DoubleLine Warns of Hidden Risk in Late-Cycle Private Credit
Event summary
- DoubleLine's Robert Cohen and Chris Stegemann published a paper, 'Volatility Laundering in Private Credit,' highlighting structural risks within the private credit market.
- The paper argues that private credit companies avoiding public markets are often riskier, seeking flexibility through one-on-one borrower relationships.
- DoubleLine cautions that marketing strategies in private credit may misrepresent volatility, particularly regarding the 'illiquidity premium'.
- Robert Cohen, Director of Global Developed Credit, and Chris Stegemann, Manager of Client Portfolio Management, authored the report.
The big picture
DoubleLine's report underscores a growing concern about the opacity and potential misrepresentation of risk within the private credit market, which has seen significant growth following the pandemic. The shift towards private credit, initially driven by alpha-generation opportunities, is now facing headwinds as market cycles mature and credit quality deteriorates. This critique challenges the narrative of private credit as a consistently superior alternative to public credit, particularly in a late-cycle environment.
What we're watching
- Investor Behavior
- How investor recalibration of expectations regarding private versus public credit will impact capital flows into the private credit space remains to be seen.
- Risk Migration
- Whether the trend of riskier companies migrating to private credit will continue as public markets tighten and economic conditions evolve warrants close monitoring.
- Marketing Scrutiny
- The pace at which regulatory bodies and institutional investors scrutinize private credit marketing practices and transparency will likely influence the sector's future growth.
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