The biggest risk for a late-stage private company is a growth slowdown. This forces a valuation model shift from a high multiple on future growth to a much lower multiple on current cash flow—a painful transition when you can't exit to the public markets.

In a typical LBO, the acquired company, not the PE firm, is responsible for the massive debt used to buy it. A proposed legislative fix would force PE firms to have "skin in the game" by sharing joint liability for these loans.

Unlike its reputation, the healthcare sector faces substantial challenges from regulation, pricing pressure, and difficulties in passing on costs. This makes it a deceptively risky area for credit investors who must perform careful selection rather than treating it as a defensive play.

A key risk for highly leveraged, sponsor-backed tech companies is not just debt, but existential competition from investment-grade giants. Large players like Microsoft or Google can easily replicate a smaller firm's niche product as a simple feature within their ecosystem, rendering the smaller company's entire business model obsolete.

Aegon's Global Head of Leverage Finance, Jim Schaefer, shares a critical heuristic: once a leveraged loan's price falls below the 80-cent mark, it has a high probability of entering a formal restructuring. This price level acts as a key warning indicator for investors, signaling imminent and severe distress.

The greatest systemic threat from the booming private credit market isn't excessive leverage but its heavy concentration in technology companies. A significant drop in tech enterprise value multiples could trigger a widespread event, as tech constitutes roughly half of private credit portfolios.

Contrary to the narrative that PE firms create leaner, more efficient companies, the data reveals a starkly different reality. The debt-loading and cost-cutting tactics inherent in the PE model dramatically increase a portfolio company's risk of failure.

To generate returns on a $10B acquisition, a PE firm needs a $25B exit, which often means an IPO. They must underwrite this IPO at a discount to public comps, despite having paid a 30% premium to acquire the company, creating a significant initial value gap to overcome from day one.

Once considered safe due to low CapEx and recurring revenue models, the technology sector now shows significant credit stress. Investors allowed higher leverage on these companies, but the sharp rise in interest rates in 2022 exposed this vulnerability, placing tech alongside historically troubled sectors like media and retail.