The consensus trade of the past three years is showing its cracks. Private credit was supposed to be the answer to everything: yield, diversification, predictability. And for a while, it was. But when every large family office, every endowment, and half the retail platforms are chasing the same sub-investment-grade borrowers, something has to give. Spreads compress. Covenants erode. Managers who couldn't raise a fund in 2018 are now oversubscribed. This week: where the crowding is most acute, what the shadow default data is quietly signalling, and where the allocators we respect are repositioning.
The Setup
How private credit went from contrarian to consensus — and why that matters
In 2019, direct lending was still a differentiated allocation. Spreads in the US middle market sat at SOFR + 550-650bps for reasonably structured deals. Covenants were standard. Manager selection separated outcomes. That world no longer exists.
By end of 2024, AUM in private credit had passed $1.7 trillion globally. Roughly 400 managers now compete for the same deal flow. The result is mechanical: spreads on upper-middle-market deals have compressed to SOFR + 475-525bps on average, and many large-cap unitranche deals trade tighter than that. Leverage multiples have drifted back toward 2007 levels in some segments. Maintenance covenants — the early warning system that protected lenders — are increasingly absent.
The investors who understood private credit in 2017 understood it as a complexity premium and an illiquidity premium. Both premia are smaller today than the fee drag would suggest. Read more →
The Signal
Shadow defaults: what the maturity wall tells us that reported data doesn't
Reported default rates in private credit remain low — around 1.8% by most indices. But default rates in private markets are a lagging indicator by design. The more useful signal is the maturity wall.
An estimated $300–400 billion in private credit maturities comes due in the 2025–2027 window. Much of this was written at peak leverage, peak optimism, in sectors now under pressure (healthcare services, software). Lenders who hold these loans have strong incentives to extend and pretend rather than mark-to-market and realise losses.
This is not a crisis call. But it is a reason to look carefully at vintage and sector exposure. Loans written in 2021-2022 to PE-backed companies in rate-sensitive sectors deserve particular scrutiny. Ask your managers not for IRR — ask for the underlying EBITDA trends on their top 10 positions.
The Repositioning
Where sophisticated allocators are moving: asset-based lending, NAV facilities, and the lower middle market
Three areas are attracting capital from allocators who have reduced or paused their upper-middle-market direct lending exposure.
First: asset-based lending. Receivables, equipment, IP royalties, aviation — collateral-backed credit where the underwriting is independent of sponsor relationships. Less crowded, more technical, and currently offering spreads 75–125bps wider than equivalent-quality cashflow lending.
Second: the lower middle market (EBITDA $5–25M). Here, the institutional capital flood has not yet arrived. Deals are smaller, covenants are tighter, and the manager universe is thinner — which means genuine edge is still available to those who can source it. The operational cost is higher. The return profile is better.
Third, more selectively: NAV lending to PE funds. Controversial, given the structural complexity, but increasingly attractive as buyout vintages 2018–2022 need liquidity without forced exits. Returns in the 12–15% range for well-structured senior facilities are available from credible managers.
What We're Watching
The one question to ask your private credit manager before your next capital call
Not: what is your net IRR? That number is largely a function of vintage and sector luck.
The question: what is your weighted average EBITDA growth across the portfolio over the last 12 months, and what percentage of your borrowers have missed a covenant test — even if waived?
The first tells you whether the underlying businesses are healthy or deteriorating. The second tells you whether the manager is managing risk or managing appearances. Managers who answer confidently, with specifics, are the ones building something durable. Managers who redirect to fund-level returns are the ones to watch carefully.
— Cecile
Editor, The Family Office Allocator