Private Credit (Direct Lending) - A Bubble or an Opportunity - July 2026

Private credit closed 2025 with a 9.3% CDLI return (9.5% annualised over 21 years) and realised losses of just 0.64% - below the ~1.0% long-run average - extending a two-decade record of ~1.7% volatility and only one negative year, the lowest of any major credit asset class. That resilience now meets its first genuine stress test: Fitch's trailing-12-month default rate hit a record 6.0% by May 2026 and PIK income climbed to 8.1% of investment income, though deterioration is lagged and concentrated - sub-$25mn EBITDA borrowers defaulted at 15.8% in 2025 versus 4.0% above $100mn, clustered in 2021-22 software vintages (~19% of direct loans). The sharper fault line is liquidity, not solvency: Q1 2026 brought ~$14bn of redemption requests against non-traded BDCs, ~$8bn unmet and the first net outflow on record, yet the 1.6%-40.7% dispersion across managers signals investors differentiating by software exposure and mark credibility, not exiting the asset class. With public BDCs trading ~25% below NAV and ~$175bn of forced secondary supply expected over 18-24 months, the dominant return driver into 2H'26 shifts from spread income to collateral selection - favouring senior-secured, hard-asset and European credit over AI-exposed software, where first-lien recoveries have collapsed from ~90% to ~8%.