“Life is like a poker game; it’s not what you’re given – it’s how you use it.”
While I found today’s quote on this random Las Vegas website, I’m not sure who should be credited for it. Regardless, in this environment where geopolitical initiatives are suddenly pushing oil prices over $100/barrel, the healthy mindset is to expect more volatility than usual. To that end, it is a good reminder that the world’s best poker players follow a disciplined process of informed decisions – not loose gambling, hoping to get lucky. Similarly, we are investors – not traders. So, dig deep, find that “Vegas nerve,” and tune out the headlines and noise that will try to throw you off track from your long-term financial plan.
Now for the real thing
The Vagus Nerve has gotten a lot of traction in books and podcasts in recent years (according to me, at least), and rightly so; it is part of our parasympathetic (involuntary) nervous system with roles (per the Cleveland Clinic) in such functions as digestion, heart rate, blood pressure, breathing, immune responses, mood, mucus/saliva production, skin/muscle sensations, speech, taste, and urine output. So, just pretty much everything important at every waking moment, then? Got it.
If you’re now thinking and asking, “Wow – that sounds really important. How do I take care of my vagus nerve?” The short answer is discipline (again, leaning on the Cleveland Clinic): physical activity, healthy eating, and techniques like meditation, hypnotherapy, or yoga are all part of the solution. As we know, this is easier said than done, as those healthy habits are constantly threatened by junk food, lack of desire, and an endless list of things competing for our time and attention. And, again, your vagus nerve can benefit from your Vegas nerve that allows you to tune out the noise and focus on the long-term plan. Today, we’ll be reminded that planning, process, and understanding can all contribute to our ability to stay strong in these times of increased uncertainty in the world around us. Here we go!
Planning, anyone?
If the above notion of the parasympathetic nervous system working in the background to synthesize a variety of inputs and optimize decisions across many functions immediately made you think that this is like the body’s form of financial planning, then we are on the same page. If not, I won’t hold it against you. While proper planning requires voluntary effort, the process is well worth it, and the resulting framework only helps strengthen that Vegas nerve by offering much-needed long-term perspective during times of turmoil in the world around us. A well-thought-out plan and related portfolio allocation can be the difference between panic selling (never advisable) and staying the course through volatility. If you haven’t done it already, there’s no time like the present to tackle that undertaking with your trusted advisor.
Private Credit Noise
I can appreciate that we (financial advisors, or probably more accurately “investment analysts,” in this context) have the luxury of meeting with investment managers, interacting with and learning about their teams, diving deep into their investment and due-diligence processes, and gaining comfort with all of that prior to utilizing an investment on behalf of clients. While even that level of rigor unfortunately can’t guarantee good outcomes, it does result in selecting investments with what we believe are appropriate risk/return trade-offs and characteristics.
Amid this ongoing barrage of negative press on private credit, the above process and understanding give us a leg to stand on. I’ve read several articles (some of which clients have sent our way) that attempt to create fear about one or two specific funds/companies. My conclusion has been that they are mostly over-hyped clickbait, riddled with inaccuracies, and avoid important nuance; thus, I would summarize it all as “private credit noise.”
On the other hand, the average reader doesn’t have the expertise to easily tease out the intricacies of what is being discussed (or omitted) and determine that they are potentially being overtly misled – nor should we expect them to. However, suddenly, pieces of portfolios clients never gave a second thought to have shifted overnight from “reliable diversifier” to “potential catastrophic failure,” despite no adverse price movement to date. Asking questions is always encouraged, but at the end of the day, clients have to trust that their advisor understands the pieces of their portfolio and the purpose of each piece, aka “why you own what you own” (WYOWYO).
The way I see it
One well-known private credit fund now has 4000+ underlying loans. Let’s say the managers making those underlying loans are of good quality and focused on risk management, like they should be and as we believe them to be. As a result, they fund a small percentage of the loans they review; this is known as “the funnel”: for example, 100 potential loans come through the door, and 3 ultimately survive the process to get funded. The teams are purposely selecting those 3 loans based on their underwriting, including how they view the underlying business, loan terms (e.g., loan-to-value, terms, risk management/covenants), etc. That 3% number is on the high side for some strategies I’ve reviewed in the past, but, assuming it holds true for the above fund, it means 130,000+ potential loans were reviewed to arrive at the 4000+ loans in the fund (makes sense why private credit funds cost more than a bond ETF, doesn’t it?)
Now, imagine you are the private lender. You go out and personally review 130,000 individual loan opportunities with businesses of all kinds (BTW, if you reviewed 50 potential loans per day, this would take you over 7 years) to make 4,000 loans you feel very good about. Then, out of nowhere, you read a bunch of articles saying that AI has come along and now all those loans you made must be bad, and you should be very scared. But hold on…you sat with all of those business owners, and aren’t they still running good businesses? How does that reporter know that AI is going to replace the intellectual property of all software companies to whom you lent money, let alone the others, like Joe’s Epic Golf Courses or Pete’s Primo Plumbing? Couldn’t a lot of these businesses actually benefit from AI, instead? Perhaps more importantly, you made sure you are first to get paid if anything goes wrong (“senior secured debt). How would these journalists know the terms on which you lent the money and the protections you baked into each private loan transaction? It doesn’t even make sense, right?
Perhaps those headlines would lead you to revisit each loan and assure yourself that it is in good standing, and that’s what we expect underlying credit managers to do. But that is part of what they would be doing, regardless of the negative press. After all, ongoing monitoring and helping borrowers are inherent to a good private credit process. As advisors, it would be impossible for us to know each of these loans even at a cursory level, so we must trust in the respective managers and their processes. There are always unknowns, and every loan cannot be a success, but a level of default risk is already built into the equation. On top of that, an unfathomable amount of diversification exists in our 4000-loan portfolio example, which is yet another risk-management factor.
Private Elephant in the room
The vitally important element missing from the above conversation is that the vast majority of our 4000+ loans are sponsor-backed transactions. That means the money (private credit) was lent to private equity firms buying the businesses. In addition, they are senior-secured loans, meaning they are paid before other creditors.
Keep in mind that the owners (NOT the creditors!) will be the first to lose money if the underlying businesses fail. And do you think that the private equity owners (and their investors) will simply stand on the sidelines while the businesses in question collapse? No. From what I’ve seen, they would take a very active role, add more capital, extend business plans, and take pretty drastic measures to work out of difficult situations before ever declaring bankruptcy and “handing the keys” over to the creditors (who could come away with more value than they lent in the first place).
In other words, if the issues that the headlines would like you to believe are, in fact, true, then why is no one writing about all the money private equity is going to lose!? That would be the real story to be concerned about, and – until that occurs – I just can’t figure out how to be afraid that my highly diversified, senior-secured, responsibly diligenced portfolio of idiosyncratic direct loans is at risk of substantial loss.
The hills are trading risk, not avoiding it
If you’re among the crowd “heading for the hills” and trying to bail out of private credit investments, this is a reminder that you are not avoiding risk but rather trading one risk for another. You can go to cash and sign up for a loss of purchasing power over time (a sure thing). You can move to public credit, which I would expect to provide far more volatility and lower returns than private credit over time (but – hey – at least it can be sold quickly, probably at a loss, when you feel panicked). You could even move to equities, which could provide higher long-term returns, but probably with much less income and far more volatility (again, tradeoffs).
More importantly, keep this question to keep in mind: if these headlines and potential volatility are scaring you out of an investment, how are you going to react when your portfolio experiences actual volatility? Thus far, the “great private credit crisis of 2026” is merely hypothetical, so as I said before: dig deep, find that “Vegas nerve,” tune out the noise that will try to throw you off track from your long-term plan. In the midst of this situation, there will be opportunities to embrace.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
