Private credit assets do not trade on an exchange like equities.

Especially with respect to direct lending which has historically been the largest sub-strategy of private credit, these loans have multi-year duration and do not self-amortize. The only meaningful cash flows are monthly or quarterly interest payments, some of which may even be paid in kind (”PIK”) rather in cash.

Investors generally must hold private credit assets until maturity or a refinancing, both of which can be several years from the date of origination.

When accessing private credit via a commingled fund, the manager may implement various liquidity restrictions such as lock-up period, gate, notice period, and redemption frequency.

Private credit loans (i) are difficult to value and (ii) lack comparable transactions; as a result, their valuations are subjective, and highly dependent on the credit opinions and valuation methodologies used by the fund managers.

It is possible that the same loan is being valued very differently by different managers. Especially as loans become more distressed, such valuation discrepancy can increase. Such lack of price discovery makes it challenging for investors to accurately assess the true value and risk of their private credit holdings.

Further, macroeconomic conditions and borrower-specific issues can lead to sharp valuation adjustments, especially in stressed economic environments where illiquidity exacerbates pricing gaps.

Private credit borrowers tend to be privately-owned, and in many cases, smaller sized companies, where most borrower information is not publicly available, especially as compared to publicly listed companies.

This makes assessing credit quality challenging, limits the extent of due diligence that can be conducted by lenders and investors, and increases the potential for unknown risks or misinterpretation of borrower stability, especially considering the aforementioned illiquidity and valuation challenges.

Unlike bank-led financing such as broadly syndicated loans or traditional asset based lending, private credit deals tend to be less standardized and more specific to the underlying borrower’s situation and the lender’s investing style and deal experience.

Such unique deal structures make private credit assets complex to evaluate and monitor, potentially leading to unforeseen risks during the investment lifecycle.

Because private credit deals tend to be bespoke and less standardized as compared to typical bank-led financing transactions, loan servicing, which includes tasks such as covenant tracking and managing restructuring negotiations, can be complex, time-consuming, and costly.

Private credit investors, therefore, have to rely heavily on the skills and network of the fund manager. Fund manager’s failure to promptly monitor or assess risk, or lack of resources to do so at scale, can impair their ability to recover from a loan default and result in credit losses.

Private credit often involves niche or specialized sectors, each with unique economic sensitivities. Concentrated exposures to specific industries or borrower types can amplify downturn risks.

Additionally, exposure to borrowers across various legal jurisdictions can introduce complexities, particularly if local regulations change or legal disputes arise.

Private credit is a much newer asset class as compared to equities or high yield bonds; additionally, over 90% of credit fund managers were only formed after the GFC.

Such short history, combined with its high historical growth rate, means there is a lack of historical data or reliable performance benchmarks, which makes it difficult to accurately assess the long-term viability of private credit.

Separately, the buildup of "dry powder" in the last couple of years has created pressure to deploy capital, which may lead to compromised underwriting standards.

These circumstances create a critical risk considering the fact that the industry has not experienced a systemic correction or significant downturn since its inception.