Tensions, crisis, a reminder of a structural reality, a turning point, and opportunity: in recent weeks the alternative assets and private credit sector has experienced episodes of lack of immediate liquidity that have led major asset managers to limit capital withdrawals.
This phenomenon does not necessarily imply insolvency, but it does reflect a structural problem in the segment: the difficulty of offering frequent liquidity in vehicles that invest in very illiquid assets, such as direct loans to companies.
There is a “liquidity mismatch,” or as Jaime Cruz, Portfolio Manager Private Debt USA at Fynsa AGF, notes in a recent report: “In simple terms, the market is remembering a structural reality: private credit is not a liquid asset, even though some structures attempt to offer periodic exit windows.”
A new difficulty for investors already saturated with uncertainty
Amid the enormous uncertainty generated by the new war in the Middle East and the chronic instability of public markets, experts are observing these movements that until recently “seemed unlikely,” according to Cruz himself.
For analysts at Apollo Academy (a firm specialized in alternative assets), we are facing a turning point.
During the period roughly between 2010 and 2022, low interest rates, abundant liquidity, and multiple expansion allowed many managers to generate returns without needing to rely heavily on operational value creation. However, the macroeconomic environment has changed structurally, and the sector now faces a scenario in which those factors can no longer sustain the same level of returns. In this context, the future success of private equity will depend on recovering the principles that historically defined the industry: discipline in acquisitions, operational improvement of portfolio companies, and clear strategies to generate liquidity at exit, argue David Sambur, Partner Co-Head of Private Equity and Head of Equity; Matt Nord, Partner Co-Head of Private Equity and Head of Hybrid; and Antoine Munfakh, Partner Deputy Glob, in a report attached at this link.
The Apollo report argues that private equity must return to its roots: “Traditionally, the attractiveness of this asset class was based on managers’ ability to acquire companies with potential for improvement, implement strategic and operational changes, and subsequently monetize that value through an exit. This approach involved active participation in the management of companies, with the objective of improving their efficiency, optimizing their cost structure, driving growth, or redefining their competitive positioning. Because they were not subject to the pressure of quarterly results typical of public markets, companies under private equity ownership could adopt long-term transformation strategies.”
Greater differentiation among asset managers
Experts agree that opportunities in the sector will depend on greater differentiation among asset managers’ strategies.
“Greater competition among managers, together with the return of some banks to certain segments of corporate financing, has begun to put pressure on origination conditions. This has translated into lower origination in some segments and a gradual compression of spreads, particularly in corporate direct lending, where most BDCs operate.
This adjustment is creating an increasingly clear differentiation within the universe of private credit. While many BDCs compete in the corporate direct lending segment, there are other areas of private credit where competition remains significantly lower,” says Jaime Cruz, Portfolio Manager Private Debt USA at Fynsa AGF.
In particular, financing backed by real assets — such as asset-backed lending and real estate financing — continues to offer attractive spreads and more defensive structures, with origination dynamics that remain favorable, the expert adds.
“For those investing with a long-term horizon, this dynamic is not necessarily negative. In fact, it can strengthen the ecosystem. When speculative flows decrease and the capital that remains is truly patient, managers can focus on what truly generates value: originating quality credit, structuring solid transactions, and capturing attractive spreads. In that sense, what is happening today with private BDCs is not a crisis, but a natural transition in a market that has grown rapidly over the past decade. And as often happens in financial markets, periods of adjustment are also those that ultimately consolidate long-term opportunities,” concludes Cruz.
