Banks, Private Credit, and the Future of Risk | Global Conference 2026

Systemic Risk Assessment:

• Panelists reached a consensus that direct lending is not currently a systemic threat comparable to the 2008 Global Financial Crisis (GFC).
• Vivek Batwal noted BDCs are generally levered 1:1 or less, contrasting with the 30:1 leverage seen in pre-2008 banks.
• Risk is significantly more distributed among thousands of players rather than concentrated in a few large institutions.
• Jeffrey Gundlach and others acknowledge isolated credit deterioration and potential losses, but dismiss the likelihood of a cascading market-wide collapse.

Credit Quality and Underwriting Concerns:

• Lending standards have loosened during the benign credit cycle, with some managers adopting a "piggyback" strategy on scaled entities without performing independent due diligence.
• High leverage remains a primary concern, particularly in enterprise software LBOs where 16x–20x purchase multiples combined with significant debt have eroded equity cushions as valuations dropped.
• Default rates currently remain low (approx. 2% for BDCs vs. 10.84% at the peak of the GFC), but panelists expect a significant increase in defaults and dispersion if a recession occurs.
• A "refinancing wall" is projected for 2028–2029, where massive maturities in software and PE-backed deals will require restructuring.

Liquidity Mismatches and Retail Investor Issues:

• The "semi-liquid" structure of certain interval funds and BDCs is causing friction; investors expected quarterly redemptions but face gating mechanisms where only ~5% of requests are honored.
• Jeffrey Gundlach reported Q1 2026 redemption requests reaching 41% in some vehicles, highlighting a fundamental mismatch between promised liquidity and asset reality.
• The disconnect between quarterly liquidity promises and illiquid underlying assets is eroding investor trust and creating potential runs on specific funds.
• The SEC has reportedly opened investigations into multiple private credit firms regarding fraud, though panelists caution against generalizing isolated incidents to the whole market.

Pricing and Valuation Transparency:

• Mark-to-market practices in private credit rely on moving averages, suppressing volatility until a "step function" decline occurs, which panelists argue erodes trust.
• Jeffrey Gundlach cited a specific instance where the same loan was valued at 95 by one manager and 8 by another, exposing wide dispersion in valuation methodologies.
• Panelists noted that median valuation dispersion for private credit loans (54 cents) is tighter than the broadly syndicated loan market (97 cents), except in distressed cases where dispersion widens to 8.75 points.
• There is significant criticism regarding "shadow rating agencies" offering investment-grade ratings for fees on sub-Investment Grade (B/BB) debt, a practice described as "financial alchemy."

Artificial Intelligence and Enterprise Software:

• AI adoption poses a disruptive "saspsocalypse" threat to enterprise software vendors, with some companies already eliminating legacy software licenses (e.g., Smartsheet, Slack) in favor of AI coding agents.
• Software firms acting as "systems of record" with proprietary data and network effects are viewed as more resilient to disruption than horizontal point-solution vendors.
• Leverage on software companies remains high because growth targets missed, leaving companies unable to deleverage as valuations declined.
• Goldman Sachs panelist Brad Rogoff stated they began turning down AI deals in 2023 and emphasize a differentiation strategy based on "Rule of 40" profitability metrics.

Institutional vs. Retail Capital Flows:

• Institutional investors (83% of capital in drawdown funds) are not redeeming; instead, they are viewing the market volatility as an opportunity to deploy capital at wider spreads.
• Pimco panelist Vivek Batwal noted spreads are retreating from all-time tight levels, making new direct lending deals more attractive for institutional LPs.
• Sovereign wealth funds are showing increased demand for non-corporate credit diversification products, though this trend is currently more pronounced outside the U.S.
• In contrast, retail investors in semi-liquid funds are driving the primary pressure due to redemption frustrations and trust erosion.

Forward-Looking Macroeconomic Factors:

• Interest rate risk is elevated; panelists predict rates may rise rather than fall in 2026, increasing refinancing costs for existing borrowers.
• Geopolitical instability, including potential war prolongation in Iran, is cited as a variable that could impact credit cycles.
• Panelists anticipate a "wild west" phase in the market where trust is tested, but ultimately expect a market correction driven by credit dispersion rather than systemic collapse.
• The equity market's health remains tightly correlated with private credit; defaults in private credit would render the associated equity positions worthless, creating a feedback loop for PE firms.