Why Private Credit Hasn’t Lost its Shine

This is a cyclical normalization of credit conditions, not a crisis.

Private credit is a key pillar of global capital formation, but it’s less transparent than public-market equivalents. Its rapid growth and widening scope invite scrutiny, as it should. But we don’t think concerns about AI disruption and default risk should define the asset class as a whole.

Along with banks and public credit, private credit plays an important role in financing corporations and the real economy. But private assets are illiquid, borrowers are private companies and there’s no daily market pricing. In the absence of real-time data, other narratives can fill the vacuum. 

Lately, those narratives have centered around concern about AI-driven disruption and worries about default risk and liquidity. These developments may create bumps along the way, but they don’t change the role private credit plays in the economy or the value it can provide in investor portfolios. Credit—public and private—is cyclical. When liquidity tightens and economic fundamentals weaken, weaker credits surface. That’s not unusual.

In Private Markets, Credit Cycles Still Matter

There have been some isolated credit losses in recent months and a few high-profile bankruptcies at companies financed by public, private and bank credit. Some of these cases involved allegations of fraud and misappropriating collateral. But these aren’t unique to private credit or to the broader economic cycle.

In our view, what we’re seeing amounts to a cyclical normalization in credit conditions. As liquidity tightens and economic fundamentals moderate, weaker underwriting can come to light. That isn’t evidence, in our view, of structural problems. Rather, it has more to do with where we are in the credit cycle.

Underwriting standards tend to weaken in the later stages of a cycle. That’s not new, and it’s not unique to private lending. Risks tied to AI-driven disruption, geopolitical uncertainty and an uncertain policy outlook add to investor concerns. But private credit, in our view, is designed in part to help manage these types of risks.

Careful underwriting and the ability to structure financing arrangements appropriately may give private lenders an advantage—whether deals are with private equity owned middle market companies, non-bank loan originators or private real estate investors.

In corporate direct lending, for example, loans typically sit at the top of the capital structure, which offers built-in risk mitigation and enables investors to proactively address concerns. They also may benefit from a large equity cushion that’s first to absorb losses tied to declines in a borrower’s value. Overall, we believe negotiated loan structures, strong lender protections and other features make private credit uniquely resilient.

Putting Risk in Context

None of this is to say there aren’t potential risks on the horizon. In markets, there always are. The trick is knowing how to invest around them and structure investments in a way that can help to limit that risk. In asset-based finance, for instance, the ability to minimize default risk through disciplined asset selection and effective structuring is an important feature.

Generative AI can be seen as a risk and a potential benefit. Take software-as-a-service (SaaS) companies, many of which are owned by private equity sponsors and financed by private credit. Markets have focused intensely on AI’s potential to disrupt business models in the sector. For some companies, it probably will.

But markets can often paint entire industries with a single broad brush. We think the strongest SaaS companies that provide “mission-critical” services to corporate clients are likely to remain essential partners for their clients. And many of these companies are embracing AI in a way that may have the potential to increase their growth potential and profitability.

For companies that meet those criteria, we see near-term tailwinds. These companies tend to specialize in certain key areas. They’re also embedded in customer workflows and are very difficult to replace.

Private Assets: Illiquidity By Design

Liquidity, of course, is often limited in private assets—and often by design. Long-term private assets aren’t meant to provide daily liquidity. Part of the value proposition for investors, as we see it, is that investors are compensated for liquidity constraints with higher yields, stronger potential returns and the downside mitigation potential that comes from custom structuring, strong borrower-lender relationships, lender control and reduced volatility.

Even so, the ecosystem for private assets is evolving to provide some limited-liquidity tools such as secondary markets and structured financing options. This may make it easier for investors to manage exposures over time.

Remember, media narratives in financial markets often emphasize risk without context. Defaults happen in all credit markets—public and private—and risks often involve isolated situations or stresses tied to specific borrowers, not systemic market failures. We believe that structural features, underwriting discipline and manager skill shape real outcomes. That’s why private credit plays such an important role in investors’ portfolios today. We don’t expect that to change.

We’ve seen China establish industry leadership before, even when it wasn’t the first mover. For example, Chinese companies didn’t invent electric vehicles or solar panels, but they now dominate these industries. Similarly, China’s cost-effective engineering talent and large end-market point to strong potential for Chinese firms to emerge as leading players in AI infrastructure and applications.

But buyer beware. Despite the strong potential, we caution investors against chasing the latest hot stocks in Chinese AI. However, we do think equity investors can find Chinese internet companies with AI exposure and valuations that remain reasonable, even after the recent rally. Enablers of AI technology, the proverbial “pick-and-shovel” makers, also deserve attention, including power producers, electric grid equipment makers and domestic electronic equipment manufacturers. These industries are likely to benefit from increased power demand due to AI adoption, especially as Chinese tech companies announce large increases in AI-related capex.

Growing Investor Interest

Nobody can say how long the recent China rally will last. But we’re encouraged because China’s current rebound isn’t driven by a single political speech or policy announcement. As we see it, investors are actively assessing the relative attractiveness of other asset classes and equity markets, and in today’s complex global conditions, some are finding China’s equity market potential to be appealing. Of course, Chinese markets can be volatile and policy decisions are hard to predict. Still, we think the proactive approach that is leading some international investors to reevaluate the Chinese market offers some hope that the current run might be more sustainable than the short-lived recoveries in the past.

Recent statements suggest that the government is committed to supporting the private sector in general and technology in particular. And ultimately, China’s future success will hinge on the government’s ability to effectively deploy policy measures to address challenges such as disinflation, weak consumer demand and trade wars.

What About Trade Wars?

No discussion of China’s equity markets can ignore the trade wars. Geopolitics—particularly tariffs and the threat of further industrial sanctions—remain the biggest uncertainty for the Chinese market. And it’s usually the main reason investors decide to avoid Chinese stocks.

While the risks of tariffs are real, we think they may be overstated. Over the past seven years, Chinese companies have prepared for tariff uncertainties by diversifying supply chains and relocating factories to Southeast Asia and Latin America. What’s more, since President Trump’s policies have been clearly telegraphed to the markets for months, we believe much of the impact of tariff hikes has already been priced into the Chinese markets.

So how can we reconcile these very different stories about tariffs and technology that are shaping sentiment toward Chinese markets today? Think about it as opportunity versus risk. DeepSeek shines a light on the long-term opportunity that China presents to investors, which can help offset some of the near-term tariff risks. Taken together, this reinforces the need for equity investors to be selective in identifying businesses that are less threatened by trade tensions while benefiting from the positive dynamics that will drive the next stage of China’s development in the 21st century.