Concerns have been raised about the private credit market, with some predicting a repeat of the 2008-2009 financial crisis. However, experts claim that private credit is not a systemic risk for bond markets, despite rising defaults and credit losses.
The sector has significant exposure to software firms, which are vulnerable to disruption by artificial intelligence (AI). Defaults are rising, and nervous investors have switched to selling, with private credit funds exercising redemption limits to prevent forced liquidation of investments.
However, Pieter Staelens of CVC Capital argues that the rate of defaults across credit markets has picked up slightly, but there is no red flag. He notes that private credit accounts for just 2% of the global fixed income market, and defaults are a normal part of credit investing.
Staelens also points out that credit losses, not defaults, are the key issue. He claims that CVC typically recovers 80 cents in the dollar in an insolvency, although this may be lower for asset-light software companies.
CVC's scepticism of credit-rating agencies, which are seen as too backward-looking, is also worth noting. Staelens argues that a large part of what they do is working out where credit ratings are wrong.