The Bridge Ep. 21: What the Headlines Miss About Private Credit

The Bridge EP 22, Private Credit Compilation – Transcript

Sonali Basak: (00:00:18 -> 00:02:02)

Welcome to the Bridge by iCapital. I’m Sonali Basak, the Chief Investment strategist at iCapital. And today’s episode is a little different. We’re going to recap one of the biggest stories of 2026; that’s private credit.

Every asset class eventually hits an inflection point after years of explosive growth. And for private credit, 2026 may have been that moment. It was a year marked by tough questions and growing debate about where risks were hiding beneath the surface. Some investors saw some warning signs where others saw one of the most compelling opportunity sets in years. But as I spoke with some of the industry’s leading investors this season on The Bridge, one theme kept emerging-that this story was more nuanced than the headlines suggested because this wasn’t just a year of challenges. And perhaps no issue captured the year’s debate better than the idea of liquidity. As private credit has become more accessible, many investors have gained access through vehicles that offer limited liquidity. But the underlying reality hasn’t changed, that these are fundamentally illiquid assets. Redemption features may provide flexibility, but they’re often intentionally limited because the underlying loans cannot be sold overnight without creating an asset liability mismatch. That distinction became one of the defining lessons of 2026. With 2027 on the horizon. Here are five lessons from private credit’s, biggest tests yet.

Lesson number one, the age of dispersion has arrived. Not all managers are created equal, and for much of private credits rise. Differences between managers were harder to see. Capital was abundant, markets were supportive, and many portfolios performed very well. But conditions have changed, and what had once looked similar began producing very different outcomes across different managers.

Davi Manlowe: (00:02:10 -> 00:02:36)
I really believe we’re in the age of dispersion. For the prior 18 years, the performance of the asset class has been excellent, and if you looked at sort of the dispersion around the average, we were all pretty tightly clustered, so it was very hard to, to, to distinguish between the different managers. You’re going to see some winners and losers within software that’s going to create winners and losers within software portfolios. I think that’s going to create dispersion in returns.

Victor Khosla: (00:02:36 -> 00:02:55)
You’ve got economic growth in the United States, uh, you’ve got equity markets on a tear, and then at the same time, these are Moody’s default rates. Default rates are 6% a year. I’ve been doing this for 25 years at SVP, never seen it.

Sonali Basak: (00:02:55 -> 00:03:31)
Now, the lesson isn’t that private credit suddenly changed. It’s that the market is finally revealing differences that were always there. Underwriting, portfolio construction and discipline. For years, manager selection may not have been the story, and now it is. It’s also showing up in how investors think about valuations, marks and payment-in-kind structures or PIK. Not all PIK is the same. Some structures are built into the original underwriting, and others emerge later when borrowers are under pressure. And in 2026, investors began paying closer attention to that distinction.

Steve Tananbaum: (00:03:31 -> 00:03:52)
You also have a marking issue where there’s just, you know, not everybody, it’s not, um, using the same pricing service. Some self-mark with a process. Others will be third party. Some will, you’ll see on private credit will be increasing their PIKs, which means for whatever reason, the ability to pay cash interest, which would, would not be there.

Sonali Basak: (00:03:52 -> 00:04:52)
That raises an important question. When does a PIK structure reflect the original design of an investment? And when does it reflect growing stress inside a portfolio? And good PIK versus bad PIK, as we’ve always defined it is if you’re doing it at kind of the time of the underwriting,

Steve Tananbaum:
exactly,

Sonali:
it’s good, but if you’re doing it retroactively to hide some issues, and that would be bad.

Steve Tananbaum:
Totally.

Sonali:
Yeah. As performance becomes more dispersed, investors may pay closer attention not just to returns, but to how those returns are generated, valued and being reported.

Lesson two, attention and fundamentals aren’t the same thing. Headlines don’t always reflect the fundamentals, but if you followed the headlines in 2026, private credit looked like it was under pressure from every direction. There were liquidity concerns, software exposure, and the all-encompassing rise of AI, questions about redemptions, but many investors drew a distinction between the attention surrounding the market and what they were actually seeing inside their portfolios.

Sam Williams: (00:04:52 -> 00:05:18)
I think credit fundamentals are actually very strong. I think when we look at our book, um, you know, we don’t see any underlying credit quality concerns. And when we look at our competitors’ books and we look in the market, we generally feel the same about how they’re positioned. And so, I, I think, you know, ultimately, um, the, the concern is not so much about the credit quality, it’s it’s about the liquidity in the market and it’s about how people are looking at, you know, potential risks out in the future.

Sam Williams: (00:05:19 -> 00:05:29)
It’s very difficult to dispel the notion that credit quality is weak when it’s strong. You know, all the data supports the continued health of these portfolios.

Sonali Basak: (00:05:29 -> 00:05:57)
The concerns were real, but many investors argued that the extra scrutiny and fundamentals had become two different conversations. The market was focused on what could happen next. Managers were focused on what was happening inside of portfolios today.

Lesson three, private credit is not one market. Private credit is an umbrella, not a trade. One of the biggest mistakes investors make is treating private credit as a single asset class. And it’s not

Victor Khosla: (00:05:58 -> 00:06:06)
Private credit today is such a broad category. The words private credit by himself itself don’t even do it.

Sonali Basak: (00:06:06 -> 00:06:19)
Behind that label are corporate loans, asset backed finance, real estate credits, secondaries, and dozens of ways to take risk. There are different structures, protections, and outcomes to accommodate for.

Jack Neumark: (00:06:19 -> 00:06:44)
Unlike corporate credit, where you’re lending against cash flows on the asset backside, you’re typically buying assets that are held inside of an SPV, you have a number of very strict contractual protections so that ultimately if things do go sideways, you can run those pools of assets off and generate, uh, recoveries that are, you know, usually, uh, much better than a, than a corporate credit, uh, loan that goes into default.

Sonali Basak: (00:06:45 -> 00:07:30)
Broad conclusions about private credit can be misleading. Different structures face different risks, and when markets get tougher, those distinctions start to matter.

Lesson four, every yield comes with a trade-off. Returns are only part of the story, and one lesson became impossible to ignore this year -that private credit is still private credit. As new vehicles have brought the asset class to a broader audience, investors have gained greater access to private markets, but the underlying loans haven’t changed. They’re still fundamentally illiquid assets. Some vehicles may offer periodic liquidity and others redemption windows, but those features don’t change the nature of the underlying investments. And 2026 reminded investors why that distinction matters.

Sam Williams: (00:07:31 -> 00:07:59)
When you think about risk in your portfolio, it’s not just about returns and volatility because those are the two areas that private credit really shows its value proposition very clearly, right? These are generally lower volatility loans than the broadly syndicated market, and the returns are a significant premium. So, it’s a great story in that regard. There’s no free lunch. The tradeoff to that is the liquidity profile. And so, people need to consider liquidity alongside the Sharp ratio.

Steve Tananbaum: (00:07:59 -> 00:08:07)
You know, there’s sometimes it’ll be liquid, sometimes it’ll be illiquid, and you want to match the liquidity with the vehicle that you’re putting it in.

Sonali Basak: (00:08:07 -> 00:08:36)
The lesson wasn’t that private credit failed the test, it was that investors became more focused on understanding the trade-offs behind the returns.

Lesson five, private credit 2.0. The reset may be the opportunity. If one theme emerged repeatedly this year, it was that periods of disruption can create opportunity, not because the challenges disappear, but because the markets become more discerning, capital becomes more selective, and discipline matters again

Mathieu Chabran: (00:08:36 -> 00:09:06)
Private creates secondary will follow the same trend, but at a multiple because there is, you know, twice or three times more debt in any given deal than equity. So, the volumes are going to be bigger. The investors who pulled a, uh, who put a lot of money into the primary market of the past, you know, 10 years, they’re looking at rebalancing. And this is, in my view, one of the biggest opportunity we’ve seen of the past, you know, two decades of a new asset class into something that is very basic, you know, which is this credit market.

Sonali Basak: (00:09:06 -> 00:09:13)
The reset is creating new opportunities and reinforcing old principles such as patience, discipline, and underwriting.

Vivek Bantwal: (00:09:13 -> 00:09:43)
Part of the reason that we’re seeing so much institutional interest right now is institutions are seeing this kind of, uh, this phenomena happening, happening and saying, oh, wow, this is a great, you know, we’re already in private credit, this is a great entry point for us to actually lean in even more because we’re now getting double digit unlevered returns on first lien senior secured. You know, um, when we kind of got to the tail end of 2025, some of these deals were having an eight something percent sort of unlevered return. And so, if we can go from an eight something percent to a kind of a 10% plus type return, you know, that’s really, really attractive for that type of risk.

Mathieu Chabran: (00:09:43 -> 00:10:13)
Private credit 2.0, we look like much more what was basic leverage finance, you know, 30 years ago. If we come back to a, you know, good sense discipline in the underwriting. Uh, and, and, and as I said, a bit of honesty, you know, in the way you are approaching, you know, your mark and the way you, you, you deploy. I mean, credit to the basic of the financial industry and the modern, you know, financial industry. I really believe we are in a, uh, in a situation where, uh, it bodes well for the cycle that we have to, uh, uh, that we’re facing right now.

Sonali Basak: (00:10:14 -> 00:11:19)
The takeaway isn’t that private credit survived a difficult year, it’s that the market may be entering a more mature phase, one defined less by asset gathering and more by underwriting discipline. Whether the debate is software valuations, marks, or payment in kind structures, the market is becoming more focused on fundamentals and more demanding of discipline as the industry calls it. Private credit 2.0.

If 2026 revealed anything, it’s that there is no single story. In private credit, the year didn’t produce a verdict on the asset class, more so a reality check. Some risks proved overblown, others proved very real, but perhaps the biggest lesson was that outcomes are no longer moving in lockstep. For years, abundant capital made much of the market look the same, yet this year revealed who is different. The next chapter of private credit won’t be defined by headlines, but by discipline manager selection and the managers who adapt as the market evolves. I’m Sonali Basak. Thank you for watching The Bridge by iCapital.

END