Companies that used private credit when public markets were closed are now refinancing back into the liquid public markets. The borrowers left behind in private credit vehicles are often those who cannot access public financing, suggesting a lower credit quality and creating a portfolio of adversely selected risk.

The current stresses in private credit are unlikely to halt its long-term growth. Instead, they will create a dispersion of returns, acting as a catalyst for a market share shift. Capital will flow from underperforming managers and structures (like non-traded BDCs) towards winners and opportunistic strategies, ultimately strengthening the asset class.

Unlike public equities, scale in private credit is a significant advantage. A larger platform allows for deeper expertise across interconnected markets (loans, high yield, real assets), better data, and stronger origination capabilities. This creates a virtuous cycle where being bigger enables a firm to get better, reinforcing its market leadership.

While the private credit asset class is expected to continue its growth, the market is maturing. The future will likely see a wider gap between top- and bottom-performing managers, with success depending more on origination skill and portfolio management rather than just riding market growth.

The private credit market has seen little difference in returns between managers in recent years. However, a changing economic environment is expected to create significant dispersion, where managers with superior credit selection and origination capabilities will pull away from the pack.

In a market flooded with capital, fundraising is becoming a commodity. The enduring competitive advantage will be proprietary origination—building platforms and ecosystems to source high-quality loans consistently through cycles, rather than just competing in auctions for deals.

The post-GFC era of low defaults meant nearly every private credit manager performed well. That era is over. For the first time in over a decade, manager and asset selection are critical, which will lead to a wide dispersion in fund performance and a shakeout in the industry.

Judging the credit market by its overall index spread is misleading. The significant gap between the tightest and widest spreads (high dispersion) reveals that the market is rewarding quality and punishing uncertainty. This makes individual credit selection far more important than a top-down market view.

A key differentiator for scaled asset managers is moving beyond reactive deal flow. They leverage firm-wide thematic research to proactively identify companies and pitch them customized financing solutions, effectively manufacturing their own proprietary opportunities.