Loose Underwriting Will Define Private Credit's First Real Test

What's New

Private credit's coming losses will trace back to lenders who loosened underwriting standards during the benign years after the GFC. Rick Miller, Group Managing Director and Chief Investment Officer of the TCW Private Credit Group, argues this in an interview on the InsuranceAUM.com Podcast. He says lenders moved from cash flow metrics to loan-to-value. They moved from EBITDA to revenue. They lent to businesses with negative cash flow and kept charging the same price. Allocators should test managers on the metrics they lend against and the remedies their documents give them.

Why It Matters

Headlines blame software exposure and wealth-channel redemptions. Miller calls those topics interesting and important, then points to underwriting as the issue that will matter. He traces the software problem to concentration from lending only to private equity sponsors. He says sponsors put about 60% of their capital into 3 sectors over the last few years. That challenges sponsor-focused lenders who built portfolios to match. TCW lends regardless of owner and has almost no software exposure, so the argument favors its approach.

Zoom In

TCW held recurring-revenue software loans 10 to 12 years ago. It then stopped winning them. Borrowers asked for more debt at lower pricing with looser documents. TCW declined to compete on those terms and moved to other sectors. Miller says the exit was not a forecast about AI. He also argues the market now treats software as more toxic than the facts support. The lesson he draws is about diversification and terms.

Memorable Quotes

• "Sending the money out isn't really that hard. Sometimes getting it back can be difficult." Miller frames senior secured lending around principal preservation.

• "Having 20, 25, 30% or more of any one industry in your portfolio we think is just a mistake." Concentration, in his view, is a portfolio management failure.

• "I can tell you we don't have virtually any exposure to it, but it wasn't a macro decision we made." TCW's clean software book came from losing deals, which Miller admits was not foresight.

• "You can't have a deterioration of your underwriting standards and not change your economics. And I think that's what our market did." Lenders took more risk without being paid for it.

The Wrap

Miller's case stands if losses cluster at managers who lent on loan-to-value, revenue or loose documents. Cash flow lenders with tight covenants should recover most of their principal in the same period. His case weakens if losses spread evenly across managers whatever their underwriting. That pattern would point to macro or sector causes. Miller expects the verdict within 3 to 5 years.