Over the last year, a week has rarely passed without private credit being in the media spotlight. Whilst Australian rhetoric has historically been biased towards real estate lending, select corporate defaults and ASIC’s report on the asset class (and forward looking implications), global reporting has begun to accelerate, first around a number of idiosyncratic defaults, followed more recently with concerns around the impact on AI of software businesses, and redemption pressures on some of the world’s largest evergreen funds. Given the extent and velocity of the news flow, we felt it important to sort through the noise, unpack what’s going on (particularly in the US), contextualise the risks, and frame private debt in the context of a global, multi-asset portfolio.
Following the so-called ‘golden age’ of private debt a few years back, news flow on private debt as an asset class has turned less constructive, particularly over the past 12 months. Not all news flow can be considered equal. So, putting aside the liquidity conversation for the moment, the below groups the most important news flow and articulates the implications for (and our view of) the relevance to private debt portfolios.
We all need to keep a closer eye on the ramifications of artificial intelligence (AI) for businesses across both private and public markets, noting that software is a more sizeable component of the private market’s ecosystem, hence the greater attention.
Speaking to participants within both venture and private equity/debt communities, there is consensus that software is certainly not ‘dead’, and that we are in a structural reset rather than an extinction event. AI changes what is valuable in software, accelerates dispersion, and forces the industry to earn its multiple again. The impact and risk (in private markets) is thus real but selective, not systemic (albeit there may still be spillover to those better positioned). The key for managers on both the equity and the debt side in managing this emerging risk, is asset selectively. Underwriting software businesses with defensible and/or mission critical characteristics reduces AI substitution risk – e.g. systems of record, proprietary/regulated data, deep integration, high switching costs and those with outcomes, not seat-based pricing. This doesn’t guarantee old multiples will still apply but it does improve the odds that revenues remain more durable through a transition.
This ultimately speaks to manager selection first and foremost and then portfolio construction to ensure that portfolios are not overexplosed to software across both equity and debt.
Generally, we feel that broader private markets platform businesses are better equipped and prepared to navigate the current landscape. They typically have greater visibility across the wider array of buisnesses and across the entire capital stack, which better helps inform actions on incumbent and underwriting of the new exposures.
Attention grabbing for sure – this is Tricolor, which does (did) exactly as the name suggests, and without going into the detail, was caught up in major fraud allegations including double and triple pledging assets to multiple funding pools (not a good thing if other parties have claims on the assets that you thought was your security alone). This falls into the asset-based finance subsector of debt (which at the sector level, we like), but Tricolor along with First Brands (a US-based auto parts supplier that borrowed substantially to fuel growth, which combined with complex and opaque practices, led to liquidity issues and thus bankruptcy) were idiosyncratic circumstances, and as much a banking, as opposed to a non-banking, sector issue.
The more recent MFS default (specialized UK mortgage lender) has some similarities to Tricolor but is clearly less niche in its underlying assets. This has the ability to have more meaningful implications for both bank and non-bank sectors, and is certainly raising question marks over founder-led specialty lenders where governance and oversight deficiency (at the company level) can bring fraud into the mix.
Turning closer to home as a means of highlighting the primary risk in private debt. Both Rockpool owner Pacific Hunter and Healthscope have been through well-known challenges resulting in the debt providers taking ownership from the original private equity sponsors. These are clear and very relevant defaults and something we would not want to see as systemic across a given portfolio. That said, they also demonstrate the point that private credit can step in and actively manage positions throughout, with the former fully repaying principal on the loan (at least within the one portfolio) and the latter still working through, with current third-party valuations at ~77 cents on the dollar, supported predominantly by the value of the underlying (hospital) assets.
It’s important to understand that defaults are normal business for both public and private credit, and that default risk is ultimately why credit attracts higher returns than say higher grade bonds, or cash. While one can never completely eradicate defaults in portfolios, avoiding and/or managing them to minimise losses again comes to manager selection and its critical role in private markets. As part of this, managers must also ensure that portfolios are appropriately diversified such that a single default (and subsequent loss if applicable) doesn’t drive an outsized negative return on what should be defensive asset classes.
On current default rates, according to the latest Proskauer Private Credit Default Index, the default rate for Q4 2025 was 2.46%, an increase from 1.84% in Q3 and 1.76% in Q2. While this represents a notable quarterly uptick, current defaults remain firmly in line with broader industry historical averages of 2%–3%. Supporting this, Cliffwater research estimated realised losses for Q4 at just 0.13% and 0.70% for the full calendar year, both well below the 1.01% annual (0.25% quarterly) historical loss rate for private debt. This disparity demonstrates that technical defaults do not always result in capital loss.
This brings us to the most recent topic of debate where we should start by highlighting that private debt is not liquid in a traditional asset class sense (and nor are other private market asset classes). That’s not to say that private debt portfolios cannot generate liquidity (they can), but these are not daily traded listed assets or bonds that can be settled in a number of days. That then begs the question, ‘why are we talking about a liquidity mismatch when we know that the assets are inherently not liquid?’
That’s where evergreen private markets funds come in. Evergreen funds have arguably been the most impactful innovation in private client portfolios in the last decade and have truly opened up the private markets. Yet the true innovation of such funds gets entirely confused in our opinion – the ability for investors to submit redemptions requests on a regular basis and access capital within well-communicated timeframes, limits and gates, is not the innovation. The true innovation is actually the inbound liquidity, being the ability to invest the desired capital and be fully invested in a diversified, institutionally managed portfolio without the pain it would take to build, and manage, that portfolio using incumbent closed-end (fund) structures.
Herein lies the problem; the media and many market participants are typically solely focused on the (outbound) liquidity as the key feature, which to put it bluntly, results not in a liquidity mismatch per se, but a mismatch of expectations versus reality. It is as much an advice and market perception problem as it is a product structure problem and that’s where the framing is a little off. Illiquidity (expressed by redemption timeframes), limits and gates are features of the asset class and its products, not bugs.
Let’s take a look at the three big B’s, Blackstone, Blue Owl and BlackRock (HPS) that are dominating headlines on this very topic.
Blue Owl has been at the heart of this debate; following a failed merger of its legacy BDC (OBDC II), Blue Owl subsequently announced a closure of the fund via run-off of the portfolio (i.e., cash is returned as income and capital is received from the underlying portfolio). Despite facilitating a loan sale to immediately return 30% of capital to clients (a positive), the media focus was on freezing redemptions, which was a regulatory requirement in this case, and normal for a fund closure of this type.
Blackstone and BlackRock’s HPS’ then received redemptions in excess of their communicated (5%) limit. Blackstone increased its repurchase to 7% of shares outstanding (the maximum permitted under the funds terms) supported by an injection of US$400m from both the firm and its staff and meaningful external inflows amounting to almost US$2bn. HPS (HLEND) stuck to the 5% limit per the standard fund terms and will pro-rata redemptions going forward, as is the design of the product.
Interestingly, while the former is a function of a legacy product, both Blackstone and HPS are effectively replicating the playbook that Blackstone itself set with its flagship real estate fund BREIT, the world’s largest evergreen fund, in 2022. Real estate is far less liquid, far more emotive (to investors) and was genuinely challenged as an asset class at the time. Blackstone maintained its redemption limits, did not move to fire sale assets, but still met 100% of redemptions, some US$15bn, over a period of 15 months, evidencing how these funds should operate during such scenarios.
Neither of these scenarios have arisen based on performance of the underlying portfolios and/or views on portfolio fundamentals. That’s not to say that portfolios could see defaults and challenges ahead (as is the case for any credit product), but the conversation is more about product structure and liquidity perception over the portfolio itself.
Redemption pressures on evergreen funds have and will emerge – as its stands, the world’s largest fund managers are managing them as expected and as far as we can see, in the best interests of its investors. Whilst gates get a bad rap owing to the GFC experience, they are fundamentally designed to protect investors, particularly where less liquid assets or longer-hold trades are in play. Should redemption pressures persist, we would want to see these managers stick to the redemption terms and provide liquidity when available without compromising the portfolio by selling assets to meet unrealistic liquidity expectations. We would be more concerned if managers compromise and seek to fire sell assets to meet redemption pressures.
We assess private debt as an asset class, like any other, through our proprietary risk factors lens. This lens illustrates that, at least from a top-down perspective, private debt’s role in a multi-asset portfolio is to provide efficient exposure to credit risk (alongside public counterparts), an illiquidity premium, and other idiosyncratic risk drivers often unique to the underlying assets. Private debt has historically outperformed public debt (syndicated loan/high yield bond) equivalents over the last decade and beyond, and has been far more consistent than its (private) equity counterparts. It also typically has more active levers to pull to protect capital relative to public equivalents.
With this context, and acknowledging that private debt is not an asset class independent from public debt or public and private equity, we believe it warrants a core position in global multi-asset portfolios – subject to overall portfolio liquidity constraints of course.
As we’ve discussed, manager selection really matters in helping mitigate the risks of investing in private debt, whether it be software-related, broader corporate exposures, or asset-based finance. Then it is a case of assessing portfolio construction, understanding where your risks lie across funds and sub-asset classes (within private debt) and whether a portfolio is sufficiently diversified.
In light of this, here are some key considerations we are thinking about when building portfolios today:
Senior, sponsor-backed corporate direct lending remains the core whilst being cognisant of overall software exposure in light of the potential impacts of AI on the sector. The US is the dominant market, but Europe and the rest of the world (including Australia) provide attractive diversification opportunities with structurally lower software exposures.
Don’t forget about Australia where competition is lower, fund level leverage is rare and fee structures are far superior. Be cognisant of concentration risk however as a shallower market typically results in more concentrated portfolios.
Asset-based finance (ABF) is a good diversifier to corporate exposure and has proven less correlated from both a credit (corporate versus consumer) and interest rate perspective (many ABF assets are fixed rate, relative to corporate which is largely floating). Genuine experience, forensic underwriting and data analytics are essential here given the nuances in play.
While older portfolios from high quality firms appear in good shape, younger portfolios with post 2022 vintage loans offer an added mitigant to risks arising from companies that had to transition from a low to high-rate environment.
Credit secondaries in particular present a very attractive opportunity on both risk and return metrics. On risk mitigation, secondary strategies can offer substantial diversification, whilst every new transaction provides an opportunity to re-underwrite a known pool of loans including taking a more conservative stance on software (pricing) for example. On the return side, potential stresses in the BDC market may present additional opportunities for secondaries at potentially attractive prices.
Our investment views are then balanced by the liquidity debate, which is primarily investor specific and thus an imperative advice point. How are private debt and other private market evergreen strategies positioned in portfolios, specifically with regards to liquidity needs? Whether evergreen vehicles and other illiquid assets are 5% or 50% of the portfolio, does the rest of the portfolio (presumably liquid) satisfy forward looking liquidity needs whether planned or unplanned? What are the portfolios true liquidity needs and thus can it tolerate limited liquidity from evergreen or closed-end funds at points through the cycle?
As a closing remark, we are big advocates for private markets and evergreen funds as an implementation pathway, but more importantly, we are bigger advocates of the essential need for high quality and holistic advice when including them in portfolios.
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