Private credit markets are facing growing pressure as investors pull back amid concerns over valuations, leverage and exposure to vulnerable sectors like software.

BNN Bloomberg spoke with Dan Rasmussen, founder and portfolio manager at Verdad Advisers, who says rising redemptions and shifting fund flows could signal the early stages of a broader credit cycle.

Key Takeaways

LINDSAY: Concerns have been mounting in the private credit market this week as investors worry about lending standards and exposure to industries vulnerable to AI disruption. In a sign of these pressures, a number of high-profile managers have limited the amount investors are able to withdraw.

So here to give us his perspective is Dan Rasmussen, founder and portfolio manager at Verdad Advisers. It’s good to have you join us.

DAN: Good morning.

LINDSAY: Is this slowdown in private credit lending concerning to you?

DAN: Absolutely. What you’re seeing now is that there are multiple ways people can invest in private credit. There are publicly traded BDCs, and then there are these semi-liquid interval funds.

What’s happened is that those publicly traded BDCs have traded down sharply on concerns that software loans, in particular, are at risk. But because the private interval funds are marked at par, they haven’t traded down.

So the logical thing for investors in those interval funds to do is to redeem as much as possible, because they know that the public equivalents are trading at a 20 to 30 per cent lower valuation. And that’s what you’re seeing.

And, Lindsay, what I expect is that flows are typically a leading indicator of distress, and I expect that to be the case here.

LINDSAY: You’ve said that most private credit today is essentially loans to private equity buyouts. So why did this type of lending explode after 2010?

DAN: After the 2008 financial crisis, regulators looked at what had been problem areas on bank balance sheets and found that LBO loans were not only illiquid but riskier than expected.

So regulators said banks needed to move this off their balance sheets because it posed systemic risk. Private credit emerged from that shift.

As long as defaults were low — which they were for most of the 2010s — this worked very well. Investors were earning four to six hundred basis points over SOFR without experiencing real losses.

But what’s happened lately is that rapid growth in lending typically doesn’t end well, and we’re starting to see the early stages of a potential crisis as investors realize higher yields come with higher risk.

LINDSAY: Are you seeing parallels between what’s happening now and what we saw with mortgages in 2008?

DAN: I think the closer parallel is the junk bond crisis in the 1980s, where you saw rapid growth in lending. The key question is always: who holds the risk?

These are still loans, so losses are not unlimited. You might see a 20 per cent five-year default rate and losses given default of 50 to 60 per cent. That implies a 10 to 15 per cent hit to NAV in a bad credit cycle.

The real issue is who didn’t prepare for losses at all and who is leveraged to these exposures.

Regulators moved this risk off bank balance sheets, but now it sits with insurers, reinsurers and annuity providers that treated it as investment-grade and earned higher yields. Those are the areas most at risk if losses materialize.

LINDSAY: You’ve described a typical sequence leading up to a default cycle. Where are we in that process now?

DAN: We’re starting to see a few early defaults, but most of the signal is coming from flows.

The issue with private credit is that as money flows out, refinancing risk increases, which raises the probability of default.

A large portion of these loans are tied to software companies through ARR-based lending. These companies often lack hard assets, and with AI risks emerging, investors are starting to question their stability.

That’s leading people to reassess whether these loans are as safe as previously believed.

LINDSAY: Could this spill over into the broader economy, or is it likely to remain contained within private markets?

DAN: The key question is how far the connections extend. Private credit is closely linked to private equity and private assets more broadly.

Those markets are held largely by institutional investors such as endowments and family offices, which can typically absorb losses.

But the concern is the growing exposure within insurance — particularly annuities and life insurance. If losses are significant, that’s where broader risks could emerge.

LINDSAY: With that in mind, what should investors be watching most closely over the next 12 to 18 months?

DAN: Watch the pace of redemptions in interval funds, monitor how publicly traded BDCs are trading, and look for signs of contagion in the insurance sector.

LINDSAY: We’ll leave it there. That’s Dan Rasmussen, founder and portfolio manager at Verdad Advisers. Appreciate your time. Thanks for joining us. Reference