The case for private credit

Episode Summary

Executive Summary: The episode argues that private credit has become a major global asset class, growing from under $100B in 2010 to roughly $2.1T today, as borrowers value speed, certainty, flexibility, and confidentiality. While recession fears raise default risk, the speakers contend private credit is relatively insulated from market volatility and systemic spillovers, and may even benefit as financing shifts away from banks and public markets.

Main Topics: Explosive growth of private credit (Priority: 5/5): Latvi frames private credit as a young but now scalable asset class that has expanded rapidly over 15 years and become comparable in size to major public debt markets. Why borrowers and investors are using it (Priority: 5/5): James explains that private credit has gained acceptance because it offers certainty of execution, flexible capital, confidentiality, and fast decision-making, especially for private equity-backed companies. Private credit’s relative insulation from volatility (Priority: 4/5): The speakers argue that private credit is less exposed to daily market sentiment than public credit and equities, and that hard economic data, not sentiment, will drive meaningful repricing. Recession risk, defaults, and performance dispersion (Priority: 5/5): They agree that a recession would raise defaults and losses, but stress that outcomes will vary widely across managers, making selection and underwriting discipline critical. Opportunities across direct lending, IG private placements, and special situations (Priority: 4/5): James highlights continued opportunity in senior direct lending, junior debt, flexible capital, energy transition, and investment-grade private placements, especially as volatility increases. Systemic-risk concerns and financial stability (Priority: 5/5): Latvi pushes back on fears that private credit creates systemic risk, arguing that leverage is limited, asset-liability mismatches are muted, and private credit can reduce pressure on banks.

Key Arguments: Private credit has grown into a distinct and scalable asset class, with AUM now around $2.1T, versus less than $100B in 2010. Borrowers, especially private-equity-owned companies, prefer private credit because it can deliver certainty of funds, flexibility, confidentiality, and speed. Public markets are repricing on volatility and sentiment, but private credit is more insulated until weak sentiment shows up in hard economic data. A recession would likely increase defaults in direct lending, but private credit may still compare favorably with high yield and broadly syndicated loans because of greater flexibility. Losses in private credit are likely to be highly dispersed across managers, making manager selection more important than in public markets. Systemic-risk concerns are overstated because private credit lacks the bank-like asset-liability mismatch and heavy leverage that amplified the 2008 crisis. Private credit may actually act as a defense against credit crunches by substituting for bank lending when banks pull back. Opportunities remain strongest in senior direct lending, particularly in the U.S. and Europe, and in bespoke capital solutions for borrowers needing time or flexibility.

Data Points: Private credit AUM: ~$2.1 trillion - Latvi’s conservative estimate of total private credit assets under management today. Private credit AUM in 2010: Less than $100 billion - Shows the scale of growth over roughly 15 years. Private equity AUM: Over $11 trillion - Used as a comparison point to private credit size. Public market comparables: On par with high-yield bonds and broadly syndicated loans - Latvi compares private credit’s scale to major public debt markets. Private credit investing history at Goldman Sachs: Since the mid-90s - James notes Goldman has been investing in private credit for decades. James Reynolds experience in private credit: 25 years - His personal tenure in the asset class. Public IG spreads: Below their medians of the last 35 years - Latvi says valuations remain relatively expensive despite recent repricing. Legal leverage caps for BDCs: Typically 2x; most do not exceed 1.5x - Used to argue that private credit leverage is constrained. Recession comparison year: 2008-2009 - Referenced as the last major recession when the asset class was much smaller. COVID policy response: Spectacular monetary and fiscal response - Used to explain why COVID is a poor test case for a deep recession scenario. Europe vintage risk window: 4 to 5 years - James says it can take this long for lender-Pequity disputes to become hard defaults. European problem vintages: 2016 to 2019 - James identifies older buyout vintages as starting to surface in restructurings. Regional banking crisis reference: March 2023 - Latvi argues private credit helped prevent a credit crunch after bank failures. Public market commodities exposure: 14% - Latvi says high yield has significant commodity exposure, making it less defensive than private credit. Episode recording date: Monday, April 14th, 2025 - Shown in the program outro.

Pivotal Quotes: "the total AUM, if I use a conservative estimate, is probably to the tune of $2.1 trillion" — Latvi Keroui: Defines the current scale of private credit as a global asset class. "what private credit can bring to the table, which is certainty" — James Reynolds: Explains the key borrower appeal driving private credit adoption. "I think risks to financial stability are largely overstated" — Latvi Keroui: Directly addresses concerns that private credit could create systemic risk.

Implications: Private credit appears likely to keep growing as an alternative to bank and public financing. For allocators, manager selection and underwriting quality matter more than ever; for borrowers, volatile markets may make private credit even more valuable.