Private credit: Promising or problematic?

While Jamie’s warnings highlight real risks, they shouldn’t be misconstrued as a negative stance on private credit. He’s advocating for responsible practices and sees potential, as shown by J.P. Morgan’s own $50 billion commitment to the space. Jamie acknowledges that “parts of direct lending are good,” and that the asset class can positively fill lending gaps left by banks under Basel III and higher rates, provided there’s greater transparency, disciplined underwriting and prudent regulation. After all, the risk lies with bad actors, not the asset class itself. Private credit isn’t inherently dangerous; it’s the execution that matters. With thoughtful structuring, it can deliver strong risk-adjusted returns without systemic issues.

In our view, there are three key points to keep in mind:

1) Fears of private credit leading to a systemic crisis are overstated. While the industry’s growth is significant, it’s still a smaller slice of corporate borrowing and not large enough to pose systemic risk. To level set: Over the past decade, corporate borrowing has grown at a 5.5% annualized pace, with commercial and industrial bank loans at 3%, and private credit at 14.5%. Yet, private credit AUM is about $1.2 trillion, just 9% of all corporate borrowing—while meaningful, we don’t believe it’s large enough to threaten the broader economy.

Even factoring in banks’ direct exposure to private debt managers, the risk remains limited, and is unlikely to trigger a ripple effect that would destabilize the banking system and create systemic risk. To boot, bank lending to private equity firms, Business Development Companies and private debt managers totaled about $320 billion last year—with over a third going to private debt managers. This is modest compared to the $2 trillion in total loan commitments to non-bank financial institutions.

2) We’d need a major economic downturn to see negative total returns in this space. In senior direct lending, higher starting yields and seniority in the capital structure help the asset class stay resilient by providing a cushion against potential losses. As a simplified example, with a starting yield of 10% and assuming 1x turn of leverage over a long-term holding period, default rates would need to rise above 6% and recovery rates fall below 40% to result in negative returns.

For context, private credit default rates were around 2.4% by the end of Q1 2025. Also, high yield bond defaults are currently at about 1.5%, below the 25-year average of ~3%. The last time high yield bond default rates exceeded 6% was during the COVID-19 pandemic and the Global Financial Crisis, and recovery rates haven’t dipped below 40% since COVID. It’s rare for high-quality managers to encounter such high defaults and low recoveries.

3) Weaker fundamentals than public markets demand higher selectivity. Yes, the private credit industry shows lower-quality fundamentals compared to public markets, including high yield bonds and broadly syndicated loans. Overall, interest coverage is weaker (2.1x versus public at 3.9x), leverage is higher (5.6x versus public at 4.6x), and EBITDA margins are slimmer (14.9% versus public at 16.4%).

The good news? Investors have historically been rewarded for the additional risk, as private credit has outperformed high yield bonds by around 150 basis points over the past decade. As the market expands, manager dispersion is expected to increase, emphasizing the need for careful selection. This underscores the vital role of our Due Diligence Team, dedicated to identifying high-quality managers that possess scale, seasoned management teams and proven track records of achieving target returns with minimal impairment.

In all, there are risks, and the industry won’t be immune to a potential economic slowdown. While we believe high-quality managers within senior direct lending will be able to navigate the impact of an economic downturn, we recommend diversification across the various segments of private credit outside of just senior direct lending (think asset-backed credit, opportunistic credit and secondaries). Double-clicking on opportunistic credit—while we don’t expect a macro distress cycle, pockets of dislocation may emerge as growth moderates, creating opportunities for specialized lenders. Moving forward, we anticipate returns to normalize to historical ranges of 8%–10% as base rates move lower, making diversification into other areas of private credit crucial.