How can private credit firms differentiate themselves in the current landscape?
There’s a structural and a cyclical answer. In the near term, differentiation will come from discipline – particularly the ability to maintain underwriting standards and avoid deploying capital too aggressively as the market becomes more competitive. As more capital has entered the space, some managers have scaled quickly, which in certain cases has led to looser underwriting and more aggressive deployment.
In our case, the focus has been on measured growth and prioritising a strong pipeline of high-quality opportunities over raising excess capital. That discipline is critical to delivering consistent performance and will become even more important in the coming cycle.
Longer term, differentiation will increasingly be driven by sector expertise. The market has evolved from making broad sector-level calls to requiring a much more granular understanding of individual businesses. Artificial intelligence has accelerated this shift, making it essential to distinguish between companies that are structurally advantaged and those that are at risk of disruption.
Firms that can combine deep credit expertise with genuine sector insight, and apply that consistently through cycles, will set themselves apart.
What are LPs looking for as they evaluate credit managers?
The starting point is alignment and discipline. LPs want to ensure that managers have not raised more capital than they can deploy effectively, particularly in a market where opportunity sets can fluctuate. Managers need to demonstrate selectivity and avoid the pressure to invest at all costs.
Beyond that, LPs are increasingly focused on differentiation. In a period where defaults are expected to rise, they are paying closer attention to whether a manager has the sector expertise required to avoid structurally challenged businesses, as well as the experience and resources to manage complex situations when they arise.
Track record is also critical – not just in benign environments, but in periods of stress. The ability to preserve capital, navigate downside scenarios and maintain performance through cycles is becoming a key point of evaluation.
Ultimately, the next cycle is likely to reward discipline over deployment, and LPs are underwriting managers accordingly.
How are capabilities evolving in private credit teams?
The fundamentals of credit investing remain unchanged: strong underwriting, disciplined risk management and the ability to manage downside are essential.
However, the bar is rising in terms of what is required to execute effectively. Credit managers increasingly need access to broader capabilities, including restructuring expertise and operational resources, to manage more complex situations as they arise.
At the same time, there is a growing need for embedded sector knowledge. Relying solely on third-party due diligence is becoming less viable in an environment where technological disruption, particularly from AI, is affecting nearly every sector. Managers need to be able to form their own independent view on whether a business is resilient or structurally challenged.
Those platforms that can combine credit expertise with deep sector insight and operational capabilities will be better positioned to navigate the evolving landscape.
How is the investment landscape changing going into the next cycle?
The investment environment is becoming more complex and more differentiated. Historically, many lenders avoided certain sectors perceived as higher risk and concentrated exposure in areas considered safer, such as software. That approach is becoming less effective.
AI is reshaping industries in ways that make broad sector-level assumptions less relevant. The key challenge now is identifying which individual businesses within a sector are likely to be winners or losers.
At the same time, diversification remains important but is not sufficient on its own. While portfolio diversification can mitigate the impact of individual defaults, it does not protect against systemic or structural risks that cut across sectors.
The priority is therefore shifting towards avoiding large structural losers. In some cases, that means recognising that certain businesses should not be financed at all, rather than attempting to compensate for risk through pricing.
Managers that can navigate this environment with a combination of discipline, selectivity and deep insight will be best placed to deliver consistent outcomes.
What are the key risks for the private credit industry?
One of the main risks is a potential misalignment driven by excess capital. As large amounts of capital have flowed into the asset class, particularly from private wealth channels, some managers have faced pressure to deploy that capital.
This dynamic can lead to larger position sizes, looser terms, tighter pricing and increased risk-taking, all of which can contribute to higher default rates over time.
However, there are signs that this trend is beginning to reverse, which should support improved pricing, stronger terms and greater discipline across the market.
In this environment, alignment of interests remains critical. Firms that maintain a long-term focus, invest alongside their clients and prioritise performance over asset gathering are better positioned to navigate the cycle and deliver resilient outcomes.
