Low transparency in the private-credit market may be concealing big problems

By Jules Rimmer

Stale pricing and the asset-liability mismatch complicate the picture for private credit

Credit markets came into the Iranian war at multiyear lows, heightening the risk of a correction and wider spreads as economic fundamentals deteriorate and interest rates threaten to rise.

Private credit is a $450 billion market that has grown exponentially in recent years, as investors have been chasing high returns. Now, though, a whole raft of problems developed - from an asset-liability mismatch to questions about the AI capex boom, opaque pricing and the "Hormuz shock." Combined, these threaten to cause major disruption in the asset class.

Warnings are coming from many quarters, but two voices have articulated their concerns this week. They include a note published Tuesday by Société Générale's cross-asset research team and remarks on a podcast from experienced hedge-fund manager Kieran Goodwin.

A veteran of several bulge-bracket Wall St firms like Salomon Brothers, Citigroup and Merrill, Goodwin is a veteran hedge-fund manager now helping Saba Capital run about $6 billion in assets. During the "Capital Allocators with Ted Seides" podcast, Goodwin identified key structural risks facing the private credit space.

Chief among them is this asset-liability mismatch, which has attracted controversy as funds have been unable to meet redemption requests and have gated money in response. Many of these funds offer quarterly liquidity and limit redemptions to 5% of assets, but demand has been double that in some instances. As funds are gated, investors have been running to raise liquidity from other funds, creating a contagion effect.

Goodwin is also troubled by what he labels "stale pricing," as marks on some positions have a wide variance and can be conservative or unreliable. And, when investors' trust in the published net asset values starts to weaken, it can trigger a feedback loop of redemption requests.

Goodwin emphasized how much disruption this recent oil-price shock and military conflict in the Middle East have caused for the asset class. Higher energy costs, higher interest rates and shifting economic paradigms from the AI-investment cycle are creating both winners and losers that the credit markets struggle to discount adequately. With a three-month window on liquidity, the sector is slow to react to big shifts in underlying fundamentals.

The SocGen team, led by Pierre Bergeron, also worried about a lack of transparency on asset quality, "making it harder to detect early warning signs of stress." They identified pressure on the software sector since Anthropic launched new AI tools to compete, and noted how this places in doubt the resilience of their business models. Huge capex outlays at hyperscalers Oracle (ORCL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG) and Meta (META) are also drawing scrutiny.

Additional stress is generated by the recent uptick in M&A activity, which has led to higher new bond issuance as rising public deficits suggest increased sovereign-bond supply.

SocGen's stated aim in their report is to "alert investors to the potential negative events that could shake-up the current low-volatile credit markets and move credit spreads wider." The SocGen team recommended investors prepare for deteriorating market conditions by building protection in credit-default swaps.

The fact that credit markets had been at record-tight levels running into the Iranian war heightens the vulnerability of credit markets, although Bergeron did acknowledge the market reaction thus far has been phlegmatic. "History shows geopolitical shocks typically have a limited and short-lived impact," he said.

iBoxx corporates over the years

Goodwin's advice included a basketball metaphor: "defense wins championships." He reminded investors that there's no substitute for" long-term, line-by-line analysis of capital structures" rather than relying on market sentiment to tell you when a crisis is brewing.

-Jules Rimmer

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03-31-26 0740ET