A lot of capital, much of it through the wealth channel, has flowed toward what has been most visible, most accessible, and most immediately rewarding, particularly direct lending. Strong income, stable performance, and growing investor access have drawn significant flows into areas that appear to deliver both yield and consistency. The crowd, in effect, is cheering. But as in any arena where perception and structure coexist, what wins applause is not always what proves most resilient when conditions shift. Today, there are two dynamics at play that determine a gladiator’s fate in the arena: the fundamentals themselves, and the gap between those fundamentals and investors’ perception of them. As we reflect on the first quarter of 2026, the distinction between spectacle and substance has become harder to ignore, and increasingly important to understand. That is not to say this tension is new. We would argue it has been building for some time. But for many, Q1 was the quarter it became impossible to ignore.
At the start of the year, we emphasized portfolio construction would be a defining differentiator and that the margin for error was narrowing. If anything, the first 90 days of the year reinforced that conviction with more urgency. The macro backdrop has grown more complicated, not less. Geopolitical tensions, most notably the evolving conflict involving Iran, have moved from tail risk to central market driver, roiling energy prices and reshaping inflation expectations in real time. The fervor around AI’s anticipated disruption continues to reverberate across an increasingly wide range of sectors, compressing equity valuations for businesses once considered structurally durable and often focusing more concern about the credit underpinning them. And the narrative around private credit, which had been building beneath the surface for over a year, broke into the open in a way that demanded attention from everyone.
Against that backdrop, it is worth stepping back to acknowledge something fundamental. The extension of credit is one of the oldest practices in civilization. The infrastructure has changed, the instruments have multiplied, and the participants have diversified, but the core function has endured: connecting capital with opportunity, and pricing risk along the way. In 1989, the leveraged finance market was predominantly high yield bonds and totaled approximately $189 billion. Today, U.S. high yield alone stands at roughly $1.5 trillion, a figure that has been largely flat for several years. We think that stasis is worth watching. High yield has had its moments before, and we suspect another one may be building as evident by U.S. high-yield issuance reaching a 7-month high in April (including the heaviest net volumes since April 2020). More importantly, the total addressable global credit market now spans more than $45 trillion across corporate, asset-based, and structured credit. That growth has been fueled by innovation, the globalization of capital flows, structural demand for diversified income, broadened access, and the institutionalization of origination. Every chapter of that evolution, from the acceptance of noninvestment grade debt in the 1970s, to the popularization of leveraged buyouts (LBOs) in the 1980s, to the expansion of direct lending in the 2010s, has followed a familiar arc: innovation opens the door, capital comes in, and the market eventually tests who built for permanence and who built to navigate hard moments.
The last five years alone have produced a remarkable expansion in diversified income solutions, from asset-based finance to hybrid capital structures to new vehicles designed to bring credit to a broader investor base. The architecture of credit has been quietly but deliberately built. That is the context in which the current moment should be read, because we are in one of those defining moments now. The question is not whether credit as an asset class is sound. It is. The question is which corners of the market were built to withstand the volatility that arrives when conditions change, and which were assembled during a period when confidence outpaced caution. History does not punish optimism. It punishes the absence of preparation and discipline. Both conditions can exist in the same market and that is the lens through which we are approaching this note.
With this framework in mind, we address the following themes that shaped our perspective this quarter:
The Arena
A review of Q1 credit markets, where dispersion has become bifurcation between quality and risk, and the same yield proved, once again, not to mean same risk.
Playing to the Crowd
A deeper look at the forces reshaping the private credit landscape, from software debt and AI disruption to retail flows and the questions investors should be asking.
Applause versus Outcomes
How we are positioning for what comes next, with an emphasis on credit selection, portfolio construction, and why a revived M&A cycle and the structural advantages of the bond market may catalyze a renaissance in high yield in the quarters ahead.
The Arena
The first quarter of 2026 tested the resolve of credit markets in ways that felt both sudden and, for those paying attention, desired. What had been a relatively constructive start to the year, with disinflation progressing, a pent-up M&A pipeline, and rate easing expectations building, gave way to a more complex and less forgiving environment. In February, Anthropic’s release of Claude Cowork ignited a global selloff in publicly traded software and IT companies, fueling investor fears that AI-driven automation would undermine the subscription-based revenue models that had made software the darling of many markets. Shares of Salesforce, Oracle, Intuit, Adobe, and Workday were among those punished. The narrative quickly extended into credit, where the absence of hard assets in software borrowers’ capital structure combined with the use of leverage in recent vintages, drove an even more pronounced repricing in the debt of highly leveraged software borrowers across both public and private markets. That shock collided with an already shifting macro backdrop: the escalating conflict involving Iran pushed oil prices above $100 a barrel, the disruption to the Strait of Hormuz introduced supply risks extending well beyond energy, and what had previously been a higher-end energy scenario became effectively the base case.
EXHIBIT 1: Global Credit Markets Endured a Tough Q1, But Have Since Snapped Back (Ex-CCC Leveraged Loans)
