Private Credit's 2021 Vintage Will Expose Managers Who Cannot Restructure

What's New

Private credit's next return gap will come from workout skill, and the 2021 to 2022 vintage will force the test. Brendan McGovern, Head of Private Credit at 26North, argues this in an interview on The Bridge. He traces recent defaults to over-leveraged deals struck when base rates were near zero. Software dominates that vintage. Its loans come due in 2027 and 2028, which will bring extensions, restructurings and hybrid capital. Allocators should screen managers for restructuring depth and for pay tied to performance.

Why It Matters

For decades, senior secured lenders posted returns within a couple hundred basis points of each other. McGovern expects that clustering to end. His view cuts against picking the largest platform by default. It also puts him at odds with managers who scaled through semi-liquid retail vehicles. He rejects the popular claim that public and private credit are converging. 26North pitches itself as a middle-market lender backed by an in-house private equity and operations bench, so a workout-driven cycle favors its model.

By The Numbers

• Probably half of today's direct lending inventory dates from the 2021 to 2022 era, when money was cheap. Half of that volume is in software.

• 2027 and 2028 are when that vintage matures.

• Roughly 15% of net asset value in semi-liquid retail funds is seeking redemption. McGovern says investors enjoyed benign-year returns without grasping that private loans cannot be sold on demand.

• $100 oil acts as a big tax on the consumer. He expects growth to slow and demand to fall as a result.

Memorable Quotes

• "Investors thought they could get the best of both worlds, the benefits of the value of an illiquid asset, but the experience of actual liquidity, and I think those things are pretty incongruous." He sees the current redemption pressure as the bill for that mismatch.

• "That doesn't exist for lenders. We have to avoid any calamity whatsoever, so there's a much more cautious tone." A software equity fund can absorb four failures in 10 names, but a credit book cannot.

• "If you look at the tick up in defaults, it feels much more like your garden-variety, poorly underwritten, over-levered business, mostly from a 2021-2022 vintage." He concedes that the asset class's current losses came from its own underwriting.

• "Good old-fashioned workout restructuring capabilities is going to be a big differentiator in this upcoming cycle." This is the line his whole case rests on.

The Wrap

McGovern's view gains support if 2027 and 2028 bring a wave of extensions and restructurings. It also needs senior lender returns to spread well past their historical band. It weakens if refinancing markets absorb the software vintage at par. It weakens further if AI lifts most borrowers along with public software indices. The next two years of maturities will settle it, starting with how many software loans get amended in 2027.