Private credit funds that have grown 10x in the last decade have likely not increased their deal sourcing capabilities by the same magnitude.

The Osterweis Strategic Income Fund is a $5.8 billion open-end mutual fund structured as a 40-act fund.

The cumulative returns of the high-yield bond market beat the equity market for the 20-year period from 1999 to 2019.

Some private credit funds have experienced 10x growth over the last five to ten years.

The rapid growth of private credit was fueled by investor demand for yield during the zero-interest-rate environment and by highly levered borrowers being shut out of the bank lending market.

Post-financial crisis banking regulations explicitly prevent banks from lending to companies with greater than six times leverage, creating a vacuum filled by private credit.

The Cliffwater Corporate Lending Fund (CCLFX) experienced significant asset growth in the last five years, particularly in 2022.

Private credit lenders were persuaded to finance software LBOs at high multiples, such as 16 or 17 times EV/EBITDA, partly because sponsors contributed larger equity checks, like 40% instead of the ty...

Unlike private equity funds which call capital after finding an investment, most private credit funds take investor money first and then seek investments, creating pressure to deploy capital.

Intense competition among private credit funds for deals has resulted in lenders offering lower interest rates and weaker covenants to borrowers.

The need for private credit funds to quickly invest incoming cash from retail investors has led to a degradation of credit underwriting standards.

Some Wall Street analysts have suggested that default rates in the private credit market could reach 15%.

In the current interest rate environment, it is very difficult for a company to recover from being six times levered.

There are significant fears that recovery values on defaulted private credit loans will be low, particularly for highly levered companies with few hard assets.

If investor inflows slow, private credit managers facing redemption requests will have to either sell their highest quality, most liquid assets or finance the redemptions with debt.

A protracted redemption cycle in private credit could lead to funds becoming more leveraged while holding poorer quality assets, increasing the risk of a blow-up.

Firms like Oaktree Capital Management are expected to raise special opportunity funds to acquire stressed or distressed private credit loans from other managers.

Redemption gates in private credit funds, often set around 5% per quarter, are designed to align with the natural maturity schedule of the underlying loans.

In 2022, private credit funds appeared to perform well because they were not marking their assets to market, which attracted significant investor inflows.

A significant dispersion in returns is expected among private credit managers, ending a period where most funds showed uniform performance.