What’s really happening in private credit | David Hirschmann | Ep 84
Private credit has scaled rapidly into a trillion dollar market, yet much of the current narrative is dominated by concerns around defaults, liquidity and AI disruption. In this episode, David Hirschmann, Co-Head of Permira Credit, explains to Ross Butler why the growth of private credit is fundamentally structural, not cyclical, and why much of the criticism reflects a misunderstanding of how credit actually works.
We explore how direct lending competes with syndicated loans, why equity cushions matter more than headline leverage, and how private credit investors think about downside risk in a world increasingly shaped by technological change. It’s essentially a technical view of the asset class, far removed from the noise.
The big take
Private credit is not a temporary solution filling a market gap. It is a structural part of the modern financial system, underpinned by regulatory change, private equity growth and the need for flexible, long-term capital.
Much of the perceived risk discussed in the media stems from applying an equity mindset to a credit strategy. When viewed correctly, through cash flow durability, capital structure and recovery dynamics, the asset class looks far more resilient than headlines suggest.
Why has private credit become a structural asset class?
The starting point is the post-GFC shift in bank behaviour.
Following the Global Financial Crisis, banks were forced to reduce long-term lending due to capital constraints and regulatory pressure. That created a persistent financing gap, particularly in the mid-market, where private lenders stepped in.
What began as a regulatory by-product has since evolved into a core part of capital markets. As private funds have scaled, they have expanded beyond mid-market lending into larger transactions, effectively becoming an alternative to syndicated loan markets in certain situations.
This is not cyclical. It is structural.
Where do banks still play a role?
Despite the growth of private credit, banks remain embedded in the ecosystem.
They continue to provide:
- Short-term corporate facilities
- Fund-level leverage
- Underwriting for syndicated transactions
The relationship is therefore hybrid rather than adversarial. Private credit has not replaced banks, it has reshaped how capital is delivered, particularly in areas where flexibility and certainty are valued over price.
Why are borrowers choosing private credit over syndicated loans?
The key trade-off is not cost, but certainty.
Syndicated loans typically offer lower pricing, but they come with execution risk and limited flexibility once the deal is completed. By contrast, private credit offers:
- Speed of execution
- Certainty of funding
- Pre-committed follow-on capital
This is particularly valuable for sponsor-backed businesses pursuing acquisition strategies, where access to capital at the right moment matters more than marginal differences in pricing.
Borrowers are increasingly willing to pay a premium for that certainty.
Does relationship lending create weaker credit discipline?
A common concern is that close relationships between lenders and sponsors could lead to leniency.
In practice, the opposite tends to be true.
Direct lending transactions typically start with conservative capital structures, often with loan-to-value ratios in the 30–40% range. That means there is significant equity beneath the debt, creating strong incentives for sponsors to support their portfolio companies during periods of stress.
When problems arise, the typical response is not immediate enforcement, but negotiated solutions:
- Equity injections from sponsors
- Covenant resets
- Maturity extensions
The relationship is not soft. It is aligned.
What actually happens in a default scenario?
One of the more useful insights in the episode is how private credit behaves when things go wrong.
Defaults do not automatically translate into losses. Because lenders often operate in small clubs with close access to management, they can take an active role in restructuring. This may involve converting debt into equity, installing new leadership and repositioning the business for recovery.
In these situations, recovery outcomes depend less on initial entry valuation and more on operational execution post-distress.
This is where experience matters most.
Are current default fears overstated?
Recent market commentary has suggested that private credit could face default rates as high as 15%.
Hirschmann’s view is that such scenarios are highly pessimistic and, if realised, would represent a broader credit event rather than a private credit-specific issue.
In other words, a default spike of that magnitude would imply systemic stress across all credit markets, not a structural weakness in private lending itself.
Is AI a real risk to private credit portfolios?
AI is clearly a major theme in current market discussions, particularly in software.
The key distinction, however, is between equity risk and credit risk.
Equity investors are exposed to exit multiples and valuation compression. Credit investors are focused on something different:
- Cash flow stability
- Revenue visibility
- Ability to refinance
A company may struggle to achieve a high exit multiple, impacting equity returns, while still comfortably servicing its debt.
This is where much of the confusion arises.
Why does information advantage matter in private credit?
Private credit lenders typically operate with far greater access to information than participants in public debt markets.
As direct lenders, they have:
- Regular dialogue with management
- Visibility on current trading
- Direct access to sponsors
This creates a more informed underwriting and monitoring process, particularly during periods of volatility.
In contrast, syndicated loan investors rely more heavily on periodic reporting and less direct engagement.
What do investors still misunderstand about private credit risk?
One of the most persistent misconceptions is that risk can be assessed through a small number of metrics, such as leverage or covenant structure.
While these factors are relevant, they are only part of the picture.
True credit assessment requires a broader view, including:
- Business quality
- Market position
- Sponsor behaviour
- Cash flow resilience
Reducing credit risk to a handful of metrics misses the complexity of the underlying investment.
The low-down
Private credit is often discussed through the lens of macro narratives, AI disruption, liquidity concerns or default forecasts.
This conversation reframes the discussion around fundamentals.
Private credit is a structurally embedded asset class with distinct characteristics, particularly around alignment, information access and recovery dynamics. The real risk is not the asset class itself, but misunderstanding how it behaves.
For investors, the takeaway is clear: private credit requires a different framework. When assessed on its own terms, rather than through an equity lens, it looks far more robust than the headlines suggest.