Private Credit Defends Against Peak Predictions

In Brief:

Private credit faces mounting skepticism as critics compare the sector's rapid growth to pre-crisis excesses, with prominent figures like Jeff Gundlach drawing parallels to CDO mania and Jamie Dimon declaring "peak private credit." Despite junk bonds trading at historically tight spreads and questions about accurate loan valuations, the alternative lending market continues attracting massive capital inflows. Mike Dennis, co-head of European credit at Ares Management, pushes back against these concerns in a wide-ranging discussion about market dynamics, regulatory challenges, and growth prospects. Dennis oversees part of Ares' $550 billion in assets under management and brings nearly two decades of European private credit experience, having joined the firm in 2007 after leading Barclays' London Financial Sponsor Group. His perspective offers crucial insights into whether private credit represents a sustainable evolution in corporate financing or a bubble waiting to burst.

Big Picture Drivers:

• Market Maturation: Private credit remains significantly less developed than private equity markets, creating substantial growth runway as the sectors converge

• Bank Retreat: Regulatory capital requirements continue driving banks away from direct lending, creating persistent opportunity for alternative managers

• Liquidity Dynamics: Record CLO issuance and active capital markets provide competition for larger deals while preserving middle-market opportunities

• Geographic Expansion: European markets offer untapped potential with less mature private credit penetration compared to US markets

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Key Topics Covered:

• Valuation Concerns: Industry response to criticism about pricing transparency and potential asset mispricing during volatile periods

• Growth Sustainability: Analysis of market drivers and capacity for continued expansion despite economic headwinds

• Competitive Positioning: How private credit managers compete with revitalized bank lending and liquid credit markets

• Regulatory Evolution: Potential impact of changing Basel III implementation and increased regulatory scrutiny on market dynamics

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Key Insights:

• Valuation Process: Private credit managers employ quarterly line-by-line portfolio reviews with independent audits, contradicting claims of inadequate price discovery compared to daily-marked liquid markets.

• Middle Market Advantage: Smaller deals (€10-100 million EBITDA) offer better relative value than larger transactions as capital markets competition intensifies for upper-market opportunities.

• Growth Trajectory: Private credit market remains significantly underdeveloped compared to private equity, with substantial room for convergence as each euro of private equity typically requires matching debt capital.

• Bank Partnership: Rather than zero-sum competition, banks increasingly access private credit exposure through leverage facilities to managers, achieving better regulatory capital treatment than direct lending.

• Portfolio Resilience: Private credit has successfully weathered both COVID-19 and interest rate cycles, demonstrating asset class durability with consistently low loss rates across the industry.

• Geographic Strategy: European markets offer compelling expansion opportunities, particularly in Italy where regulatory improvements and growing private equity activity create favorable conditions despite historical challenges.

Memorable Quotes:

• "I would push back and say, actually, the process is the policies for valuing assets in the private credit managers I know are actually pretty robust." - Mike Dennis, defending industry valuation practices against criticism

• "Private credit will catch up with the private equity markets. Look, for every euro of private equity capital invested, typically, you're raising a euro, a dollar, a pound of private credit." - Mike Dennis, explaining the growth potential

• "We view the banks very much as partners. In every deal that we do, the company in question is going to need a banking relationship." - Mike Dennis, describing the collaborative rather than competitive relationship

• "The critical thing in direct lending is to make sure that you are seeing the widest opportunity set that you can see." - Mike Dennis, on maintaining competitive advantage through origination capabilities

• "Trump and whatever he does next, I mean, it's very hard to predict, and credit managers don't like things that they can't predict or control." - Mike Dennis, identifying his primary concern for the market

The Wrap:

The private credit industry stands at a critical juncture, facing legitimate questions about valuations and sustainability while demonstrating remarkable resilience through recent economic cycles. Dennis's defense highlights how established managers are adapting to increased scrutiny through robust processes and strategic positioning, particularly in middle-market segments where structural advantages remain intact. The sector's evolution from niche alternative to mainstream asset class appears likely to continue, driven by persistent bank retreat and institutional capital seeking yield, though success will increasingly depend on origination capabilities and selective deployment rather than broad market beta.