Episode summary
They Want You to Panic | Larry Swedroe on Why Private Credit Won't Crash the Economy
Excess Returns
· · Guests: Larry Swedroe
Summary
Larry Swedroe argued that private credit grew from a small niche into a nearly $2 trillion market after 2008 because banks pulled back, regulation tightened, and borrowers wanted faster, more flexible financing. He said private credit is not one asset class but a set of structures with very different levels of credit risk, liquidity risk, and concentration risk, and he favored open-architecture funds that diversify across thousands of loans rather than narrow BDC portfolios.
Swedroe’s main defense was that much of the public alarm around private credit overstates systemic risk. He said the media often focuses on gross losses, not net flows or recovery values, and that many loans are still trading near par even when spreads widen. He argued that in a severe recession private credit could still lose money, but that it would likely perform better than public equities and junk bonds because the loans are typically senior secured and sponsor-backed.
He also emphasized that investors should focus on liquidity management, underwriting discipline, and leverage. In his view, the best firms pay for committed credit lines, monitor daily cash needs, and keep concentration low. On AI, he said the real issue is not that every software borrower will collapse, but that investors must separate vulnerable products from embedded software that may adapt or even benefit.
Key takeaways
- Swedroe said private credit expanded after 2008 because banks reduced lending and borrowers were willing to pay for speed, flexibility, and illiquidity premiums.
- He argued the biggest real risks are credit risk, liquidity risk, and concentration risk, not a single headline systemic failure.
- He said open-architecture platforms like Cliffwater are safer because they diversify across thousands of loans, while many BDCs are heavily concentrated.
- Swedroe said media reports often highlight gross losses and outflows, but ignore recoveries, net flows, and the fact that many loans still trade near par.
- He believes AI is a real underwriting issue for software borrowers, but the risk is uneven and embedded software may be relatively resilient or even helped by AI.
Notable quotes
“private credit was a really small niche business up until the great financial crisis of 2008”
“there are three big risks that investors need to be aware of”
“diversification as you know is the only free lunch in investing”
“They want to create a panic so that people tune in and read their articles”
How the episode opens
This is far better situation much less risky for the economy than when the banks are lending cuz the banking system provides the you know the liquidity for the whole economy the loan that was still paying well right because you originated it and the spread was 550 and now it's 700 but maybe you can sell it at 95 or 96 not the 30 cents on the dollar or 70 cents on the dollar that the press reports. We get a serious recession, clearly credit losses go up. And if private credit losses go up to the extent like in '08, my crystal ball is always cloudy.
But I'm willing to give you whatever odds almost you want that Cliff Waters fund will lose money maybe that year, but it will far outperform public equity. far outperform jump bonds. They want to create a panic so that people tune in and read their articles.
Larry, welcome back to Excess Returns. It's always good to see you. — Yeah, it's great to be back.
In today's conversation, we're going to try to focus on three key areas, but maybe we'll just focus on one, which is the first one we're going to discuss here, and that's, you know, some of the biggest misconceptions around private credit from your perspective. I think we want to work through, you know, and educate our audience as to what private credit is, where you think the real risks are, and then also talk about what investors and maybe the media and the, you know, overall financial profession is getting wrong about the broader narrative with private credit. You've been writing a lot about this and this is obviously front and center in the media on most financial news stations.
And so that's going to be, I think, the the key topic of today's uh discussion.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- private credit
- illiquidity premium
- credit risk
- liquidity risk
- ai in credit markets
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Excess Returns
-
We Asked Fidelity’s Director of Global Macro Who Wins If AI Spending Slows -
An AI Bubble Could Hit Stocks. Inflation Could Hit Bonds. How Do You Diversify and Keep Both? -
Tech Is Priced for a Boom. 86% of the Economy Grew 0.7%. What If AI Slows? -
Tech Is the Cheapest Since 2022. Walmart Is 46 Times Earnings. Where Is the Bubble? -
This $1.5 Trillion Manager Expects More Fed Hikes. So Why Is He Still Bullish? -
AI Stocks Cracked. Margins Could Be Peaking. So Why Is a Liquidity Expert Watching the Debt Wall?
Excess Returns, this episode and its artwork belong to Excess Returns. Octagon is not affiliated with the show; this page is an independent summary.
