The private credit industry is showing resilience in the face of mounting scrutiny, waving off concerns that the market could become a trigger for the next global financial crisis (GFC).
Since last year, the sector has faced a wave of criticism, with comparisons ranging from “cockroaches” to “a canary in the coal mine” and exposure to the so-called “SaaS-apocalypse”. The latest flashpoint has been turbulence in the US wealth market.
Several of the largest firms have been hit by rising redemption requests, with the most high-profile case being Blue Owl Capital gating one of its retail debt funds, a move which prompted a flurry of headlines likening private credit to the next financial crisis.
Yet many in the industry have pushed back against these claims. While liquidity dried up during the GFC and funds were forced to gate redemptions, industry figures are quick to stress that the current environment is markedly different.
The reality is that gating is a feature of the evergreen fund structure of business development companies (BDCs), designed to protect investors. In other words, it is not a failure of the model but a component of its design.
“During the GFC, gating was often a reactive response to unexpected liquidity stress that took investors by surprise; in today’s private credit and semi liquid fund structures, gating is an explicit, pre-defined design feature aligned with the liquidity of the underlying assets,” Antonello Aquino, EMEA head of private credit at Moody’s told Alternative Credit Investor.
Meanwhile, a senior executive at one of Europe’s leading private credit managers privately dismissed suggestions last month that the sector is heading towards a GFC-style crash. Having worked at an investment bank during that period, the executive said the current situation is fundamentally different.
They also pointed to challenges in the US BDC market as being largely software-specific. The executive added that recent BDC sell-offs could even have a positive knock-on effect on Europe’s private credit market, which remains more institutionally focused than in the US.
At the same time, conversations with limited partners, including pension funds and insurers, suggest that many investors remain undeterred by the negative scrutiny, continuing to view private credit as a strong diversifier.
However, a top figure at a UK pension fund did caution that managers can sometimes be overly optimistic, which can be off-putting. They noted it would be refreshing to hear a more balanced “middle ground” view, acknowledging both the opportunities and the risks as the asset class expands rapidly.
Offering a more measured perspective, one executive at a US manager did raise concerns around private credit more broadly, but said the liquidity issues in the US BDC market are a “sideshow” compared with other challenges. The executive pointed to the need for closer attention to performance, particularly rising payment-in-kind levels and non-accruals.
Overall, however, the majority of sentiment across the industry remains positive. Many see the evolution of private credit into open-ended vehicles in both the US and Europe as a natural progression, with one source describing the current turbulence as a “bump in the road” as the sector continues to mature and expand into new channels.
