Would you go work in Private Credit right now?
Title says it all. Amid the uncertainty the sector is facing would go work in private credit right now? To be clear, I don’t think the area is going anywhere over the long-term, but I do think a natural rebalancing will need to occur and there will be some winners & losers. All that said, would you transition into PC today or would you give it time to let some of the dust settle?
Also how would you think about lateraling to an established player who may be more overexposed to certain pain points right now, vs. a newer name who can capitalize on this volatility?
Bumping
Bump
Based on the most helpful WSO content, private credit remains a compelling space, but the decision to enter it now depends on your risk tolerance, career goals, and the specific dynamics of the firm you're considering.
Sector Resilience and Long-Term Outlook: Private credit is not going anywhere in the long term. The sector has shown resilience, and its role in providing nonbank lending solutions remains critical. However, as you mentioned, a natural rebalancing is likely, with some firms emerging as winners and others struggling due to overexposure or poor risk management.
Current Volatility and Risks: The sector is facing challenges, including potential covenant breaches, ripple effects from leverage, and the risk of underperformance in funds that lack experienced managers or crisis-tested strategies. If you're considering entering now, be prepared for a potentially bumpy ride in the short term.
Established Players vs. Newer Names:
Timing Your Move: If you're risk-averse, it might make sense to wait for some of the dust to settle and see how the market shakes out. On the other hand, entering during a period of volatility could provide unique opportunities to learn and grow, especially if you join a firm that is well-positioned to navigate the current environment.
Ultimately, the decision should align with your career aspirations and risk appetite. If you're confident in the firm's strategy and leadership, entering private credit now could be a strong move, especially if you believe in the sector's long-term potential. However, due diligence on the firm's exposure, risk management practices, and positioning in the current market is crucial.
Sources: State of Credit markets now and in the future?, Credit Hedge Fund opportunities, https://www.wallstreetoasis.com/forum/private-equity/qa-non-target-top-bucket-ssg-private-creditdirect-lending?customgpt=1, Distressed Investing: This Time It's Different, Private Credit is Paradise
Bump
What are your other options? Are you in IB and interested in credit?
More of a theoretical question than an options one
Looking back, I made the move from MBB > PC. If I could go back I would try to go into PE first (modelling and general commercial learning seems to be magnitudes higher). PC generally relies a lot on the diligence done by the sponsor. If you are young and full of energy I think the tried and true path still holds for max learning, comp, and career flexibility it is IB > PE > then decide PE/PC/HF/MBA, etc.
Thanks for that. In an ABF group so PE really not an option, skillset lends itself well to PC though. Would you make the same jump right now amid all the market headlines?
Mayb your carry might suck for a little, but the asset class is here to stay. It’s like of like asking if banking is dead post-2008 (not that we are seeing a GFC level scenario here. We’re not)
Recent headlines will impact ABF investing way less than DL if I had to guess. Why not go do ABF on the buyside?
Hi, a bit unrelated, but from your experience in ABF, what are some of the options down the line if you wanted to switch? Is PC a direct exit and are there any other possible options? Thanks
ABF at a PC shop a great place to be tbh. I think more capital will rotate from DL to ABF
Bump!
PC is seriously overshot. Lots of rightsizing will occur over the coming years. Personally regret leaving banking for it looking back
Interesting. Obviously the industry isn’t going anyway but curious for your take on what rightsizing looks like. Who are the winners in your mind?
I mean that AUM needs to contract and pricing needs to go higher or the industry won't make more than its cost of capital. Basically every publicly traded credit vehicle trades at a discount to nav. That should tell you what market believes these assets are worth/need to be worth to make a reasonable return
I don't think there will be winners, just ones who lose less. Blue Owl comes to mind as a big loser
Why exactly do.you regret leaving banking for PC?
Assume it's not the rightsizing, this happens in banking too
Comp lower. Path to promotions just as bad as PE. Lower exit opps
Maybe this is a stupid question, but what exactly is wrong with private credit right now?
Are direct loans seeing a large uptick in defaults?
I guess investors are trying to exit before the funds mark their software loans to market. Rather than trying to unload illiquid leveraged loans at 80, it seems like funds are capping exits. Private credit holds capital for longer by design
What am I missing here? The basic advantages of private credit over the BSL market aren't going anywhere
What are the advantages of private credit over BSL? Non mtm is the only one I can come up with and that is great in good times but terrible in bad times (illiquidity). Fee structure is great for the GP but bad for investors when BSL offers the same product at 30bps instead of 150-400bps. Increased leverage? Perhaps - but you can just buy CLO equity if you want that (OXLC or ECC make that available to everyone).
Many reasons. Private credit is often preferred by sponsors and borrowers given (i) speed of execution - no need for ratings or a syndication process, (ii) no syndication means more economic certainty with no flex language, (iii) sponsors prefer for their lender group to be comprised of large PC holders who they have good relationships with across multiple PortCo’s vs. 50+ CLO’s holders in a BSL deal.
BSLs generally don't do DDTLs, which precludes a big chunk of the sponsor-owned world that relies on inorganic growth. Execution is easier. Covs are looser. Admin is easier than having a gaggle of BSL lenders to deal with. Amendments/modifications are easier to get done. Max leverage. More flexible on upsizes. Once in a while, equity co-invest is needed and PC can do that.
If there weren't any pros, no one would have been taking PC $ at a ~50bps spread all these years.
Agree. This is the use case for PC. DDTL and relatedly for the sub scale assets. But I would also argue that this is another form of lower quality/something the borrower should pay for. As a lender on a DDTL you enhance the asymmetry problem already a core negative of the loan market: good loan gets refi'd, bad loan you are stuck with. Except in the case of a DDTL you are only getting paid 50bps during the undrawn period but bear the full downside of funding possibly into an environment that you'd rather avoid (either company doing worse that anticipated but not yet bad enough to trip covs or a market where spreads have moved wider). There is definitely a price you can put on the DDTL option but my point is there should definitely be a price. Also this is all centered around roll-ups, the majority of which are occurring in sectors under considerable stress (possibly bc roll-ups themselves are very difficult).
DL funds will struggle raising new funds and lower performance fee on existing vehicles. I used to work at one of the large platforms and focus was entirely deployment / growing AUM - suspect underwriting rigor, documentation and pricing will uptick
Better to join opportunistic credit fund with asset backed financing capabilities.
Stay away. Outlook is awful for the sector on both AUM trend and performance.
Assets flooded the space due to the lack of mark to market and no thoughts about how a portfolio seasons. Works great for a few years as loans have to be truly terrible for problems to be bad enough that a PC book recognizes it. Add growing books to the mix and its easy to show great "performance". That will all reverse now with inflows frozen/some outflows. Performance will look like when a CLO goes into run off - lots of problem assets in years 4,5,6 etc after all the good loans were repaid. And will be much worse in this instance as the lending was truly atrocious while the prospective returns were below cost of capital.
Not only will the jobs not be fun due to bad performance, there is going to be a massive imbalance of people to new assets/originations since that's effectively what working in PC has been. Origination/sales rather than investing/underwriting - at least at a VP/Principal level. PC has been all about taking PE firms skiing to get a look at the next deal rather than being a clever lender. The related upside here is that your peers would not be particularly talented!
Can you elaborate on the imbalance of people in new assets/ originations? I don't understand the point
Similar to LMM PE. Flood of assets have come into the space resulting in a flood of human capital as it does actually take bodies for both assets (hard to scale simply via dollars). In PC, almost all of the work at least so far takes place during origination with a lot of that even being pre-origination (i.e. making sponsors like you via ski trips and events). As origination slows way down which is a certainty (has still been going full speed despite a slower PE market due to LMM roll up momentum and PC refi activity), there will be a lot less for all these PC employees to do. You make a loan, "monitor" it by having 1 person attended 4 board meetings a year (or not if syndicated PC), and then deal with cov breaches/refi's.
Its possible that these groups add resources on the workout side. But they currently have no idea what they are doing on that end so not sure where they start (process so far has been recut debt at 80-85% of original, call the balance equity, and repeat the exercise a year later). To be clear this has also been the case at the KKR/ARCC etc of the world.
And one little secret to explain why coming from a distressed credit investor. Almost all the gains are from the entry price with maybe a little help from reversing the starvation that the excess debt load was forcing on the enterprise. None of that is happening when you just change ownership, keep the debt, and barely touch marks.
Your analysis does not seem coherent. Most of your point is around PC making bad risk/reward investments over the past couple years which is true but isn't this correction healthy for the broader market in that case? AUM will be rightsized and PC will charge higher rates commensurate with their cost of capital
Yes a correction will help - especially on the rate side of things. But a few things to consider.
A) That correction hasn't even started. Private credit is still printing 450 spread deals, only change is that they aren't doing so on software. That will probably change with in the next call it 3 months. But it is still happening!
B) That correction will destroy any carry for GPs and be bad awful for LPs while making any future fundraising very difficult. Effectively the industry has been telling all their investors that they are producing great risk adjusted 9-12% returns for the past 5-10 years. Over the next couple years, LPs are going to instead find out that they actually earned low single digit returns where marks were inflated followed by a hard correction (or what I expect to actually be meaningfully negative returns that that is tbd).
C) Shrinking assets and bad performance is not a good place to invest your career!
So maybe at the end of all that it is good to be in PC. But that will take 2-3 years at least to play out. And even then, you need to bet on the fact that PC will be in demand. I'm sure we disagree with that part but I don't see any reason for it to exist outside of possibly serving the LMM roll-up universe (though that is smallish part of the pie by $ and I suspect a shrinking one given performance of roll-ups, at least after the LMM funds finish investing their current fund). On anything larger, you are are just transforming low fee syndicated credit into high fee non-marked credit with the fee differential being paid for by balance sheet leverage.
And I know, everyone says no that's not right PC is needed to replace bank lending after Dodd-Frank. Not true! Banks didn't do any of this lending that PC is now doing. Sure they took down big LBO commits but that was largely to syndicate! They took down too much of it and got caught which was bad. But we have a 1.7trn high yield market and a levered loan universe larger than that that can easily do everything that Dodd-Frank lending prohibitions restricted and with a 30bp fee structure.
For the record, I am bearish on PC as a sector and agree people should not invest their career in it but I disagree with some of your points
A) True
B) True but there's real dispersion here. Funds that are predominantly retail/wealth oriented are most affected by this. Some firms really have been able to generate the 9-11% realized net returns you referenced. Although returns going forward will be lower and carry will be fucked
C) Agree. But I would say this is for the alternative sector broadly. There really aren't major asset classes with good tailwinds on this side. Forward thinking people should either stay in banking or pivot to industries of the future with real growth tailwinds (ie. AI, defense etc)
Disagree that PC has no place in the market though. Most major funds do not want to have to deal with 100s of 5mm holders of CLO debt to get an upsize, amendment, follow on etc. done. Furthermore, only funds/assets with a certain scale/reputation etc can tap into the HY/BSL market. The CLO market is also jumpy with new issuances completely shut down the minute the economy gets shaky
Bottom line is that the tailwinds that made a career in alternatives a good way to make real money no longer exists over the next 20 years
Response to B) i would agree that a small number of earlier vintage funds did return 9-11% but that was when the market was a tiny fraction of the size and it took a massive bull market in PE plus PC expansion to get there. And many many did not (about half the public guys blew up if you look who was there in say 2014: BX via FSIC/FSK, Apollo via AINV/MFIN, plus a bunch of others suck as Fifth street, Medley, Garrison, ICMB, and others I can't remember while even ARCC would have been toast if they hadn't gotten the uplift from their ACAS PE acquisition). I would be that returns on effectively every direct lending vehicle around today will be very bad on a 5 year basis. They have been over-reporting the 9-11% income by not reserving (like a bank would do) or marking like they should so will now see the catch up from losses at the end of a portfolio (effectively what happened to folks like PSEC that didn't reserve on their CLO equity portfolios). Software could make it catastrophic (though that is tbd).
As far as direct credit goes, your first comment is just not true. Most $'s are with funds that are both facing BSL market and PC. Its simply matter of who gets better pricing or permits higher leverage etc. You correctly point out that smaller assets do not have access to that market - much as I highlighted with regard to LMM roll-ups which are really are a great user of PC due to their need for frequent add on capital. However, it seems like effectively all roll-up sectors are in trouble (Dental, Vet, other medical, HVAC, carwash, the list goes on). Jury is still out but suspect the market comes around to the idea that roll-ups are really really hard to make work - much like the market already determined pre-GFC.
Super insightful - would love to see more of your takes on credit markets in general!
@CPDDOUGH can you comment on the clo market trend too? Is it a good place to develop career? And can you expand on your point regarding opportunistic credit fund with an asset backed strategy? What does that type of deals look like / in which industry sectors are they generally found? Thank you
CLOs will be super interesting over the next few years. So much of the lev universe has moved there and unlike private credit, there will be a lot of secondary activity around the product. That includes both inside the asset (managing loan portfolio) plus around the liability/equity instruments themselves. The skills learned are definitely different. You learn some about liquid credit markets which i personally think is very interesting. Also get plenty of quant light work on modeling portfolios. Still have core credit analysis but less in depth than a distressed seat. Though I suspect there will be so much activity on the assets with many CLOs likely being wound down that it might be a path to some exposure there.
All that said, return profile for CLO equity is likely v bad (though somewhat already reflected in market. see ECC/OXLC). Managers have been retaining equity and using their fees to subsidize those returns. Has resulted in massive spread compression. Meanwhile imho underwriters have been slow to adjust their models to recognize how bad recoveries will likely be (due mostly to priming LMEs but also due to quality). And that was before you head chems/packaging/building prod blow up - with software now a very worrisome potential downside.
Not great for returns of managers. But likely a really interesting place to spend the next 5 years and secondary opportunity provides the chance to do well off of it.
Bump
It feels like private credit is getting to a point where a correction is more likely than not. When that happens, you’ll really see who did their due diligence and who was under pressure to just put money to work. As always, there will be winners and losers.
That’s also why hiring in this space shouldn’t just be about the candidate, it should be just as much about the firm. Not all platforms are built the same, and that’s going to matter a lot more in a tougher environment. And obv. about the strategy, some opportunistic players will get a chance to make some good investments.
If you’re getting close to final interviews or an offer, you’ll usually have the chance to go a bit deeper, that’s where you should really lean in. Ask about fund performance, how the portfolio is actually behaving, what losses have looked like, if any, and how they’re thinking about deployment right now.
Fundraising is another big one, is capital still coming in, or has that slowed? And more broadly, what’s the mood internally, are they being more selective, or still pushing to deploy?
Private credit can still be a great career move, but the gap between good and bad platforms is probably going to widen from here. So it’s less about does private credit make sense right now and more about does this specific firm make sense. If your funds current performance is not top but you get a share in the new fund thats being raised at some point it can be a good move.
Awesome write up. Thanks for this. My background is more ABF focused, but I may overlap a bit into traditional PC as well. Will be sure to dig in more if offers come in.
Who do you think are the best positioned platforms?
Honestly I cant tell you from the outside in perspective. I would suspect large credit platforms like a PIMCO to do well and even profit from the latest development (the opportunistic teams at least). I think you can get a feeling for it by checking how much money has been invested, the team size, the approach they take, ask about what their IC looks like, which industries they favor, how they get comfortable around risks and what they think about latest trends on AI, how tariffs impact their portfolio, if possibly the wars have an impact etc.
There are a lot of smart questions you can ask and you will see that some are better prepared to answer them than others. Then finally there is also a bit of luck in investing, you can do all the work in this world but you just cant predict some trends, be it for the good or bad...
Agreed. That’s what I said. 4 weeks.
Someone will tell you 3 weeks but that’s almost never happens.
Thoughts on pc secondaries and where that strategy is headed?
bump
yes
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