functioning as intended – these terms are simply now visible given heightened investor attention.
At LEO, we have always been clear that investors should have a 3-5 year horizon for this asset class. Why 3-5 years? Because that’s the length of a typical loan. The liquidity offered by today’s more liquid structures is on a best effort basis only. Investors do not get paid 5%+ above cash just for the credit risk, but for the illiquidity risk as well.
What’s Actually Happening in Portfolios
When we look past the headlines and focus on actual outcomes, we see a reasonable market environment.
- Returns across diversified private credit portfolios remain stable and income oriented. Spreads have tightened materially since the glory days of the COVID crisis but are now holding at historically acceptable levels.
- Manager discipline is starting to increase, not decrease, with greater emphasis on underwriting quality and downside protection. It’s true that post-COVID things have become relaxed, but it appears that managers are once again paying attention to risk.
- There has been no forced selling or disorderly portfolio behavior within well-constructed strategies. None of our managers have had to gate so far, and only Blackstone has seen redemption requests approaching the limit.
- Default rates remain contained and arguably are improving now that interest rates are lower and the main tariff and economic uncertainty are somewhat in the rear-view mirror.
In other words, the private credit market exhibits signs more reminiscent of a normalizing credit cycle than of a systemic problem. The chart below from Apollo puts default rates into perspective:
Why We Remain Constructive on Private Credit – When It’s Done Right
Private credit was never meant to be a tactical trade. It is designed to deliver contractual income, portfolio diversification, and resilience across market environments.
Those objectives remain intact. The asset class has historically averaged a return of 9.5% a year (see chart below). During the financial crisis, default rates hit 11%. But private credit fell only by -6.5% in 2008 because undefaulted loans continued to generate high levels of income throughout the year.
It’s, of course, impossible to predict what will happen should a similar crisis occur. The asset class is bigger today than it was 20 years ago, and investors are different, so the price impact may be different as well. But we can mathematically predict what will happen to fundamental returns (the payments, not market prices).
FLP Atrato Consulting, an alternatives research consultant, did this math. Using the characteristics of a typical private credit portfolio today, they made 2 conservative assumptions:
- A similar crisis-level default rate of 11% for the next 3 years (this level is 5.5x the current default rate of 2%), and
- A crisis-level recovery rate of only 50% after default (vs the historical industry average of 75% recovery)
Their result showed a fundamental capital return of-2% per year. There would, of course, be mark-to-market, but that is harder to predict. Importantly, hopefully, all can agree that losses of 2% a year, with maybe another 5%+ in price markdowns in such a scenario, are relatively benign. And certainly much better than the losses most likely experienced by equities, high-yield bonds, and other similar risk asset classes. A slightly less conservative scenario of “only” 3x the default rate at 7%, instead of going 5.5x to 11%, would see a positive cashflow return.
Bottom Line for Investors
At LEO, our approach to private credit today focuses on a few core things:
- Broad diversification across managers (10 today) and borrowers (2,000+)
- Limited exposure to the most stressed sectors, including technology and software (sub 10%)
- Conservative positioning at the top of the capital structure (90%+)
- Focus on lower and core middle market, asset-backed and specialty managers (65%+)
- Prioritization of stability and a reasonable income, rather than double-digit yields at any cost
Periods like this – when activity slows, underwriting tightens, and weaker strategies are exposed – tend to lay the groundwork for stronger long‑term outcomes.
Private credit is not immune to cycles, but today’s environment favors patient investors and diversified portfolios to achieve the illiquidity premium, not an exit from the asset class. That is why we believe investors should remain invested in the asset class, and why allocations through diversified solutions continue to make sense as a core income-oriented holding.
The gap between what the media says and what we’re seeing in portfolios is wide, and history suggests that staying disciplined during such periods is often the most rewarding approach.
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