Q: What is all the fuss about?
Private Credit, in particular direct lending, has become a large, mainstream market so it is only natural that it is getting more attention. And some of that attention is warranted. That said, it is worth mentioning that Direct Lending did not appear overnight. Its growth has been steady and quite methodical over the past 15 years, shaped by the GFC and certain regulatory changes such as Dodd-Frank. As middle-market private equity raised more capital to address the fact that companies were remaining private for longer, someone needed to provide financing for those deals. That’s where direct lenders stepped in.
At the same time, investor interest is strong. Not long ago (last six or seven years), most institutional investors did not have a dedicated allocation to private credit. Today, it has become a core part of many institutional portfolios, marking one of the most significant structural shifts in capital flows the market has seen.
Fast forward to today, and while the headlines talk about “private credit”, most of the focus is really on direct lending. In our view, direct lending has offered healthy returns for senior secured risk—a good place to be the last several years. Like any market, there are times when it’s better to be a lender and times when it’s better to be a borrower. The euphoria that filled the headlines a few years back was always a bit much for what is, fundamentally, a basic and simple lending product. Now the pendulum has swung in the opposite direction, and we are seeing the narrative shift just as dramatically the other way.
Much of the recent discourse around private credit tends to conflate the broader market with direct lending, when in reality, most recent defaults have come from other corners of the market. This is not a “private credit problem,” but rather a reminder that complacency or unforeseen shocks can create headlines, even in a fundamentally resilient market. The direct lending market consists of closed-end or permanent capital vehicles—structures with conservative leverage, strong liquidity profiles, and limited-to-no redemptions. That is a far cry from what folks picture when they hear “systemic risk.”
As private credit attracts a wider investor base, there is still plenty of education needed. For those who take a closer look, direct lending is designed to be as steady as it gets. These are senior secured loans that are directly originated and negotiated with borrowers. As credit investors, our north star is to protect principal and collect coupons. But some recent events have reminded everyone of the perils when you drift from the basics. Poor underwriting and credit selection, lack of transparent due diligence or relaxed covenants can, and often do, lead to credit deterioration and losses.
However, direct lending remains a key source of capital for middle-market borrowers. While the market has shown real resilience, there is no question it will be tested as the cycle matures, and certain sectors remain under pressure. But it is normal for markets to oscillate. After a long stretch of ultra-low rates, circumstances are different and it’s only natural to see more challenging situations emerge.
Private credit platforms play an essential role as a source of capital and we believe are built to ride out volatility, not amplify it. When traditional channels are unavailable or capital markets freeze, private credit can remain accessible and keep capital flowing—we view this as an important guardrail for the broader economy.
Q: We’ve seen defaults in a handful of names recently. Is this the start of a bigger wave? Are we seeing cracks in underwriting, or is something else at play?
The high-profile defaults have grabbed a lot of attention, so it is no surprise that people want to know what is under the hood. And yes, recent headlines around First Brands and Tricolor are indeed notable. Every credit cycle exposes excesses and forces a reckoning with underwriting standards. But the recent defaults we’ve seen are about specific companies or sector dynamics (even outright fraud or unique operational issues), not cracks in private credit.
It’s worth stating plainly: we had zero exposure to these credits. In fact, we evaluated one of these credits multiple times and passed.
That said, we are principled but not immune to mistakes. When events like these happen, we take notice. The first thing we do is re-examine our own book, look for any similar risks, and make sure our process holds up. So far, we are seeing the benefits of conservative underwriting and a relentless focus on structure and alignment. To put this into context, about 85%1 of our US direct lending portfolio is with issuers with +$100mm in EBITDA, and nearly half of that is with issuers exceeding $200mm. We have also seen issuer revenue and EBITDA growth across the portfolio increase from time of investment to the present. That doesn’t make us immune, no one is, but it does give us confidence in our approach.
The pace of direct lending market growth has slowed, which we view as healthy. From Day One, our focus has been on portfolio construction: lending to large companies with real earnings and a clear reason to exist. Our flagship portfolios hold more than 100 positions each to maintain real diversification. We believe this approach means it would take a truly severe wave of defaults and poor recoveries to put overall returns at risk. In most environments, well-diversified portfolios can absorb volatility and continue delivering solid, high-single-digit income.
Q. An even larger part of private credit today is asset-based finance, or ABF. Where does that fit into all this?
ABF has evolved from a niche strategy to a core pillar of private credit across North America, Europe and Australia. What began as specialized lending against tangible assets is now a global solution connecting capital to the real economy. ABF demonstrates how many investors are building more diversified, resilient credit portfolios. The strategy stands out for giving investors access to a broader set of assets and cashflows driven by fundamental trends. This can span consumer loans/finance, mortgages, equipment leasing, and renewables, to name a few. These strategies offer flexibility in structuring, deep collateral coverage, and direct origination or long-term partnerships with scaled, large counterparties.
In ABF, we prioritize established issuers with long-track records and set a higher bar for deals involving short-duration, high-velocity assets, with ongoing enhancements to our diligence and monitoring in response to the kind of market events that often lead to lapses in counterparty selection or underwriting.
With ABF being commonplace and touching many sectors, the scale of the market has become a major draw for investors and issuers. Today, the total addressable market for asset-backed securities represents many multiples of the private corporate credit market at ~$1.7T. This migration is unlocking scalable, high-quality opportunities (many investment grade) for investors and new financing avenues for issuers seeking true partnership. One large theme we are seeing is more corporates shifting to asset-light models and banks are moving toward longer-term funding partnerships rather than one-off sales.
This is a global trend, as recent transactions underscore the growing diversity of ABF opportunities worldwide.2
- In the US, the Harley-Davidson transaction, with a $5+ billion loan portfolio purchase and forward flow agreement, unlocked liquidity and marked a major pivot for their captive finance business, supporting the company’s shift to a capital light model.
- In the UK, our acquisition of NewDay’s consumer credit receivables portfolio, paired with a multi-year forward-flow agreement, supports access to credit for nearly six million cardholders.
- In Europe, we extended and upsized our agreement with PayPal to purchase up to €65 billion of BNPL loans, providing scalable funding in a rapidly growing market.
- In Australia, the acquisition of the AUD$21.4 billion Westpac RAMS mortgage portfolio as part of a consortium marked the largest ABF portfolio sale in the country’s history and was our first such transaction in Australia.
Each of these partnerships reflects a broader trend of corporates and banks seeking long-term, flexible funding to support innovation, balance sheet strength, and access to capital across sectors and regions. In a market where needs are getting more complex, that scale and flexibility have become essential ingredients for long-term relationships.
Q: What are the top risks and opportunities you are watching as we look ahead to 2026?
The economic backdrop remains full of crosscurrents. Tariffs, monetary policy shifts, and persistent inflation are working through the system. While headline credit stats look acceptable, no one should get too comfortable. Markets are not cheap, valuations are lofty and most things feel “priced to perfection”, and it’s rational for any investor to reassess where they’re taking risk.
We are in an environment where geopolitical tensions and inflationary pressures, driven by everything from deficit spending to fragmented trade, can create pockets of volatility overnight. We continue to monitor how credit performance in both consumer and commercial portfolios responds to evolving labor markets, inflation, and sector-specific disruptions.
More deals mean new opportunities and origination, but they also are at a time with increased competition and tight spreads, especially for higher-quality credits. Our focus is on being selective and making sure we are not sacrificing structure or downside protection just to deploy.
Innovation is accelerating, with AI-driven capex and new trends in data centers opening fresh lanes for financing. Large tech issuers are tapping markets in ways we have not seen before, so we are spending real time with our teams assessing value and structure.
On the positive side, these crosscurrents also create opportunities. Our pipeline of structured alternatives and partnership capital remains strong, and we see potential where technicals have widened spreads or where ABF assets can deliver income and downside protection. We are also watching how pending securitization reforms, including the Solvency II regime, may unlock new ABF supply in Europe.
Above all, complacency is the biggest risk. Our job is to stay vigilant, challenge our assumptions, and build portfolios to weather whatever comes next.
