Private credit faces asset-dilution risks
The speakers argued that a prolonged redemption cycle in private credit could force managers to liquidate their highest-quality assets, leaving funds with highly levered, lower-quality portfolios.
The argument
The guests explained that while redemption gates protect against immediate runs, persistent outflows force managers to sell easy-to-monetize, high-quality loans first. This dynamic could dilute the remaining portfolio's credit quality and potentially create opportunities for distressed debt buyers to acquire stressed loans at steep discounts.
The thesis, stress-tested
✓ What validates it
- ✓Private credit default rates climbing toward the discussed 15% threshold
- ✓Interval funds hitting their 5% quarterly redemption gates consecutively
▸ Risks discussed
- ▸Slowing inflows could accelerate the need to sell assets
- ▸Recovery values for highly levered software/SaaS companies in bankruptcy could be near zero
- ▸Rising interest rates place severe strain on companies with 6-7x leverage
Hear it yourself
"We're gonna be speaking with John Sheehan. He is a portfolio manager for the Strategic Income Fund at Osterweis. And Craig Manchuk, he's also a portfolio manager at the Strategic Income Fund. So thank you so much, John and Craig, for, coming on All Thoughts. Thanks for having us. Thanks for having us. So maybe just to begin with, how long have you guys been in the bond space? The firm has had a fixed income strategy for twenty coming up on twenty four years, actually, started by our one of our other partners, Karl Kaufman. Originally, the firm here was started as an equity only firm."
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