The absence of daily pricing in private credit removes an essential discipline. Mark-to-market in public markets acts as an honest, early warning system that forces managers to scrutinize underperforming assets, a mechanism private lenders lack.
Beyond yield premiums, illiquidity imposes a major opportunity cost: the inability to rebalance. When one asset class soars, liquid investors can sell and reallocate to cheaper assets. Heavily illiquid investors are stuck, forfeiting valuable strategic portfolio shifts.
In a significant role reversal, emerging market central banks were more proactive and aggressive in tightening monetary policy to combat post-COVID inflation than developed market institutions. This action demonstrates a secular improvement in their credibility and sovereign credit quality.
Europe's defense spending surge is a funding opportunity beyond just armaments. Private capital can finance critical infrastructure like barracks, logistics hubs, and hardened data centers, partnering with governments that lack entities like the U.S. Army Corps of Engineers.
As private credit funds absorb riskier, smaller deals, the public high-yield market is left with larger, more stable companies. This migration has improved the overall quality and lowered default rates for public high-yield bonds, creating a performance divergence.
The idea that investment-grade companies will abandon liquid public markets is "highly improbable." The real growth for private capital is in asset-based finance (e.g., consumer, aviation loans) as banks change their lending models, creating a multi-trillion dollar opportunity.
Problem loans from the 2021-22 era will take years to resolve due to private credit's tendency to "kick the can." This will lead to a prolonged period of underwhelming mid-single-digit returns, even in a strong economy, rather than a dramatic bust.
The narrative that private lenders get superior information is challenged. Large public asset managers like PIMCO have excellent management access, while private market disclosures can be stripped-down, less regulated, and use weaker auditors, undermining the information advantage claim.
The intermediate part of the curve offers the best risk-reward. Investors can capture "roll-down" returns by holding a bond as it shortens in maturity and its spread tightens. This benefit is absent in flat, long-dated curves, which also lack sufficient natural buyers.