When "Private Credit" Stops Being Private

Over the past decade, private credit has become one of the fastest-growing segments of the alternative investment landscape. What began as a niche solution for middle-market borrowers after the Global Financial Crisis has grown into a multi-trillion-dollar asset class attracting institutional capital, wealth managers, and increasingly, retail distribution platforms.

Today, however, the narrative around private credit is beginning to shift.

Recent headlines have focused on concerns ranging from crowding and declining spreads to potential credit quality issues and liquidity mismatches. While the long-term role of private credit in diversified portfolios remains intact, the current environment highlights an important truth about alternative investing:

When too much capital chases the same opportunity set, the opportunity set changes.

At Kelly Park Capital, this dynamic has informed our investment philosophy since inception.

What Is Private Credit?

Private credit broadly refers to non-bank lending provided by private funds or institutional investors, typically outside traditional public markets.

Common strategies include:

• Direct lending to middle-market companies
• Unitranche loans
• Asset-based lending
• Opportunistic credit
• Specialty finance

Following regulatory changes after the financial crisis, banks reduced lending to certain segments of the market. Private funds stepped in to fill that gap, providing capital directly to borrowers. The result was an extraordinary expansion of the asset class.

Over the past decade, capital flowing into private credit funds has grown far faster than the underlying supply of lending opportunities, compressing spreads and intensifying competition among lenders. This growth has been fueled by several factors:

• Investor demand for yield in a low-rate environment
• Reduced bank lending capacity
• Increasing institutional acceptance of private markets
• Expansion of private markets distribution channels

While these forces drove the asset class forward, they also created new challenges.

Why Private Credit Is Receiving Negative Press

The recent scrutiny surrounding private credit largely reflects structural pressures that tend to follow rapid capital inflows. As capital poured into traditional direct lending strategies, competition among lenders intensified — one consequence has been compression in lending spreads.

In practical terms, lenders today are often being compensated less for taking credit risk than they were several years ago. At the same time, the macro environment has changed materially.

Many private credit loans are structured as floating-rate instruments, typically priced at a spread over SOFR or other benchmark rates. As policy rates increased sharply over the past several years, the all-in borrowing costs for many middle-market companies have risen dramatically, placing pressure on cash flows and debt service coverage.

In addition, a significant portion of loans originated during the private credit boom of 2020–2022 will eventually require refinancing in a higher-rate environment. For some borrowers, this combination of higher interest costs and tighter capital markets may prove challenging.

Finally, competition among lenders during the expansion of the asset class led in some cases to higher leverage multiples and weaker covenant protections, leaving less margin for error if operating performance deteriorates.

None of these dynamics are unique to private credit. They are common characteristics of markets experiencing rapid asset growth and capital concentration. But they do underscore an important point: not all private credit strategies are the same.

Not All Private Credit Is Created Equal

KPC Private Funds has deliberately taken a different approach to credit. Rather than participating heavily in the most crowded segments of direct lending, we focused our efforts on specialty and alternative credit strategies where the underlying drivers of return are less dependent on broad credit cycles.

Examples include:

• Litigation finance
• Public equity backed lending
• Home equity contracts
• Floor plan financing for niche industries such as jewelry retailers
• Other asset-backed specialty finance opportunities

These strategies differ from traditional direct lending in several important ways:

1. Returns are often driven by asset-specific or contractual structures rather than corporate leverage cycles.
2. Competition from large credit funds is typically lower, as these markets require specialized underwriting expertise.
3. Correlation to broader credit markets may be reduced, depending on the structure of the underlying assets.

Importantly, the challenges currently facing traditional private credit strategies have not necessarily translated into similar dynamics across these specialty segments. Many traditional private credit strategies rely heavily on leveraged corporate borrowers whose performance is tied to economic cycles. By contrast, many specialty finance strategies derive returns from asset-level structures or contractual frameworks that may be less directly dependent on middle-market earnings growth.

The Role of Selectivity in Private Markets

Private markets often reward selectivity and specialization.

When an asset class becomes widely adopted, the dispersion between strategies tends to increase. Investors who simply allocate to the broad category may experience very different outcomes depending on the underlying manager and strategy.

For financial advisors building diversified portfolios, the takeaway is straightforward:

Private credit is not a single investment — it is a category encompassing many distinct strategies, each with different risk drivers.

As the private markets ecosystem continues to mature, we believe the next phase of growth will favor more specialized and differentiated strategies, rather than large pools of capital pursuing the same opportunities.

Final Thoughts

The expansion of private credit over the past decade reflects a structural shift in global capital markets. In many cases, private funds have stepped in to provide financing in areas where traditional bank lending has declined.

At the same time, the recent scrutiny surrounding the asset class illustrates a familiar pattern in financial markets: as capital flows concentrate in a particular strategy, competition increases, structures evolve, and the dispersion of outcomes across managers and strategies tends to widen.

For investors and advisors evaluating private credit today, the key consideration is not simply whether to allocate to the asset class, but how those allocations are structured and where the underlying sources of return are derived.

As the private markets ecosystem continues to mature, we believe strategies that rely on specialized expertise, differentiated sourcing, and distinct return drivers may become increasingly important components of diversified portfolios.

In private markets, the category label often matters less than the underlying structure of the opportunity.