Episode summary
A New Test for Private Credit
Thoughts on the Market (Morgan Stanley)
· · Hosts: Vishy Tirupattur · Guests: David Miller
Summary
Private credit has grown from a niche strategy into a market worth more than a trillion dollars, but the episode argues that the current pressure is less a broad crisis than a test of liquidity structures and sentiment. The host says investors are asking about transparency, valuation, and redemption limits, while David Miller says the industry has already absorbed prior shocks, including the GFC, the pandemic, and the 2022-23 rate shock, without systemic damage.
Both speakers argue that non-traded BDC liquidity features are a design choice, not a flaw, because they help prevent fire sales in illiquid assets. Miller says fundamentals remain solid, with portfolio metrics improving from 2024 to 2025, and that any rise in defaults is likely to be concentrated in software rather than spread across the market. He says there have been no software defaults year to date and that AI disruption is real but not imminent.
On positioning, Miller says retail inflows pushed spreads tighter and terms weaker, but those trends are now reversing as flows moderate. He sees the most attractive opportunity in direct lending for new capital, especially in opportunistic and hybrid private credit where borrowers need flexible capital for M&A, growth, or balance-sheet repair.
Key takeaways
- David Miller says private credit has already been stress-tested by the GFC, the pandemic, and 2022-23 rate shocks, and he sees the current pressure as far milder.
- The host and David Miller argue that liquidity limits in non-traded BDCs are intentional features designed to avoid forced selling of illiquid loans.
- Miller says defaults may rise, but the risk is concentrated in software rather than systemic, and he cites no software defaults year to date.
- Miller says AI disruption to software is not imminent because infrastructure capex and adoption will take time, and some incumbents may benefit.
- Miller says spreads have widened enough to create an entry point in direct lending and especially in opportunistic or hybrid private credit.
Notable quotes
“I think the current situation is more of a test uh of the non-traded BDC structure”
“The limitations on liquidity are there so that the vehicles can operate properly over the long run”
“the metrics were actually improving”
“there have been no software defaults”
“we think that AI is going to be a net tailwind overall for software over time”
How the episode opens
Welcome to thoughts on the market. I'm Vishittop, Morgan Stanley's chief fixed income strategist.
And I'm David Miller, global head of private credit and equity within Morgan Stanley Investment Management. Today, the evolving risks and opportunities in private credit. It's Tuesday, March 31st at 10:00 a.m.
in New York. Until recently, private credit was among the fast growing parts of the financial system. In just over a decade, it went from a niche strategy to a market that's well worth over a trillion dollars.
After years of outsized inflows and unusually smooth returns, private credit is now in focus and investors are asking tough questions about liquidity, transparency, and valuation. David, uh, you manage private credit and equity portfolios within Musani Investment Management. Do you think the industry is facing its first real stress test and how do you think the industry is fairing?
So I think private credit has been tested before. You could go back to the GFC and I know that was a long time ago and the industry was quite a bit smaller but you could certainly look to the pandemic and the rate shocks of 22 23 as a stress test and I think private credit performed you know quite well through that despite the initial volatility. We saw some of that recently last year with liberation day and the current environment from a fundamental perspective doesn't feel as bad as those time and the industry does not feel under that stress.
I think the current situation is more of a test uh of the non-traded BDC structure where roughly 20% of direct lending assets sit and the liquidity provisions in those vehicles are designed to provide some liquidity but not total liquidity. And so while I think the the vehicles are working as intended, obviously there there's been a lot of noise.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- private credit pressure
- credit risk
- liquidity and refinancing
- investment opportunities
- private credit risks and opportunities
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “A New Test for Private Credit” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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