Private Credit's Best Managers Are Declining 98% of Deals and Their LPs Are Relieved

What's New

Susan Casser of Neuberger Berman, Christina Lee of Oaktree, Nawei of Barclays, and Lotfi Kurui of PIMCO argued that private credit is undergoing its first genuine stress test and the result is a widening gap between disciplined and deployment-driven managers in a panel at the Bloomberg Global Credit Forum. Casser disclosed that Neuberger Berman's year-to-date decline rate on its $25 billion direct lending portfolio has reached 98%, up from a normal 94%, even as the market shifts to definitively risk-off conditions with spreads up 50 basis points and leverage asks down. The panel described a market where buyers have adjusted faster than sellers, mid-market activity is picking up as sponsors deploy remaining dry powder, and the AI data center financing wave is being met with selectivity rather than broad enthusiasm.

Why It Matters

The stress test is happening at full employment, which makes it structural rather than cyclical. If underwriting deteriorates when an asset class grows sevenfold in a decade, the correction happens when growth slows, not when the economy breaks. For allocators evaluating manager re-ups, the dispersion now emerging across GP performance, decline rates, and portfolio construction is the first meaningful dataset on how direct lending behaves under pressure. Casser's formulation is blunt: capital deployment is the opposite of selectivity, and a senior secured asset class requires choosing one.

Big Picture Drivers

• Buyer-seller equilibrium not yet found: Spreads have widened 50 basis points, but sponsors and sellers have not fully adjusted. Casser compared the dynamic to 2022, when buyers repriced immediately and sellers lagged, slowing deal consummation even in an environment with adequate pipeline.

• Mid-market activity rising as large-cap freezes: Lee noted that $200 to $300 million financing packages are easier to execute than billion-dollar-plus structures in the current direct lending market. Sponsors with vintage pressure to deploy are finding the mid-market more accessible, less competitive with BSL, and subject to lower volatility.

• Private credit retreating to credit fundamentals: Barclays' Nawei reported that private credit providers are showing retrenchment in leverage, more stringent credit selection, and wider pricing. One client described certain private credit lenders as "bidding to lose," likely those with higher exposure to public BDCs.

• Software valuation remains unresolvable on a sector basis: PIMCO's Kurui argued that software trades at its lowest-ever premium relative to the S&P 500 and that the de-rating will be permanent until the market can answer what the terminal value of these businesses is. The sector still trades as one risk factor with no dispersion, indicating the analyst community has not yet identified winners and losers.

• AI data center financing met with capped return logic: Lee explained Oaktree's caution on data centers: the best outcome for a performing private credit lender is return of coupon and principal. Without knowing which data center operators will be winners, aggressive deployment into the sector offers asymmetric downside.

By The Numbers

• 98% — Neuberger Berman's year-to-date decline rate on private credit deals, up from a typical 94%

• $10 billion — Neuberger Berman's average weekly pipeline, down roughly 10% from prior year

• 50 basis points — Spread widening in the current risk-off environment

• $200 billion-plus — Software debt maturing through 2028, though Kurui argued the imminent refinancing need is not the primary challenge

• $3 trillion — Estimated financing needed for the AI data center buildout

Key Trends to Watch

• Manager bifurcation as the durable signal from this cycle: Lee described the current environment as direct lending's first true stress test after 15 years of uninterrupted growth. Non-accruals are rising and performance dispersion across GPs is appearing for the first time. Allocators conducting manager due diligence now have a real-world dataset rather than backtested assumptions.

• Add-on acquisitions replacing platform LBOs as deployment channel: Casser emphasized that add-ons are getting executed at lower leverage and higher spreads, reflecting sponsors pursuing definitive operational objectives rather than optimizing financial terms. This deal type does not generate headlines but constitutes a material share of deployment in risk-off periods.

• Software refinancing favoring incumbent lenders: Casser argued that existing lenders sitting on software maturities effectively own the optionality. The private equity sponsor retains the company only if they pay down the lenders under tighter documentation and better pricing. The refinancing path runs through the current creditor group, not the new-issue market.

Memorable Quotes

• "Capital deployment is the opposite of selectivity. It's a senior secured asset class. Pick one." Casser draws a hard line between the two mandates investors ask managers to fulfill simultaneously.

• "You cannot get the illiquidity premium without subjecting yourself to illiquidity." Casser's reminder to allocators demanding daily liquidity from a structurally illiquid asset class.

• "One of my state pension fund investors sat down and before I could even shake his hand, he said, 'You're underdeployed.' I took a breath and he said, 'And we're happy with that.'" Casser on the gap between deployment pressure and informed LP expectations.

• "The best we can do is give you your coupon back and your principal. So we need to be selective because we really don't know yet who the winners and losers of this competitive set is going to be." Lee on why Oaktree's performing credit mandate limits data center enthusiasm.

The Wrap

The stress test thesis matters because it is happening in an economy at full employment, which means the underwriting deterioration is endogenous to the asset class rather than imposed by recession. Kurui framed the dynamic precisely: if you grow something sevenfold in 10 years, underwriting standards deteriorate and you start deploying rather than investing, two processes that produce different outcomes. The 98% decline rate at Neuberger Berman is not evidence of a broken market. It is evidence of a functioning one, in which the bid-ask gap between risk-adjusted lender expectations and sponsor pricing ambitions has widened enough to separate discipline from momentum. Whether that gap closes on the lender's terms or the sponsor's will determine recovery rates across the next vintage of private credit.