Large banks have offloaded riskier loans to private credit, which is now more accessible to retail investors. According to Crossmark's Victoria Fernandez, this concentration of risk in a less transparent market, where "cockroaches" may be hiding, is a primary systemic concern.

A telecom financing company defrauded lenders including BlackRock's HPS of over $500 million by fabricating receivables from major carriers like T-Mobile. The entire scheme, involving forged contracts and spoofed emails, would have been exposed by a single phone call to verify the collateral, highlighting severe due diligence failures in the booming private credit market.

Recent negative headlines about private credit stem from illiquid private funds with redemption gates, not publicly traded BDCs (Business Development Companies). These public BDCs use permanent capital, meaning they don't face investor runs or forced asset sales.

Recent "canary in the coal mine" cases like First Brands, often blamed on private markets, were not PE-owned and were primarily financed in liquid markets. In fact, it was private credit firms pushing for deeper diligence that exposed the issues, strengthening the argument that private credit offers a safer way to access the asset class.

Despite headlines blaming private credit for failures like First Brands, the vast majority (over 95%) of the exposure lies with banks and in the liquid credit markets. This narrative overlooks the structural advantages and deeper diligence inherent in private deals.

Despite investor concerns about private credit, banks involved in the space feel reassured by their risk management strategy. They structure deals to be senior, are over-collateralized by hundreds or thousands of loans, and partner exclusively with established, prime sponsors, creating multiple layers of protection.

To combat fraud, some credit funds use the prospective borrower's due diligence deposit to fund deep background checks on founders and management as the very first step. Any past financial impropriety, no matter how old, results in an immediate rejection, making recent high-profile frauds avoidable.

Hunt observes that the volume of stories about alternative asset managers' exposure to problematic private credit is higher than at any point in the last decade, including during COVID. The persistent denials from CEOs mirror the "subprime is contained" rhetoric of 2007.

Concerns that Business Development Companies (BDCs) will trigger a financial crisis are unfounded. Unlike banks levered 10-to-1 pre-2008, BDCs are legally capped at 2-to-1 leverage and typically operate closer to 1-to-1, minimizing systemic financial risk even if underlying loans default.