Why is portfolio construction such an important concept for analyzing private credit managers? The answer seems obvious, but it’s more than ensuring defaults and loses are minimized.

As the asset class has grown to dominate the debt capital markets, questions persist around its durability. How will the asset class perform in a real downturn? Will BSL competition compress spreads and raise credit risk in a “race to the bottom”? Are private credit valuations supportable, or will they crash and contaminate the financial system leading to another GFC?

We believe these conclusions are unfounded. The best private credit portfolios act as firewalls when market volatility impacts liquid assets. 2022 was a prime example of that dynamic. By selecting borrowers whose businesses weather rate or economic storms reasonably well, direct lenders can maintain consistent and stable returns for their investors.