Private credit heavyweights want to put the $3-billion industry’s recent woes in the rearview.

At the Milken Institute’s 29th annual Global Conference, investment fund managers, executives and advisers defended the hot-topic sector, which has faced a barrage of scrutiny since late last year.

Investor concerns over borrower creditworthiness, weak underwriting standards and the threat of artificial intelligence to software loan performance gave private credit a steep hill of a public relations’ problem to climb.

Despite a fresh, alarm-sounding study from the Financial Stability Board warning of private credit’s vulnerabilities, opaque valuation practices and interconnectedness with broader financial markets, conference panelists representing direct lending giants maintained the sector is on solid ground.

“I’m just not seeing that there’s a systemic problem here behind this,” said Molly Duffy, global head of financial sponsors coverage for London-based Standard Chartered Bank.

For Duffy and others, the 2008 financial crash – driven by loose lending and cheap credit – served as a key point of comparison.

“There’s a big difference between what you saw in the financial crisis – you had a lot of concentration, and I think there’s many more players now,” Duffy said. “It’s much more distributed in terms of the risk.”

So far, private credit defaults have stayed low, even among the software-as-a-service companies that attracted aggressive, high-leverage lending ahead of the widespread launch of the generative AI tools now rocking the sector.

“There have been lending practices in direct lending and private credit that were more egregious than in other areas,” said Brad Rogoff, Barclays’ global head of research, noting that lenders’ exposure to software is a “problem.”

Investor outflows

Spooked by market volatility and artificial intelligence-driven uncertainty, the retail investors that once flooded into private credit vehicles raced to withdraw at record volume, only to be blocked by funds’ redemption caps.

Investors expected funds to be more liquid than they are, creating an asset-liability mismatch – but the issue is “clearly not systemic,” Rogoff said. Tweaking how direct lending is presented to retail investors can weed out distrust and confusion, panelists agreed.

Their suggested first step? Doing away with the misleading “semi-liquid” moniker used to describe the funds that attracted a boom of individual investors, many of whom overestimated how easy it would be to pull their money out when they wanted to.

“My belief is that a lot of these products were sold for very high commissions,” said Jeffrey Gundlach, chief executive of downtown-based investment manager DoubleLine. “I have a feeling that the financial intermediaries – not all of them, of course, but enough – didn’t explain, and I think many of the owners of these interval funds thought they could get all their money out of every quarter.”

Leaning into direct lending

Despite investors’ dampened confidence in the private credit model and a challenging fundraising environment, some money managers are leaning further into direct lending.

Last year, New York-based Third Point brought on a handful of private credit professionals and expanded its direct lending strategy. In a Monday panel discussion, the hedge fund’s chief executive and founder Daniel Loeb said the move was well-timed and well-funded with firm capital. Investor appetite for the strategy hasn’t been tested yet, he said.

“We have a clean portfolio. We don’t have any legacy positions to worry about,” Loeb said. “We can get started at a time where underwriting is better, and it’s a good return.”

In February, insurer Kuvare stepped into private credit with the purchase of a $1.4 billion loan portfolio from leading direct lender Blue Owl Capital. The sale provided much-needed liquidity to Blue Owl, one of the asset managers recently flooded with redemption requests from private credit investors.

“This is the power of having a strong, long-duration, long-term balance sheet,” Dhiren Jhaveri, Kuvare founder and chief executive, said during a Wednesday panel. “We have the benefit and curse of trying to figure out how to invest $6 billion of policyholder premiums every year.”

The transaction brought Kuvare a positive 5.4% return – a “very strong financial outcome for our balance sheet,” Jhaveri said. The company is working with regulators, he said, to monitor its private credit exposure.

The U.S. Securities and Exchange Commission has indeed kept a close watch on the sector. SEC Chair Paul Atkins told Milken attendees Monday that the regulatory agency is investigating allegations of fraud in the private credit market.

Notwithstanding a handful of bad actors, Atkins said direct lending is a critical capital source for small and medium-sized businesses underserved by banks. The SEC is collaborating with the Department of Labor on a proposed rule that would ease access to private lending for 401(k) plans, he said.

“The good thing about private markets is that they exist,” Atkins said.