What Doomer Narratives Miss About Private Credit | John Cocke of Corbin Capital

Episode Summary

Executive Summary: John Koch argues that private credit’s recent stress is a cycle-driven reality check, not a systemic collapse. Interval funds created pro-cyclical inflows that boosted growth and performance, but when spreads widened and redemptions rose, fundraising stalled and underwriting discipline became more important. He sees opportunity in non-sponsor lending, data-center finance, and secondaries—while warning that illiquidity and negative convexity matter.

Main Topics: Interval funds and the pro-cyclical private credit cycle (Priority: 5/5): Koch explains how open-ended/interval structures attract capital when performance is strong, which forces managers to buy assets aggressively and can inflate recent-vintage performance. When markets weaken, inflows stop and redemption requests rise, exposing the structure's liquidity mismatch. Sponsor-backed direct lending under pressure (Priority: 5/5): The discussion focuses on private equity-backed software and sponsor lending, where widening spreads, weaker underwriting, and lower recovery expectations are creating strain. Koch argues that deal quality can deteriorate when capital must be deployed quickly. Non-sponsor and asset-backed lending as a relative strength (Priority: 4/5): Koch contrasts sponsor lending with non-sponsor lending, where covenants are tighter and capital often finances productive assets or expansion, supporting better recoveries and more defensive risk-reward. Private credit secondaries and continuation funds (Priority: 4/5): He describes the rapid growth of private credit secondaries, especially continuation funds, and argues that buying credit portfolios at or near NAV can be a poor proposition because credit lacks the capital appreciation of private equity. Data center and AI infrastructure finance (Priority: 5/5): Koch sees data centers as a major new private credit vertical, with lending secured by contracts from highly rated counterparties and collateralized by chips, power infrastructure, and related assets. Why the doom narrative is overstated (Priority: 4/5): He pushes back on claims of an existential private credit crisis, saying rising defaults and lower recoveries will likely cause gradual IRR degradation rather than a 2008-style systemic event. Corbin Capital’s positioning (Priority: 3/5): Koch closes by describing Corbin as a multi-asset credit shop focused on dislocations and less crowded areas such as structured credit, non-QSIP securities, litigation finance, non-sponsor lending, and asset-backed finance.

Key Arguments: Private credit fundraising via interval funds is inherently pro-cyclical: capital arrives when performance is strong, forcing managers to buy assets at the top of the opportunity set. Rapid asset growth can improve reported returns because newer vintages and larger denominators can make portfolios look stronger than they are on an equal-weighted basis. When public loan spreads widen and equity valuations weaken, investor subscriptions pause and redemption requests rise, exposing liquidity pressure in open-ended structures. Sponsor-backed lending has faced underwriting pressure because managers competing for large inflows may accept weaker deals and tighter pricing. Non-sponsor lending often has better structural protections because lender capital funds productive assets, collateral creation, or expansion rather than sponsor distributions. Defaults in sponsor-backed deals and public leveraged loans are not yet crisis-like, but recovery rates are trending lower due to aggressive liability management and lender-on-lender conflicts. Private credit secondaries are attractive only if purchased at a discount; paying par or above for credit portfolios creates negative convexity and limited upside. Data center finance is a growing, financeable niche because contracts with hyperscalers are investment-grade quality and the underlying chips and power assets provide collateral. The private credit 'doom' narrative overstates the risk: even meaningful default and loss assumptions may still leave investors with positive returns over a fund’s life. The real risk is not a sudden systemic run, but a slow bleed of returns as weaker vintages work through the portfolio and liquidity is paid out organically.

Data Points: Firm AUM: roughly $10 billion - Corbin Capital’s total assets under management as described in the introduction Private credit via interval funds: about $300 billion - Koch’s estimate of capital that entered the private credit market through interval funds Private credit market size: about $2 trillion - Approximate size of the overall private credit asset class mentioned in the discussion Direct lending market size: a little over $1 trillion - Segment most associated with sponsor-backed loans Monthly inflows to large public managers: down 90% year over year or more - Koch uses this to illustrate the collapse in interval fund fundraising Quarterly gate: 5% of NAV per quarter - Redemption limit in interval funds Private credit secondaries in 2023: about $6 billion - Early stage of the secondary market according to market participants Private credit secondaries in 2024: about $10 billion - Secondary market growth the following year Private credit secondaries last year: about $20 billion - Koch’s cited estimate of more recent secondary transaction volume Continuation funds share of secondaries: $12 billion of $20 billion - Majority of 2024/last year’s private credit secondary volume Data center investment needed: roughly $1 trillion - Estimated capital spend for data centers over the coming period Cost per gigawatt of data center buildout: $40 billion to $50 billion per gigawatt - Koch’s estimate of the capital stack required to build AI data center capacity Rack cost: $3 million per rack on the low end - Used to explain how quickly AI infrastructure costs scale Data center powered-land value: $300,000 to $500,000 per megawatt - Illustrates market pricing for shovel-ready powered land Return compression in data-center credit: from mid-teens to 200-300 bps for top credits - Koch describes spreads tightening as the market matured Private equity secondaries turnover: about 2% of interests over a fund life - Benchmark used to compare with private credit secondaries Cumulative default/loss example: 10% defaults with 50% recovery = 5 points loss - Illustrative example Koch uses to show credit can still produce positive returns Leverage loan recovery index: below 50 cents on the dollar over the last 12 months - Koch cites JPMorgan data to show weakening recoveries

Pivotal Quotes: "certain private credit managers are experiencing the reality check that comes with raising capital in pro-cyclical evergreen structures" — John Koch: Core thesis on why interval funds are now facing fundraising and redemption stress "you can't create liquidity from an illiquid asset class" — John Koch: Explanation of why redemption promises in private credit can only be met organically or at someone else’s expense "the doom narrative to me is way overblown" — John Koch: His rebuttal to claims that private credit is headed for a systemic collapse

Implications: Investors should treat private credit as illiquid, structure-sensitive credit rather than a liquid substitute. The best opportunities now may be in disciplined non-sponsor lending, selective secondaries, and data-center finance, while open-ended vehicles may face slower returns and tougher fundraising.