Private Credit: High Yields, Rising Risks, and Why We’re Staying Patient
Private credit has become one of the hottest areas of the market. High yields and strong recent performance have drawn in a wave of new investors into the private credit asset class as banks have backed away from lending since the Global Financial Crisis. When an asset class becomes this crowded this quickly, it’s important to ask whether the fundamentals still justify the enthusiasm. A disciplined investment process is not only about choosing what to buy but also about recognizing when to step back instead of following the herd.
The private credit market of today looks very different from the one that existed a decade ago. What began as a niche strategy focused on lending to middle‑market companies has ballooned into a trillion-dollar industry. As capital continues to pour in, competition among lenders has intensified, and competition has changed the structure of the market and not for the better.
Borrowers now hold more negotiating power, pushing for weaker covenants and more flexible terms.
Underwriting standards have loosened, with lenders accepting higher leverage and lower‑quality financials to win deals.
Loan structures have become more aggressive, often with limited transparency into borrower performance.
Lower‑quality borrowers accessing capital they couldn’t obtain from traditional banks.
This is the classic pattern of a maturing, crowded asset class where early investors enjoy strong returns because they were being fairly compensated for the amount of risk they were taking but the later herd investors face a much different risk return profile. Investors are no longer being fairly compensated due to higher risks and lower returns.
At the same time, private credit remains fundamentally illiquid and opaque. Investors commit capital for years at a time, with limited visibility into how loans are marked or how borrower fundamentals are evolving. The structure of the private credit asset class creates a more fragile backdrop that can get lost in the pursuit of higher yields.
The major appeal of private credit are current yields that look meaningfully higher than traditional fixed income. It’s easy to assume that a double‑digit yield signals a strong opportunity, but yields can rise simply because risk is rising faster. Defaults, restructurings, and fees can erode returns in ways that aren’t obvious upfront. More wealth has been destroyed by chasing higher yield than by almost anything else in finance.
Another underestimated risk by investors is the liquidity profile of the private credit asset class. Many private credit funds offer periodic liquidity even though the underlying loans cannot be sold quickly. History shows that this mismatch works until it doesn’t. When markets tighten or redemptions rise, funds may gate withdrawals or suspend redemptions. Liquidity risk tends to show up precisely when investors need liquidity most.
We continue to monitor private credit and believe it will offer compelling opportunities again. Today, however, the combination of abundant capital, loose underwriting standards, and weaker structures, suggests that patience is the more prudent strategy. Avoiding an overhyped, crowded asset class is not a missed opportunity; it’s a deliberate risk‑management decision.
A disciplined portfolio isn’t built on chasing the highest yield. It’s built on transparency, liquidity, and durable sources of return. In this environment, steering clear of crowded or opaque areas of the market is a strategic choice that protects long‑term wealth.
