The 564-lender gap is private credit's real risk

Private credit has 564 direct lending managers. Just 27% of them have operated for a decade or more. A mere 4% were investing before the Global Financial Crisis. The rest are younger: 40% have less than five years of experience. Nearly three-quarters have never managed through a full credit cycle. That is the backdrop to this year's headlines.

The recent run of negative headlines looks like a collection of unrelated accidents. One week a software borrower is struggling under AI disruption. The next a fund is limiting withdrawals. Then another borrower is paying interest in kind or extending maturities. WealthManagement.com's review argues the stories share a root cause: too much leverage, too little underwriting discipline, too much capital chasing the same transactions, and too much attention spent raising assets rather than protecting capital.

Private credit has genuine attractions — floating-rate income, lower volatility than public equities, and the shift away from bank lending. Those attractions are real. They also made the asset class easy to sell and hard to evaluate. An industry with 564 managers was built on that gap, and now it is being tested.

The same headlines are exposing what many investors missed during the boom. Private credit is not one asset class; it is a collection of underwriting cultures. Some are built on collateral, covenants, and sector expertise. Others are built on the appeal of placing assets quickly.

As this publication has argued, private markets have become a distribution boom. That boom created the newer managers. Platforms and fund sponsors competed for shelf space, and the implicit promise was that they could manage money as well as they raised it. Fee cuts and liquidity pressure were the first sign that the firms were competing for a finite pool of investor dollars. The current tightening is the second: conditions separate the lenders who have seen a cycle from the ones who have not.

The shift away from bank lending has put corporate credit in different hands. It is no longer concentrated in institutions that built underwriting teams over multiple downturns. It sits in funds run by a generation of managers who have never watched their loans go bad. The inexperienced cohort is the product of that shift.

A fund that limits withdrawals is a fund whose assets and liabilities have stopped matching. For inexperienced managers, the options are few: extend maturities, pay in kind, or close the gates. Each option moves the problem onto the investor.

The negative stories are real, and they are no reason to abandon private credit. For an allocator, they are a due diligence checklist: what is the fund's leverage, who is the borrower, how much of the coupon is being paid in kind, and what happens when withdrawals run ahead of liquidity? Managers with a decade of experience have answered those questions before. Managers with five years are answering them for the first time.

Selectivity is now the whole game. Investors who can name the managers that underwrote conservatively before the boom will be fine. Investors who bought the asset class simply because it was the trend are the ones who will meet the gates.

Warren Buffett's line about the tide has been quoted a lot this year, and it applies here: only when the tide goes out do you discover who has been swimming without a cycle. Private credit is at that moment.

Watch the 27%. Those are the firms with a decade-plus track record, conservative structures, and sector expertise. The rest of the industry will spend the next couple of years proving why experience is the entire product.