Private Credit Market Insights

Hot off the press is the latest private markets quarterly update from our CIO team. Here’s what we’re seeing right now across asset classes: In #privateequity, we still like value-oriented buyouts, and specifically, managers with strong track records in operational value creation. We also recommend allocations to secondaries, as secondary exit solutions should remain a favored liquidity option and NAV discounts remain in the double digits. We continue to recommend #privatecredit, but selectivity will be key as manager dispersion is far greater here than in public credit. Spreads have tightened as competition has returned to the loan market. But we remain constructive on the sector given yields near 10%, low defaults, declining leverage, and ample covenants. Our outlook for lower growth combined with two Fed cuts in 2H25 is also supportive. In #realestate, a bottoming trend in a majority of CRE values began occurring in late 2024. We believe 2025-30 will be rewarding for investors that can identify and lean into markets benefitting from strong demographics, migratory patterns, and job creation. We believe there are opportunities emerging from properties facing financial distress that are still solid assets – which we’ve often seen in multifamily. Full report below.

‘Peak’ Private Credit? A prominent bank CEO in the news has stated Private Credit has peaked. With the highest level of conviction, I can assure you that is simply not the case. First, some imply that Direct Lending (DL) defines Private Credit (PC), however, it is just one of the three main pillars that represent private credit. DL is currently the largest segment of PC, it is still growing, and I expect it to grow proportional to PE, a business that will undoubtably be bigger 5-10 years from now than it is today. As corporate earnings grow, the corporate sector at-large will support more debt that allows a company to add operating leverage, a reasonable assumption since corporate earnings grow with GDP and earnings are only temporarily interrupted by an occasional recession that comes along ~1x every 10 years or so. Second, Assrt-Based Lending (ABL) is only getting started. Although Marathon has been in the ABL business for 20 years, having invested $30B+, investor interest in ABL is just ramping up now. A leading consulting firms released its survey of institutional clients with ABL representing the #1 allocation request for the coming year. The TAM for ABL is enormous with some estimates providing a range of $30 to $40 trillion. In the next 5-10 years, I believe the ABL business overall will grow by 30% annually as AUM for ABL becomes as large as DL. The ABL outlook should enable PC to grow 2x on its own. Diversification and low correlation to DL, makes ABL a terrific compliment for PC investors (institutional, insurance, wealth management). The third PC leg to the stool is Opportunistic Credit, which includes capital solutions and special situations. Capital solutions provide tailored financing to meet a company’s strategic needs, ranging from growth capital and debt refinancing to solve for liquidity or restructuring through credit or hybrid structures, structured as debt, often with equity upside. The return objective for Opportunistic Credit should allow managers to generate higher IRRs than observed in DL & ABL. As DL has slowed over the past year, capital solutions have picked up rather significantly. PC also includes infrastructure debt, data centers, and more. Specialty finance such as litigation finance and NAV lending are not sectors that Marathon favors, however, they do represent a growth for PC. So, while, certain skeptics may question the growth of PC, you should have no doubt the direction of travel—the size and scope are huge and getting bigger. As the global economy grows $3 trillion per year (global GDP now exceeds $100 trillion), the amount of credit needed grows proportionally. Private Credit peaking? Not even close; that’s like saying the internet peaked in 2001 à before smartphones, cloud computing, streaming, social media, and more recently AI has helped to re-define the global economy. The Private Credit markets are ~$4T today and I believe it will grow to $10T over the next 7 years.

KKR has released its Mid-Year Outlook for 2025, which highlights why private credit, which still presents pockets of relative value opportunities amid compressed spreads, remains a cornerstone strategy in today's "Make Your Own Luck" investment environment. 𝐓𝐡𝐞 𝐀𝐁𝐅 𝐎𝐩𝐩𝐨𝐫𝐭𝐮𝐧𝐢𝐭𝐲 As we navigate an evolving investment landscape, asset-based finance (ABF) emerges as a powerful play, according to Henry McVey and the Global Macro team. The opportunity is substantial—approaching $6 trillion today and projected to exceed $9 trillion—significantly larger than the combined high yield bond, leveraged loan, and direct lending markets. While direct lending remains important, the team’s analysis shows that collateral-based cash flows like asset-based finance offer increasingly attractive risk-adjusted returns. These investments benefit from two powerful tailwinds: inflation boosting demand for hard assets and bank de-risking creating a durable funding gap for alternative lenders to fill. 𝐌𝐚𝐤𝐢𝐧𝐠 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐜 𝐀𝐥𝐥𝐨𝐜𝐚𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 2025 Europe also presents an opportunity, as issuers typically run lower leverage yet offer wider spreads than U.S. peers—effectively paying investors a premium for market complexity. As McVey and team advise: "Now is the time to climb the capital stack away from unsecured beta towards secured cash-flows that pay you for accepting complexity, not leverage." In this evolving environment where traditional portfolios face structural headwinds, private credit offers investors a meaningful way to truly "make their own luck" in the back half of 2025. https://go.kkr.com/3UfqAql

Households are running late on their debt payments, and transitions into serious delinquency are growing across debt types. In 2021 and 2022, debt balances shrunk and the share of delinquent accounts decreased dramatically. Since then, however, the pendulum has swung in the other direction. In the first quarter, the share of newly delinquent and seriously delinquent balances exceeded prepandemic numbers in auto loans, credit cards, mortgages, home equity lines of credit and other debt types. While seriously delinquent student loans haven’t surpassed 2020 levels, they rose from less than 1% last quarter to over 8%, as servicers began reporting late accounts after a pause in payments and subsequent on-ramp period.   There’s a chance the share of delinquent accounts will continue growing during this period of higher interest rates and economic uncertainty. The likelihood of missing a #debt payment continues to grow, according to data out last week from the New York Fed. Delinquent accounts can impact your credit and financial security for years. When households anticipate they may be late on a debt payment — that’s when they should be reaching out to their bank or issuer. Depending on the account type, lenders and credit issuers may be willing to work out an arrangement that makes payments easier, whether that means adjusting the due date or even renegotiating the terms of a loan. Waiting for the account to go into collections can make recovering from a tough financial situation even more difficult. Today's HHDC data release from the NY Fed: https://lnkd.in/gdNgtu6D

It’s not delinquencies that drive returns in private credit, it's recoveries. For any given segment/sector of the market, the lending rates are substantially similar between managers. So, what drives marginal performance between managers, is their ability to control the downside. While delinquencies can be a leading indicator of losses, they, by themselves, have very little impact on returns, as mathematically, a constant rate of delinquencies (fully recovered) have very little impact on returns. Meanwhile, late and default fees may actually increase returns. What drives returns then is recoveries. Imagine two managers charging similar interest rates, however one has a 10% default rate with 100% recovery, and another with a 5% default but a 0% recovery.    That’s why manager, industry, and strategy selection within private credit is so important. For example, recoveries are likely to be far higher In a senior lending strategy on hard assets such as real estate than there would be, for example, on a mezz lending strategy on tech companies… yet both are private credit. And within the sector, the manager that’s a local / niche specialist is far more likely, imho, to select the investments more likely to be recoverable, and be able to resolve defaults than a generalist dipping in and out of markets. That’s why I am so focused on senior lending in a single segment (real estate), predominantly (>95%) in a single market with a stable economy (#Boston), where I have a depth of experience and expertise. In a downturn, depth of knowledge and market expertise wins over breadth. As always, my musings, and not investment advice. Interested in hearing alternative viewpoints. #AlternativeInvestments #PrivateCredit #RealEstateInvestment John, JAKE, Dave, Shawn, George, Ian, Leyla , Aleksey 

“More money in real estate” looks positive…until you read the fine print. Everyone is celebrating the surge of private credit into commercial real estate. Big names like Blackstone and BlackRock are filling the funding gap as banks step back. Less regulation. Higher leverage. More deals getting funded. It sounds great… until you realize the other side of the story. Moody’s warns that private credit loans often run at 60 to 75 percent loan-to-value, compared to banks at 50 to 65 percent. That thinner cushion means if property values keep falling, we could see defaults ripple through the system. Some say it could even echo the early stages of 2008. Here’s what investors need to watch for: 1.    Higher leverage means thinner safety margins. 2.    Many lenders have limited track records in downturns. 3.    Liquidity can vanish quickly when markets turn. And here’s how disciplined investors are protecting themselves: 1.    Favoring conservative leverage. 2.    Scrutinizing lender stability. 3.    Stress testing every deal beyond the base case. 4.    Diversifying across property types and regions. 5.    Holding more liquidity than usual. Private credit is creating opportunities today, but it could just as easily magnify the next downturn. Do you see private credit as fueling healthy growth, or setting up the market for another shock? #ThePowerOfPassiveInvesting #YourLegacyOnMainStreet

Investors Have Moved from High Yield to Private Credit “High yield” is quickly becoming a misnomer. Spreads to Treasuries have tightened to the point where this once-compelling asset class has lost its edge. What used to offer real excess return now feels more like a liquidity trap with a risk premium in name only. According to Martin Fridson, CIO of Lehmann Livian Fridson Advisors, the high-yield bond market has grown just 0.44% annually since 2015—compared to a robust 11.4% CAGR from 1986 to 2014. That’s a dramatic slowdown. Historically, high-yield bonds paid a spread of ~520 basis points over Treasuries. But in the current cycle the High Yield spread has hovered below 300 bps, trading as tight as 260 bps. That’s not high yield. That’s low compensation for meaningful risk. 📈 So where is capital rotating? To private credit—a space that’s grown from just $200 billion in the early 2000s to over $2.5 trillion globally, according to the BIS Q1 2025 review. By comparison: Bloomberg High-Yield Index = ~$1.4T Public leveraged loan market = ~$1.3T (Source: Fitch) Private credit isn’t monolithic. I can't emphasize this enough: strategy selection and manager skill matter A LOT. But the appeal is clear: the ability to deliver customized, less correlated, and more intelligently structured returns. As Craig Manchuck of Osterweis puts it, the private market offers financing that’s “more hand-carved than machine-made.” At Applied Real Intelligence LLC ("A.R.I."), we’ve been focused on one of the most attractive and overlooked segments of the market: venture debt and growth credit. It’s where innovation meets credit discipline, and where returns are driven by access and structure, not speculation. As I’ve been writing for years in Venture Capital Journal, the future of fixed income is private, customized, and performance-driven. #PrivateCredit #VentureDebt #FixedIncome #AlternativeInvesting #Investing #GrowthCredit #Alpha #InstitutionalInvesting #CFA #CAIA #CFP CFA Institute, CAIA Association, Barron's, The Wall Street Journal

It’s a cognitive trap that leads people to believe the future will look like the past – despite clear signs to the contrary. Psychologists have studied this for decades. In times of uncertainty, most people don’t react soon enough. They delay. They rationalize. They keep doing what used to work – until it doesn’t. That’s exactly what we’re seeing in CRE today: -> Cap rates haven't repriced -> Interest rates remain elevated -> Refinancing risk is accelerating -> Transaction volume has collapsed -> Debt/cap rate spreads are razor thin And yet: → Lenders are sitting on bad debt. → Sponsors are still assuming interest rate cuts. → People are still pricing deals assuming endless rent hikes. This isn’t optimism. It’s denial masquerading as confidence. Cycles don’t crash in panic. They turn in silence when everyone’s still telling themselves everything’s just fine. If you’re not stress-testing your assumptions right now to maximum worst-case scenarios, you’re not managing risk – you’re absorbing it. Now’s the time to: ✔ Hold cash ✔ Reduce debt ✔ Wait patiently *** Subscribe to my newsletter if you're ready to trade groupthink for clarity - link here: Adam Gower Ph.D. and get early access to my conversation with John Chang, Marcus and Millichap, out tomorrow.

Private credit isn’t just booming, it’s basically Logan Roy in Succession trying to take over everything in sight. I’ve been flagging for a while how life insurers are charging into private credit, but this new Chicago Fed paper spells it out: 👉 Private placements doubled in a decade, hitting $849B in 2024 and are now 14% of insurer balance sheets. 👉 PE-owned insurers are the real power players, leaning into financial firms + privately placed ABS. 👉 Why? The juice! 80–150 bps more than public bonds. 👉 And the payoff? Outsized growth in indexed annuities, where higher yields translate into bigger market share. It all feels like a strategy Logan Roy would use on Succession. Use the balance sheet as “permanent capital,” squeeze out more yield, then dominate the product market. But it also leaves insurers far more entangled with the rest of the financial system. (It's giving shadow bank energy, but make it annuities.) As I’ve said before, this isn’t a side plot. This is one of the (if not the most important) main arcs in the industry right now. And this paper shows just how central insurers have become to the private credit story. What could possibly go wrong? Full read here: https://lnkd.in/eKXQSsMm

You've probably already seen 367 posts about what people saw at Money 20/20. So here's one about what I didn't see - banks taking advantage of a huge lending opportunity. I am talking about banks using their balance sheets to fund non-bank lenders or to develop lending programs that leverage technology-enabled service providers. In other words, banks can offer a viable alternative to private credit, either through providing wholesale lines to fintechs or through direct funding of loans. Lending innovation is being held back by the lack of good funding options. New lenders frequently face interest rates in the mid-teens and an 80-85% advance rate, meaning that the company has to come up with 15-20% of every loan. All while still having to bear 100% of losses up to the point of bankruptcy. No wonder so many fintech lenders want to sell technology, not make loans themselves. Meanwhile, many banks struggle to find good loans to make or to diversify concentrated loan books. [Regulatory nerdery] Many of these banks' capital constraints come from the leverage ratio rather than risk-based capital. In these cases, the bank can start this business with zero initial impact on the capital it needs to hold. [/Regulatory nerdery] There are multiple ways to take advantage of this opportunity. Banks can: ➡️ Provide wholesale lines to non-bank lenders. For partner banks, this can be combined with sponsoring the program to add non-interest income into the mix. ➡️ Take the loans onto their own balance sheet, whether through outright purchase or risk-sharing arrangements. ➡️ Partner with technology providers to build new loan products, whether to embed with distribution partners or to market directly. There are role models that have had success in this area. CCBX a division of Coastal Community Bank, Synchrony, and Customers Bank have all been doing various versions of this for years. More recently, Bankwell looks to be building an interesting business. But the opportunity is huge, especially if you believe in embedded lending. Perhaps I just took the wrong meetings and went to the wrong parties in Vegas. Or perhaps there is a ton of greenfield space just waiting for the right builders to show up.