Traci Alloway

How worried should we be about the future of private credit at this point and the idea that is it going to be a systemic issue for the financial system?

I think the liability structure that we've discussed numerous times is dramatically different than what we saw in the financial crisis.

So most financial institutions that fail, fail because of their liability structure.

They're built to realize losses over extended periods of time.

which I think many of these credit funds will be able to do.

But I do think that we are going to enter into a period where we're going to see significant dispersion among credit fund managers or private credit managers.

We've been lulled into uniformity of returns, right?

If you look in the public markets, it's been a huge trend towards indexation.

So most people own SPY or QQQ or whatever form you want to pick.

So equity returns all look very similar.

And that's what happened in the early days of private credit, where everything was marked to par.

You had an 8%, 9%, 10% coupon.

It looked great.

So you couldn't really see some of the cracks below the surface.

As Craig alluded to earlier, there have been managers who've been doing this for 25, 30 years.

And they're very new, recent entrants into it who've seen substantial growths.

in their assets that they had to invest.

So I think that's probably the first leg that we'll see is that you're going to start to see real dispersion of returns from manager to manager.

But, you know, they have a good head start where they have coupons and they have returns built in that they can absorb higher default rates than they are now.

It's just a question of how high do those default rates get relative to the coupons that they're earning.