Private credit—particularly middle-market direct corporate lending—has attracted heightened attention as capital has flowed into the space and retail-oriented vehicles have expanded access. While concerns about liquidity, valuation, and systemic risk have featured prominently in the financial press, a closer examination suggests that private credit is not a speculative bubble and does not represent a systemic risk like mortgage-backed securities in 2008. It is important to note that it is NOT a substitute for traditional fixed income. Rather, it is a distinct asset class that, when appropriately sized and carefully selected, can serve as an alternative to high yield bonds or equities.
What Is Private Credit?
Private credit encompasses a range of nonbank lending strategies, with middle-market direct corporate lending representing the largest and most established segment. These loans are typically senior-secured, floating-rate obligations extended to profitable, private-equity-backed companies.
Importantly, private credit should be viewed as an alternative to equity or high yield bonds, not as a replacement for traditional investment-grade fixed income, which serves a liquidity and capital-preservation role in portfolios.
Is Private Credit a Bubble?
The defaults last year of Tricolor and First Brands spurred headlines in the financial press of a ‘bubble’ in private credit. Both of these situations involved fraud and were asset-backed loans, not the typical senior corporate loans that represent most private credit. The other factor driving concerns for the sector has been the growth of retail vehicles offering periodic liquidity while holding fundamentally illiquid loans. These structures have highlighted the real risk of forced redemptions and/or fund gating during periods of stress.
From a systemic perspective, the private credit market remains relatively small. Total assets are estimated at roughly $2.0–$2.5 trillion, representing approximately 6.5% of U.S. GDP with the bulk of the assets held in the diversified portfolios of large institutional investors. By comparison, losses from securitized mortgages during the 2008 financial crisis amounted to roughly 6% of pre-crisis GDP and concentrated within the banking system. The losses were sufficient to destabilize the entire banking system. For private credit to have a comparable economic impact, nearly the entire asset class would have to suffer complete loss – an outcome inconsistent with its senior-secured structure and historical loss experience.
- The asset class is dominated by senior-secured lending to profitable operating businesses diversified across industries and generally avoids overly cyclical industries such as energy or steel making.
- Average annual loss rates for direct lending from 2005–2025 were approximately 1.0%, below those of high yield bonds1.
- Roughly 75% of loans are held in institutional vehicles2 without redemption provisions, reducing the risk of forced selling.
Risk and Return Characteristics
Private credit risk should be evaluated relative to equities and high yield bonds, not traditional fixed income. Compared with publicly traded loans and high yield bonds, direct corporate lending has historically offered:
- Attractive income: First-lien direct lending yields have exceeded those available in high yield bonds and broadly syndicated loans.
- Lower credit losses: Historical loss rates have been lower than high yield bonds and comparable to, or better than, publicly traded loans.
- Higher recovery rates: Private lenders typically control the capital structure, allowing for cleaner, faster restructurings—often outside of bankruptcy court.
- Structural protections: Loans are commonly backed by covenants and sponsor support, with private equity firms frequently contributing additional capital to stabilize borrowers.
While yields have moderated as retail capital entered the space, returns remain compelling relative to risk when underwriting discipline is maintained.
Portfolio Considerations
Paul Comstock Partners began allocating to private credit in 2022, following interest-rate increases that materially improved forward return expectations. These investments continue to perform as expected. The focus has been on:
- New underwriting, avoiding loans originated during the ultra-low-rate environment of 2016–2021.
- Manager selection, emphasizing experience, credit discipline, and alignment of interests.
- Appropriate portfolio sizing, recognizing the illiquidity and complexity of the asset class.
Private credit allocations should be constructed with an understanding of liquidity constraints, vehicle structure, and the role the investment plays within the broader portfolio.
Conclusion
Private credit is not a bubble in the traditional sense. It is a maturing asset class that has grown in visibility as access has expanded beyond institutional investors. While certain retail structures introduce additional risks, the underlying market—dominated by senior-secured, middle-market lending—remains fundamentally different from the leverage-driven excesses of past credit cycles.
For investors who understand the risks, accept limited liquidity, and focus on manager quality and underwriting standards, private credit can serve as a durable source of income and diversification.
This material is proprietary to Paul Comstock Partners and is intended for informational purposes only. Past performance is not a guarantee of future results. Private credit investments involve risk, including the potential loss of capital and limited liquidity.
- Cliffwater Direct Lending Index Data on 50,000 private loans (https://www.cliffwaterdirectlendingindex.com) ↩︎
- Data from PitchBook Houlihan Lokey, J.P. Morgan ↩︎