Private Credit Concerns in Context

In what seems like a matter of months, private credit has gone from one of the hottest asset classes to perhaps one of the coldest. Concerns that the rapid growth in private credit funds has come at the expense of underwriting standards and that these funds are far too exposed to the software companies now in the crosshairs of AI innovation have precipitated this sentiment shift. And as retail investors rush to exit these funds and run up against redemption limits, there are serious questions about the private credit push to access flows from retirement accounts. So what's really going on in p

Great. Thank you for having me.

So, Alex, let me take a stab at trying to summarize this very bearish narrative we have right now around private credit. The idea is that private credit firms took in a lot of money, and they rushed to deploy it as quickly as possible, which meant there were some frauds. They maybe have over allocated into potentially risky sectors. Software, which we have discussed on this podcast, looks vulnerable. So there's a lot of factors playing into some negativity around the space. Did I get it right, first

of all?

And is there any truth to any of this most importantly?

Yeah. Well, look. This is certainly the narrative. But like with anything, there's a lot of nuance to it, and I think it is really important to unpack what's actually going on versus what are the headlines. And then, ultimately, what are the risks because there's definitely some valid risks in some of the things that you mentioned. So there are really three big sort of issues that I think the market is grappling with. The first one is private credit has been a great asset class and has grown really quickly over the last several years. And we've talked about in similar settings in the past. We

So let's unpack some of that, and let's just start with software, which I mentioned. You just mentioned. How concerned should private credit investors really be about exposure to software companies being disrupted by AI and potential losses related to that in the space?

Yeah. So let's talk about some of the numbers. So the software related question is predominantly sitting in the direct lending part of the private credit ecosystem. So when we talked about 3 and a half trillion dollars plus, the direct lending piece of that is about 1.6, 1.7. Software is a big part of that. We think it's roughly 25 ish percent of exposure in terms of the assets that have been allocated to this part of the market. Now all software is created the same. And the challenge is going to be some of the software companies that will have terminal value questions. We won't see that for s

So I think that's really helpful at framing the potential negative outcome here. And if I'm hearing you correctly, yes, there's a negative outcome, but it's a little bit more insulated than some of the other assets tied to some of these themes, and the fundamentals still look like they're holding up reasonably well.