What's Actually Going On With Private Credit

This episode of Odd Lots dives deep into the rapidly expanding and increasingly controversial world of private credit, exploring its historical roots, structural mechanics, and current risks. Hosts Tracey Alloway and Joe Weisenthal, joined by portfolio managers John Sheehan and Craig Manchuk from Osterweiss, trace private credit back to its origins in corporate finance arms like GE Capital and Heller Financial, showing how it evolved from financing tangible assets like aircraft and rail cars into a dominant force in corporate lending—especially after the 2008 financial crisis when banks were restricted from lending to highly leveraged companies. The episode highlights the unique structural tension in private credit: while institutional funds traditionally raise capital and then source deals (like private equity), retail-focused private credit funds often take money upfront and must deploy it quickly, creating pressure to underwrite aggressively and accept weaker terms. This has led to a surge in leverage, reduced covenants, and a growing mismatch between illiquid assets and liquid fund structures—raising concerns about redemption risks and potential contagion. Despite the alarmist headlines, the hosts argue that private credit is not a systemic threat on par with 2008, but rather a market undergoing a painful correction. The real danger lies in the dispersion of performance across fund managers, with some having overextended themselves in the race for yield. The episode underscores how the rise of software-as-a-service (SaaS) companies—once considered unfinanceable—has pushed private credit into new, riskier territories, where traditional asset coverage metrics no longer apply. The conversation concludes with a call for more nuanced understanding: private credit isn’t inherently dangerous, but its recent growth has exposed flaws in underwriting, liquidity management, and investor education. The key takeaway is that while private credit remains a vital financing tool, its current stress points demand greater scrutiny and structural discipline.