A New Test for Private Credit

Private credit has evolved from a niche strategy into a trillion-dollar market, demonstrating resilience through historical stress tests like the 2008 financial crisis and the pandemic. While recent media narratives express concern over liquidity and valuation, current fundamental metrics show improving leverage and coverage trends. Software, a major sector of focus, maintains a default rate of less than 2.5%—significantly lower than the 5% industry average—with AI positioned as a net tailwind for established enterprise platforms rather than an imminent threat. Systemic risks remain contained due to low leverage within investment vehicles and limited links to the broader banking system compared to 2008. Current opportunities lie in widening spreads for direct lending and the growing demand for opportunistic hybrid credit, which provides flexible capital solutions for M&A and balance sheet rationalization. David Miller of Morgan Stanley Investment Management notes that while retail capital inflows previously tightened spreads, moderating flows are now leading to more favorable pricing and terms for investors.