Private Credit Spotlight: Fundamentals or Market Sentiment?

By Eric Freedman, Chief Investment Officer, Wealth Management and Lynne Kostakis, Executive Director of Alternative Investments, Wealth Management 

Spurred by several high profile defaults, redemption spikes and investor anxiety over potential AI disruption, private credit has been prominent in both investment media and mainstream headlines in recent weeks. 

As we evaluate the evolving conditions and news, the key question is whether the current disruption reflects underlying investment fundamentals or is primarily driven by market sentiment and investor behavior. 

Why We Continue to See Value in Private Credit

First and foremost, we continue to view private credit as a value-added way for lenders to match with borrowers. Private capital provides unique financing capabilities to corners that banks and traditional lenders cannot or do not access, and recent news does not change the overarching purpose and value inherent in private credit.

The asset class offers diversification through multiple lending structures and durations; exposure across industries and geographies; and return streams that are less correlated with traditional public markets. These characteristics continue to support private credit’s role as a strategic allocation within diversified portfolios.

Recent private credit headlines broadly fall into two categories: Liquidity, Redemptions, & Investor Stress and Valuations, Defaults & Broader Market Stress. We discuss both categories below.

Liquidity, Redemptions & Investor Stress

The Rise of Evergreen Fund Structures

Over the past several years, we have seen a fund structure other than the drawdown fund that has historically been synonymous with private market investing (where your capital is called when needed, and the fund has a finite life) emerge with speed and size — the evergreen fund. “Evergreen” is an umbrella term for multiple fund structures that have a few features in common: perpetual life (that is, no fixed end date); periodic subscriptions and redemptions (typically capped at ~5% per period); regular NAV‑based pricing; and capital invested shortly after subscription.

Examples include open-ended private funds, interval funds, nontraded BDCs (business development companies), and other permanent capital vehicles — many of which have appeared in recent headlines.

As valuations and market stress have entered the narrative, some investors have exercised redemption features. In several cases, redemption requests have exceeded stated thresholds. Managers have responded differently, some enforcing limits strictly and others allowing redemptions beyond thresholds to accommodate investor needs. As redemption requests are elevated and potentially persist, it may take several quarters for some vehicles to fully absorb these flows. If this is the case, it is likely that related headlines will remain elevated as well.

Importantly, this period represents a real-time stress test of evergreen structures, and we expect continued evolution in how these funds are designed, how investors use them, and how the industry educates clients on liquidity expectations and tradeoffs. 

Asset Flows, Liquidity and Investor Behavior

Evergreen structures serve a purpose, but asset flow is a variable we are closely monitoring. Private credit funds inherently offer limited liquidity by design and for good reason given their underlying holdings, and private credit assets have grown almost 3x in the past 10 years¹ from increased allocations by existing investors as well as new investor and sponsor entrants. In periods of market stress, a combination of adverse headlines, inadequate investor education, liquidity mismatches and short‑term oriented capital can lead to selling at inopportune times, particularly in poorly constructed vehicles.

Beyond valuation “noise,” sustained outflows can distract managers, shifting focus from sourcing and underwriting loans toward managing communications and investor concerns.

Understanding the “Wedge” Between Borrowers and Lenders

Market circumstances can drive a wedge between what we seek for clients, and part of our job is to understand if that wedge is real and persistent or illusory and temporary. In the case of equity investing, exceedingly high valuations or poor corporate governance can drive a wedge between corporate profit opportunities and shareholder returns. In real estate debt investing, cost overruns or delayed tenant cash flows drive a wedge between bondholders and the capital required to pay them back. Wedge effects also exist within private credit. 

Valuations, Defaults, & Market Stress

Software Exposure in Private Credit

Fundamentally, private credit value is derived from loan repayments to lenders. Loan repayments are a function of borrowers generating capital to cover their costs, including interest costs across their capital structure. Recent volatility in the software sector, particularly concerns around AI disrupting certain business models, has heightened investor scrutiny.

Software exposure is meaningful across several credit markets, including private credit, syndicated loans and structured credit. Importantly, software is not a monolithic sector. It spans vertical-specific platforms, horizontal enterprise solutions, mission-critical, high-barrier solutions and lower-barrier, more commoditized offerings. This dispersion matters greatly when assessing credit risk.

AI, Market Volatility and Investor Perception

We have a continued respect for AI’s role across many industries; disruption will not be uniform or instantaneous. Irrespective of how AI may impact industries, whether it is the over 35% peak-to-trough drop in software stocks since September 2025² or headlines regarding major software or fintech companies embarking on large layoffs, investors are concerned about software. That part is clear. What is unclear is if at this stage the pressure is isolated to market sentiment and forward-looking disruption concerns or the underlying fundamental loans that private credit managers own should be “marked,” or priced, at lower levels than they are currently carried due to observable loan deterioration.

Loan Valuations, Marking Practices and Market Signals

Unlike public securities, loans do not trade in public markets or exchanges and therefore are not subject to prices reflected on a ticker or a FactSet machine. Instead, they are subject to appraisal-based pricing, typically informed by manager models, market comparables and independent third-party valuation inputs. Over the past couple weeks, we have seen some private credit managers reflect lower prices or marks on some of their loans. As is often the case, market observers quickly extrapolated that this may mean other loans should be marked lower and private credit loan books should fall in value. 

Defaults, Impairments, and Credit Fundamentals

What no one knows yet is if that lower credit value will in fact be realized and loans actually become impaired because of fundamental business changes to software companies taking loans. Defaults or impairments have not taken place at any scale within the software space, and overall credit defaults remain very low by historical standards. That doesn’t mean defaults can’t rise, but it is worth noting. We are continuing to monitor loan fundamentals and have had several discussions with managers that we will share. 

Our View

We remain committed to private credit as a core component of private capital portfolios while maintaining heightened vigilance in a news-heavy environment. Distinguishing signal from noise and sentiment from fundamentals is essential.

The potential “wedge” between what we want from the category and what it may deliver requires constant oversight, disciplined manager selection and engagement, and clear client education. We will continue to assess developments thoughtfully and share insights as conditions evolve. 

 

1. Preqin; Private Credit AUM 2016-2025

2. FactSet, S&P North American Technology Software Index