During the recent PDI webinar we were asked, beyond yield, diversification, and deployment, what private credit areas are most vulnerable? What scenarios could likely create problems? These questions are excellent ones, because they allow us to tease out the differences among private capital managers, not just throw the entire asset class out with the bath water. 

For inexperienced or under-resourced managers there are potential pitfalls. As we discussed last week, under-deployment is a major problem for investors. Unlike, for example, the broadly syndicated market, where CLO managers can access a relatively large number of well-traded secondary loan opportunities, middle market loans don’t trade.

While the primary large cap loan market has boomed this year, the vast majority of this activity is refinancing or repricings. That means CLOs and retail funds likely already have the assets in their portfolio, so rolling into the new deal doesn’t help volume much and probably hurts yield.