Alternative Credit Leaders Flag Risks And Rewards Ahead

In Brief:

In Ares Management's recent "In the Gaps" webinar, Co-Heads of Alternative Credit Joel Holsinger, Keith Ashton, and Kevin Alexander discussed key trends affecting private credit markets in 2025. The panel highlighted how recent market volatility, flattening credit curves, and demographic shifts are reshaping private credit opportunities. They warned of concerning consumer credit trends in subprime sectors while noting that institutional capital flows are creating unsustainable compression in credit spreads, potentially signaling the end of the current cycle. Their analysis suggests markets are approaching an inflection point with a 45-56% probability of recession.

Big Picture Drivers:

• Capital Flows: Insurance and pension fund demand compressing spreads despite fundamental risks

• Credit Curves: Flattening yield differentials across credit qualities signaling potential market peaks

• Consumer Bifurcation: Prime consumers remaining resilient while subprime showing significant stress

• Cyclical Indicators: Early warning signals appearing in fine dining, consumer behavior, and employment

Key Topics Covered:

• Spread Compression: Credit curves flattening across asset classes despite fundamental deterioration

• Private Credit Dynamics: Institutional investors pushing into riskier tranches seeking yield

• Market Signals: Fine dining and restaurant indicators showing recessionary warning signs

• Recession Odds: Panel estimates 45-56% chance of recession, significantly higher than Wall Street consensus

Key Insights:

• Yield Hunting: Investors stretching for yield in private credit markets as curves flatten

• Model Breakdown: Panelists described current spread levels as "$20 oil" - unsustainable prices that eventually correct

• Supply-Demand Imbalance: Insurance flows into senior tranches pushing investors down the capital stack

• Equity-Credit Divergence: "Big disconnect right now between credit markets and equity markets" as volatility hasn't meaningfully impacted spreads

By The Numbers:

• 55%: Holsinger's probability estimate of recession in next 12 months, versus Goldman's 35%

• ~100 bps: Compression in spread between AAA and BB tranches in subprime auto since 2023

• 50%+: Restaurants reporting decreased foot traffic, a leading indicator of consumer stress

Memorable Quotes:

• "Credit makes the world go around... it's that whole music, you know, the money makes the world go around." - Joel Holsinger explaining how credit cycles drive broader economic patterns

• "We got to the point where it frankly is hurting a lot of the buyers in this market... I've been calling it $20 oil." - Joel Holsinger comparing current credit spread levels to oil prices so low they become unsustainable

• "There's a big disconnect right now between the credit markets and the equity markets." - Kevin Alexander highlighting how equity volatility hasn't meaningfully impacted credit spreads yet

The Wrap:

The panel's analysis suggests private credit markets may be approaching an inflection point, with capital flows creating artificial spread compression despite underlying deterioration in consumer metrics. Their consensus points to a likely mild recession with continued pressure on consumer sectors, creating potential dislocation and opportunity for private credit investors positioned to capitalize on the correction. Investors should watch for divergence between equity volatility and credit spreads as a key indicator of market direction.