There is a lot of noise about private credit right now. Much of it misses simple facts and confuses how this market works. I want to set the record straight and share what I’ve seen across cycles, drawing on data and experience. The core message is simple: private credit is not a magic shield, but the headlines are far scarier than the numbers.
What People Are Getting Wrong
Headlines suggest private credit is sitting on hidden losses. The claim goes like this: funds show stable returns because they do not “mark to market,” and when they finally revalue, losses will hit at once. That argument ignores how managers actually value loans, how losses flow through a portfolio, and what happened in the last true stress test.
“Case study, 2008. The worst economic catastrophe any living person has ever seen… It was private credit’s worst performing year ever. Performance, down 6% as the S&P got cut in half, down 55.”
I lived through that period as a practitioner. Banks failed. Liquidity vanished. Equity markets were cut in half. Yet private credit finished the year down single digits. That is not because managers pretended everything was fine. It is because loans behave differently than stocks.
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Why 2008 Still Matters
We learned a lot from the global financial crisis. It was not a neat test. It was a live fire drill. During that year:
- The S&P 500 fell about 55% peak-to-trough.
- Private credit posted about -6% for the year.
- Actual credit losses for loans were roughly 0.59%.
- Managers marked portfolios down more than realized losses, then saw a double-digit rebound in 2009–2010.
Those marks were not a cover-up. They were a cushion. Managers took valuations down to reflect risk, then recovered as markets stabilized and borrowers kept paying. That pattern matters today because the market structure is similar. Loans pay coupons. They amortize. They are not priced on ten to twenty years of potential earnings the way equities are.
How Private Credit Actually Works
Private credit funds make loans. Most are senior in the capital stack, secured by assets or cash flow. Many are floating-rate, so coupons reset as base rates move. The typical loan maturity is two to four years. Within that window, lenders focus on cash generation, interest coverage, leverage, covenants, and collateral. If a borrower runs into trouble, lenders can negotiate amendments or restructures, and recoveries often come from collateral rather than future equity growth.
Valuations do not swing the way stock prices do. That is by design. Valuations in private funds reflect expected cash flows, credit risk, and comparable market yields. They adjust during stress, but a solid performing loan that pays on time does not drop 40% overnight because of a gloomy headline.
The Software Myth and the AI Scare
A popular claim is that private credit holds loans to software firms, and software stocks have been hit. True on the equity side. But loans are not stocks.
“Equities look out ten to twenty years and price the long term value of the company… Private credit is two to four year loans.”
Equity investors are pricing what artificial intelligence might do to software margins over the next decade. Lenders ask a simpler question: Will this company generate enough cash in the next few years to pay interest and refinance or amortize? Those are different questions with different risk horizons.
Consider the core systems many companies run on—customer relationship management, billing, and enterprise software. Turning those off is not a quick decision. There is switching risk, retraining costs, and potential disruption to revenue. In the real world, systems of record are sticky. That matters for lenders focused on near-term cash flow.
“Do we really think companies are going to completely unplug from Salesforce, handing their clients’ most sensitive data over to an AI agent in the next couple years? Ask Amazon how their AI coding agent just had their online store shut down for six hours.”
AI will change workflows and reduce certain costs. It might compress long-term margins for some firms. But the lending question is about the next eight to twelve quarters. Most borrowers are not burning the house down to chase a marginal tool. They are integrating new technology in phases and watching the risk.
The “They Don’t Mark It” Argument
Let’s address the idea that private credit returns are an accounting trick. In 2008, managers marked portfolios down by about 6 percent, while realized losses were less than 1 percent. If the goal was to hide pain, that is a strange way to do it. Marks reflected higher yields in public markets, weaker trading levels for comparable loans, and uncertainty in the depth of the recession. Those judgments were conservative, which is why the rebound was strong when the dust settled.
Today, funds publish regular NAVs based on third-party valuation inputs, market color, and borrower performance. Are they perfect? No. Are they blind? Also no. Loans with missed payments, covenant breaches, or weak coverage get flagged and valued accordingly. You see that in dispersion across managers and funds.
What Jamie Dimon Meant by “Cockroaches”
I respect the big banks. They have deep underwriting teams and play a vital role in the system. But let’s be honest about incentives.
“But Jamie Dimon said cockroaches because when companies get financing through private credit, they don’t pay Jamie Dimon’s bank like they would through a traditional bond.”
Private lenders compete with banks for loans and fees. That competition is healthy for borrowers. Sometimes banks win. Sometimes private lenders offer speed, certainty, or structure that fits better. That is not a scandal. It is a shift in market share.
What the Data Says Right Now
Despite the noise, many private credit funds are positive year-to-date. Borrowers are still paying. Base rates have lifted coupons. Credit selection and sector mix matter, but the broad picture is stable cash flow meeting higher interest costs. We should expect some cracks. Higher rates expose weak balance sheets. But the idea that the whole market is about to “rug pull” is more drama than math.
Where Private Credit Fits in a Portfolio
Private credit is not a cure-all. It is a tool. It can offer higher income than public bonds, lower volatility than equities, and a different path of returns. It also brings trade-offs: reduced liquidity, manager selection risk, and the need for strong underwriting. For many investors, it sits between core bonds and equities as a source of income and diversification of return drivers.
Here is how I think about fit and risk management as a Chief Executive and advisor:
- Income first: The yield is the main driver. Focus on net returns after fees and losses.
- Quality of underwriting: Track record through stress matters more than slide decks.
- Sector mix: Essential services and cash-generative models tend to be more resilient.
- Structure: Senior secured, covenants, and lender protections are key.
- Liquidity: Know the lockup and gating terms. Match them to your needs.
Risks You Should Not Ignore
I never want this to read as cheerleading. Every investment carries risk. In private credit, top risks include:
Refinancing pressure. Loans coming due must be refinanced at higher rates. Companies with thin margins may struggle. That increases amendment requests, extensions, and potential restructures.
Sector concentration. Overexposure to a single industry can hurt if a cycle hits that niche. Diversification is not a slogan; it is a safeguard.
Manager dispersion. Not all lenders are equal. Weak covenants, light diligence, or rapid growth can hide sloppy risk controls. Look under the hood.
Illiquidity. You cannot sell out in an afternoon. If you need daily liquidity, this is not the right sleeve.
Lessons From 2008 That Still Apply
Three clear lessons carry forward from that crisis:
- Price the risk, not the fear: Mark loans to reflect risk, but do not confuse equity panic with loan performance.
- Cash flow pays the bills: Focus on interest coverage and free cash flow in the next few years, not a distant terminal value.
- Conservatism wins: Downward marks in a storm can speed the rebound when payments keep arriving.
Answering the Common Pushbacks
“What if the marks are fake?” Independent valuation inputs, audits, and borrower financials inform marks. The 2008 pattern shows managers were conservative, not optimistic.
“But software stocks are down.” Equity and credit are different. A lower long-term equity value does not mean a borrower misses next quarter’s payment.
“Banks are warning about cockroaches.” Competition hurts incumbents. That does not make private loans toxic. It means borrowers have choices.
What I’m Watching Next
I am tracking default and recovery rates, amendment activity, and net interest margins at the borrower level. I am also watching sectors most exposed to rate shocks, like interest-rate-sensitive services or firms with high fixed costs. Manager discipline around covenants and portfolio construction will separate steady ships from leaky ones.
I also pay attention to secondary trading in public credit as a real-time signal. If yields in comparable public markets move up meaningfully, private markets should reflect that. If payments hold and spreads tighten, expect stability or recovery in valuations.
The Bottom Line
“Someone please inform the reporters that private credit was down 6% in 2008 when the world was collapsing.”
Private credit is not risk-free. But the claim that it is hiding a cliff of losses ignores history, structure, and how loans are valued. The last real crisis saw private credit lose mid-single digits while equities lost half their value. Managers marked down more than realized losses and then recovered as cash flows kept coming in.
Keep a cool head. Look at cash flow, structure, and maturities. Match your liquidity needs to the vehicle. Choose managers with discipline. The headlines will come and go. Payments and protections decide outcomes.
Frequently Asked Questions
Q: How is private credit different from high-yield bonds?
Private credit loans are typically privately negotiated, often senior secured, and carry covenants tailored to each borrower. High-yield bonds are broadly distributed, usually unsecured, and priced daily in public markets. Private loans may offer higher coupons and stronger protections, but they come with less liquidity.
Q: What happens if interest rates stay high for longer?
Higher rates lift coupons on many floating-rate loans, boosting income. The trade-off is more pressure on borrowers’ coverage ratios. Expect more amendments, extensions, and selective stress. Manager quality and sector selection become even more important if rates remain elevated.
Q: Is now a good time to allocate to private credit?
It can make sense for investors seeking income and lower volatility than equities, provided they accept reduced liquidity and perform thorough due diligence on strong managers. Focus on diversified portfolios, senior secured exposure, and proven underwriting through past stress periods.
Image Credit: Photo by Jakub Zerdzicki: Pexels
