Adams Street's Diehl: Hyperscalers Are Quietly Degrading Private Credit Quality

What's New

Jeff Diehl, Managing Partner and Head of Investments at Adams Street Partners, argued that the largest private credit managers are creating systemic underwriting risk by scaling deployment far beyond what disciplined lending can support in a conversation on S&P Global's Private Markets 360. Diehl oversees a $65 billion platform that sits on both sides of the table as LP and direct lender. His central claim: the four largest BDC managers must each deploy roughly $23 billion per year just to stay fully invested, and that pressure is pushing them into larger, weaker credits with fewer protections. The traditional selectivity metrics are meaningless. What matters is the left tail of the loan tape.

Why It Matters

If Diehl is right, the conventional private credit diligence framework, decline rates, median portfolio statistics, deal count, measures activity rather than exposure. Manager selection becomes a loan loss avoidance exercise. The managers on the other side of this thesis are publicly traded firms whose incentive structures reward asset growth over credit quality. Diehl acknowledges Adams Street's advantage as a 100% employee-owned partnership, which is both a genuine differentiator and a competitive positioning argument investors should weigh accordingly.

Big Picture Drivers

• Unprecedented deployment pressure: The four largest BDC managers must each invest approximately $23 billion per year, with the largest needing roughly $43 billion. Add insurance general accounts and the top four need roughly $70 billion combined.

• Gravity toward weaker credits: Deploying at scale means lending above $100 million in EBITDA, where private credit competes against the broadly syndicated loan market. Winning requires matching BSL terms: higher leverage, lower spreads, fewer protections.

• Erosion of the institutional governor: Institutional LPs in drawdown funds once constrained scaling ambitions. Perpetually offered BDCs and insurance accounts have removed that brake.

• Public ownership misalignment: Publicly listed managers face structural tension between investors who want loan quality and stockholders who want asset and revenue growth. Diehl argues this makes sustained underwriting discipline inherently difficult.

By The Numbers

• $43 billion per year in required deployment for the single largest BDC manager alone.

• ~$70 billion in combined annual deployment across the top four managers' BDC and insurance pools.

• 600 new buyout transactions per year from Adams Street's manager universe, against a target of lending to approximately 30.

• $150 to $200 billion in secondary market volume last year, up from $1 to $2 billion when Diehl joined Adams Street in 2000.

Key Trends to Watch

• BSL convergence: If private credit terms in the large-cap segment keep converging with broadly syndicated standards, the asset class's quality premium over liquid credit narrows to near zero.

• Wealth channel growing into its diligence: Global wealth allocation sits below 1% versus approximately 10% for institutions. Diehl compares the current environment to "the early days of the liquid mutual fund industry," with uneven evaluation capabilities across platforms.

• IPO reopening: Diehl expresses the strongest conviction in 25 years about the pipeline, citing AI companies growing at 1,000%-plus. A reopening would ease four years of LP liquidity pressure and shift secondary market dynamics.

Memorable Quotes

• "It can start to put pressure on investment teams to deploy rather than invest, which ultimately can compromise underwriting discipline." The thesis in one line.

• "In lending, you don't get upside like you do in private equity. It's all about avoiding the downside and avoiding loan losses." Why left tail risk is the only metric that drives return dispersion.

• "Your customer shifts from your investor to your stockholder because stockholders have demands." The incentive problem at the heart of the hyperscaler thesis.

The Wrap

Diehl is not predicting a credit crisis. He is diagnosing a mechanism: deployment pressure at scale degrades underwriting, and the degradation is visible in loan tapes if investors look at the right data. His thesis succeeds if the next cycle reveals higher loss rates among hyperscaler portfolios relative to selective lenders. It fails if larger borrowers prove resilient enough that weaker terms never translate into realized losses. The actionable takeaway is narrow: stop evaluating managers on deals declined and start evaluating them on the fundamentals of the loans they made, particularly the weakest positions. The firms that build left tail diligence now will be better positioned than those that wait for defaults to show them what the loan tape already does.