Private Credit Enters Adolescence as Market Tests Resilience

In Brief:

Private credit has evolved from a financing appendage of private equity into a $3 trillion asset class facing its first major market cycle, with industry leaders warning that underwriting discipline will separate winners from losers as economic uncertainty creates both opportunities and risks. Five industry veterans gathered at the Milken Institute Global Conference to discuss how the rapidly maturing market is navigating rising interest rates, geopolitical tensions, and massive capital inflows that have transformed deal dynamics. The panel included John Bowman (CEO, CAIA Association), Michela Bariletti (Chief Credit Officer, Phoenix Group), Paul Horvath (CEO, Orchard Global), Joe McCurdy (Senior Managing Director, Guggenheim Investments), and Rudy Sahay (Founder, Aquarian Holdings), who collectively represent decades of experience across multiple financial crises and market cycles.

Big Picture Drivers:

• Market Maturation: Private credit approaching $3 trillion of $25 trillion alternatives market, transitioning from niche strategy to mainstream asset class

• Regulatory Shift: Post-GFC banking regulations forced disintermediation, creating opportunity for private capital to fill lending gaps

• Interest Rate Impact: Rising rates have capped leverage levels and created natural discipline in deal structures compared to pre-2008 era

• Capital Concentration: Handful of mega-funds raised vast sums while smaller players struggle to compete, creating new market segmentation

Key Themes:

• Market Evolution: How private credit transformed from pre-GFC appendage to standalone $3 trillion asset class over past decade

• Bank Partnerships: Debate over optimal relationship between traditional lenders and asset managers in new ecosystem

• Deal Sizing: Strategic considerations around fund size and market positioning between mega-funds and nimble players

• Technology Integration: Role of AI and data analytics in underwriting, portfolio management, and competitive advantage

Key Insights:

• Leverage Discipline: Current interest rate environment has naturally constrained leverage levels, with deals sitting at approximately 40% loan-to-value ratios compared to pre-crisis peaks of 6-8x leverage.

• Control Premium: Private credit's value proposition centers on certainty of execution and lender alignment during stress periods, contrasting with fragmented broadly syndicated loan markets.

• European Opportunity: Brexit and deglobalization have created dislocated markets in Europe where asset managers partnering with local banks can achieve superior risk-adjusted returns.

• Insurance Synergy: Long-term insurance liabilities create natural alignment with private credit cash flows, generating private equity-level returns in senior secured positions.

• Technology Imperative: Firms not adopting AI and advanced data analytics within 3-5 years will lack competitive ability to source deals and assess risks effectively.

• Infrastructure Focus: Energy and data center lending emerging as key strategy to capitalize on AI-driven digital infrastructure buildout and energy dominance themes.

Memorable Quotes:

• "We are holding that risk for as long as we're in the position. We have to own it. We have to manage it. And we have to make sure that we are comfortable going to sleep at night with the risk we have in our balance sheet." - Rudy Sahay, explaining insurance company approach to private credit investing

• "The second you feel like you're competing with broadly syndicated, you've lost. You're giving up liquidity, you should be getting something for that." - Joe McCurdy, on maintaining pricing discipline in private credit markets

• "This uncertainty is actually causing opportunity. The adversity is causing people or dare I say allowing politicians to do what they knew that they needed to do but weren't doing." - Paul Horvath, referencing IMF head's comments on crisis-driven reform

• "So what happened over the past couple of years and given the volatility is that sometimes we find ourselves short credit compared to where you would like to be and you wait for the opportunity to deploy." - Michela Bariletti, on maintaining underwriting standards during market volatility

• "There's a lot of lore, a lot of mythology and even some tension around is this new is this old uh well the activity is not new but kind of the institutional I would say reputation of the asset class is a newer thing." - John Bowman, framing the discussion on private credit's rapid institutional adoption

The Wrap:

The private credit market stands at a critical juncture where its first major stress test will determine which strategies and managers survive the transition from adolescence to maturity. While massive capital inflows have created new competitive dynamics and potential risks, experienced practitioners see current market conditions—with higher interest rates providing natural leverage constraints and geopolitical uncertainty creating opportunities—as favorable for disciplined underwriters. The integration of AI and technology, coupled with strategic partnerships between asset managers and banks, will likely define the next phase of evolution for this now-essential component of institutional portfolios.