Private Credit Manager Selection Separates Winners From Losers
Private credit has become one of the most talked-about asset classes in investing. Unfortunately, it has also become one of the most misunderstood.
Open any financial publication today, and you’ll see a familiar list of concerns: rising defaults, gated funds, AI-related software losses, refinancing pressures, consumer credit risks and warnings about systemic liquidity. Some commentators have even compared private credit to an iceberg hiding unseen dangers beneath the surface.
These are legitimate issues. They deserve attention. But they’re not reasons to avoid private credit. There are reasons to become much more selective about who you invest with.
The headlines are exposing something many investors have overlooked during private credit’s extraordinary growth: private credit is not a monolithic asset class. Manager selection has always mattered. Today, it matters more than ever.
The Problem Isn’t Private Credit. It’s Undisciplined Credit.
Over the past decade, capital has poured into private credit. That’s not surprising. Investors have been attracted to floating-rate income, lower volatility than public equities, and the structural shift away from bank lending.
Today, there are 564 direct lending managers. But experience is increasingly rare:
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27% have been operating for at least a decade
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40% have less than five years of experience
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Nearly three-quarters have never managed through a full credit cycle
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Just 4% were investing before the Global Financial Crisis
Those statistics should give investors pause.
The industry’s rapid expansion created enormous opportunities, but it also attracted firms whose experience was built during one of the most benign credit environments in modern history. Many learned how to originate loans. Far fewer have learned how to manage them when conditions deteriorate.
As Warren Buffett famously observed, “Only when the tide goes out do you discover who’s been swimming naked.”
Private credit is beginning to experience its own version of that moment.
The Headlines Share a Common Thread
At first glance, today’s negative stories appear unrelated.
One week, it’s a software company struggling under the weight of AI disruption. Next, it’s a fund limiting withdrawals. Then it’s another borrower requiring payment-in-kind interest or extending maturities.
Look deeper, however, and many of these situations share common characteristics. Too much leverage, too little underwriting discipline, too much capital chasing the same transactions, and too much focus on raising assets rather than protecting capital.
None of these problems is inherent to private credit as an asset class. They’re symptoms of inexperienced, short-sighted investment management.
Bigger Isn’t Always Better
One of the unintended consequences of private credit’s success is that an enormous amount of capital has concentrated in the upper end of the market. Large borrowers attract dozens of lenders. Competitive auctions compress spreads, weaken covenant protections, increase leverage multiples and reduce lender influence when challenges inevitably arise.
Avoiding these issues is simple enough. Looking at sectors outside upper-middle-market companies and large corporations—such as the core middle market—eliminates most of these issues. Core middle market companies, generally generating between $10 million and $50 million of EBITDA, offer several structural advantages:
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Less competition among lenders
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Stronger covenant packages
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More comprehensive diligence
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More frequent financial reporting to lenders
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Greater ability to influence outcomes when borrowers face challenges
Experience has taught us that these differences matter far more during difficult markets than during easy ones.
Sector Expertise Matters Too
Another lesson from recent headlines is that not every industry deserves the same underwriting approach.
Take software. We have invested successfully in software for many years. We continue to believe it’s an attractive sector.
But software isn’t one industry.
Some businesses enjoy recurring revenue, high switching costs and mission-critical products. Others face rapid technological disruption, customer concentration or business models that artificial intelligence may fundamentally alter. Those distinctions matter.
Sector specialization is about understanding where risk resides before it becomes a headline. The same principle applies across healthcare, government services, business services and consumer businesses.
Private credit is ultimately a business of underwriting individual companies, not broadly defined sectors.
The Real Test Begins After the Loan Closes
Originating a loan is only the beginning. Managing risk is an ongoing process.
The best asset managers have the same professionals sourcing, underwriting and monitoring an investment throughout its life. They receive financial reporting, maintain regular dialogue with sponsors and management teams, and emphasize downside analysis before making an investment decision. The investment committee spends more time debating what can go wrong than what can go right.
That mindset becomes invaluable when markets become more challenging.
Credit investing isn’t about avoiding every problem. It’s about recognizing problems early and having the experience to manage through them.
Investors and Advisors Should Ask Different Questions
Private credit shouldn’t be evaluated by headlines alone. Instead, advisors and investors should ask a different set of questions.
How many credit cycles has the manager navigated?
Where do they invest?
What industries do they know best?
How much leverage do they allow?
What protections do they negotiate?
How do they behave when a borrower struggles?
Those questions often tell you far more than a fund’s current yield.
Volatility Doesn’t Create Great Managers. It Reveals Them.
The current environment is testing every private credit manager. Some portfolios will prove resilient. Others won’t. And that’s healthy.
Every maturing asset class eventually reaches the point where experience separates itself from momentum, and private credit has reached that stage. The industry’s future remains exceptionally bright. Banks continue to retreat from middle-market lending. Companies still need flexible capital. Investors continue seeking differentiated sources of income.
None of that has changed. What has changed is that the easy years are behind us. For investors, that’s not a reason to abandon private credit. It’s a reason to focus on what has always mattered most: disciplined underwriting, thoughtful sector selection, conservative structures and experienced managers who have already proven they know how to navigate difficult markets.
