There are two things at play here.  Private Credit has expanded by 10X over the past 15 years ($300B to $3T).  Post-GFC regulation changed capital requirements for banks, and those middle-market loans went to the private market.  Free market capitalism at its best.  The private market also offered customization and privacy to middle-market borrowers; the syndicated bond market never did.  What has happened, though, is that massive expansion has also led to some erosion of loan covenant quality.  Variable-rate loan vintages from 2021, when rates were at the zero bound, for example, have obviously reset to much higher rates for those borrowers.  Lenders that structured loans offering the option for a portion to be repaid with equity rather than cash known as PIK (payment in kind) are also something we are watching closely.  There have also been two notable bankruptcies in the space this year, with First Brands and Tricolor.  All this said, the asset class continues to perform quite well, and overall default rates remain very low.  Our selected managers in the space are focused on higher-quality and larger-sized deals where we feel comfortable.

As for recent media, all alternative funds can gate redemptions if assets exceed a certain threshold in a given quarter.  There isn’t anything new or sinister about protections built in to protect shareholder value in an asset class with limited liquidity.  Now, have some of those redemption gates been hit lately? Yes.  Has that been sensationalized in the media, however?  You bet.  To your question, though, that doesn’t necessarily mean there is systemic risk in the entire asset class.  The canary in the coal mine isn’t going to be a few bankruptcies or gated redemptions when retail investors get spooked.  High-Yield Credit spreads in the low 300’s tell you the whole story here.  They may have moved marginally, but they are telling you credit markets are functioning just fine. 

We not only do not incorporate ‘market seasonality’ into what we do, or think about ‘calendar month histories’ in terms of capital deployment, we actually deny that any such thing exists.  There is no month anyone can say anything about (“September is usually awful” or “December is usually excellent” or “sell in May and go away”) that is not over and over and over and over again … wrong.  Case in point – ummm, THIS year.  But all such “calendar historical trends” are filled with months – and not 1% of the time but more like 30-40% of the time – where they are completely and totally countertrend.  This stuff is dressed up astrology, if I am being nice, and not worthy of a serious investor’s consideration.

Fair enough!  I often speak and write in a financial vocabulary that is quite automatic for those of us in money management, but I should slow down sometimes and explain the meaning of certain financial vocabulary.  If a company does $1 billion of annual sales (total revenue), and the value of the company (market capitalization = shares outstanding X share price) is $10 billion, the company is said to be trading at 10x revenue.  In other words, it is just shorthand for the math.  If a company is does $1 billion of earnings and has a total market cap of $38 billion, it is said to be trading at 38x earnings – also shorthand math.  Revenue (sales), Profits, Cash Flow, and Book Value are the various metrics where these math equations are generally calculated, with earnings being the most prominent (and important).

We are bottom-up investors and have always (not sometimes, but always) found thematic top-down investing decisions to end very poorly. That said, we certainly have a macroeconomic outlook that impacts our asset allocation decisions, and the issues you bring up do impact our macroeconomic outlook. But we categorically reject the binary nature of that construction – that there is a productivity surge. OR a structural deficit drag. I am quite confident that there can be productivity from AI that does not cure the deficit drag, and vice versa. The attempt to reduce these various and complex matters to just two possible outcomes without a continuum will prove inaccurate, in my view, and therefore require more nuance and dynamic allocation decisions.