What's Actually Going On With Private Credit

What It Covers

Osterweis portfolio managers John Sheehan and Craig Manchuk trace private credit's evolution from GE Capital's industrial financing through post-2008 regulatory changes, explaining how the market surpassed the high-yield junk bond market in size while accumulating structural vulnerabilities in retail-facing fund vehicles.

Key Questions Answered

• •Private Credit Origins: Private credit's roots trace to GE Capital financing railcars, aircraft engines, and medical equipment decades before the 2008 crisis. Many experienced lenders splintered from GE Capital into firms like Heller Financial, building the middle-market LBO lending infrastructure that later became the foundation for today's dedicated private credit funds.
• •Regulatory Catalyst: Post-2008 bank regulations explicitly prohibited lending to companies with leverage exceeding six times EBITDA, forcing highly leveraged borrowers out of traditional banking channels. This regulatory vacuum directly created private credit's explosive growth, as PE sponsors needed financing partners willing to extend leverage that banks were legally barred from providing.
• •Retail Fund Structural Risk: Retail-facing private BDC structures offer periodic redemption gates, typically capped at 5% quarterly, to attract wealth management capital. However, when inflows slow, managers must sell their highest-quality assets first to meet redemptions, leaving funds progressively more leveraged with deteriorating credit quality — a compounding spiral that gates slow but cannot stop.
• •Software Lending Vulnerability: Private credit funds financed software company LBOs at 16-17x EBITDA multiples, accepting payment-in-kind interest structures where unpaid interest compounds onto principal. Unlike physical assets with recoverable collateral, obsolete software businesses carry near-zero bankruptcy recovery value, meaning default losses could be total rather than partial for these vintage 2020-2021 loans.
• •High-Yield Market Upgrade: Private credit's absorption of the riskiest borrowers has structurally improved the public high-yield bond market. Double-B rated bonds now represent approximately 60% of the high-yield index, up from roughly 35%, while triple-C rated bonds have fallen from over 20% to around 9%, making remaining public high-yield portfolios meaningfully safer than historical averages.