Conference Presentation, Panel
Banks, Private Credit, and the Future of Risk | Global Conference 2026
Milken InstituteErik Schatzker, Vivek Bantwal, Molly Duffy, Jeffrey Gundlach, Kristofer Kraus, Brad Rogoff, Paul
- Private credit lending practices have been aggressive, particularly in enterprise software with high leverage, though lending standards remain less egregious than pre-2008 levels.
- Credit deterioration may crystallize from weaker underwriting, leading to mark-to-market pain for investors during liquidity events despite a non-systemic asset-liability mismatch.
- Price volatility is currently suppressed by "set it and forget it" par-marking and moving average pricing mechanisms, which may turn into misleading step functions during downturns.
- Retail investors in interval funds face significant risks due to a lack of understanding regarding liquidity gates applied at the aggregated fund level rather than the portfolio level.
- Redemption requests are projected to reach 41% in the first quarter of 2026, potentially creating a scenario where investors demand even higher liquidity in subsequent cycles.
- Institutional investors are expected to maintain capital flows into private markets as a diversification source, with no evidence of capital fleeing due to BDC liquidity issues.
- Systemic risk is deemed unlikely as the BDC sector represents only about 25% of direct lending, while the remaining 75% consists of long-term locked-up capital, and bank exposure to private credit is under 1% of balance sheets.
- Default rates in public credit are currently approximately 1.5% to 4% depending on liability management adjustments, far below the 10.84% peak seen during the Global Financial Crisis.
- A refinancing wall for private credit loans originating in 2021 is expected to become material in 2028 and 2029, potentially leaving equity values at zero or negative.
- The Federal Reserve is more likely to hike rather than cut rates in 2026, increasing stress on risk assets and exposing loans to higher refinancing costs.
- AI adoption is expected to reduce the addressable market for software vendors by eliminating license needs, eroding pricing power, and disrupting point-solution providers lacking proprietary data.
- Companies with "Rule of 40" metrics of 40% to 60% FCF margins are projected to trade at higher multiples and remain more resilient than non-compliant peers.
- Losses are anticipated for companies purchased at high multiples (16x to 20x) in 2021 where growth has not materialized, eroding equity cushions.
- Fraud investigations by the SEC are expected to remain isolated events, such as a few examples in a six-trillion-dollar market, rather than threatening the entire sector.
- Credit quality in high-yield bonds is expected to remain superior to previous cycles, though poor-tier lending persists in private credit due to infrastructure gaps in small firms.
- Artificial intelligence is expected to create material contractionary periods that could generate bubbles in industries beyond software as borrowers migrate to public markets.
- Trust in the market may erode further due to discrepancies between quarterly liquidity expectations and gate mechanisms, compounded by practices like accruing interest on defaulted bonds.
- Significant losses are expected when a recession arrives, particularly for loans originating in 2000 and 2001 that face refinancing at higher interest rates.
- Sovereign wealth funds are expected to increase demand for non-corporate credit diversification products outside the U.S., while institutional LPs re-up allocations to rebalance as public markets rise.
- While the risk is distributed, stress in one corner of the credit market has the potential to become contagious, causing investors to seek liquidity from other leveraged finance areas.