Private credit grew quickly while banks stepped back from mid market lending. That gap was real, and early lenders were paid well for filling it.
Conditions have changed. More capital is chasing the same borrowers, and we are seeing weaker covenant packages presented as market standard. Accepting those terms is a decision, not a formality.
We look hardest at three things: cash conversion over a full cycle, the lender's position in the capital structure, and whether the manager has ever actually run a restructuring. The third is easy to overlook until it matters.
“Documentation quality explains more of the return gap than headline yield ever will.”
- 01More capital chasing the same borrowers has loosened covenants.
- 02Recovery rates, not default rates, separate managers.
- 03Restructuring experience is a genuine differentiator.
Default rates remain modest, but recovery outcomes vary widely between managers. Documentation quality explains much of that spread.
Our own approach is to accept lower headline yield in return for tighter terms. Capital is at risk in any credit strategy, and the terms are the only thing standing between a difficult year and a permanent loss.