The Bearish Tide in Private Credit: A Prudent Play or a Risky Gamble?
37min read The private credit market, once a bastion of steady returns for alternative investors, has become a battleground for short sellers. As economic headwinds gather momentum, these contrarian investors are placing bets against lenders like blackstone (BX), KKR (KKR), and Apollo Global Management (APO), betting that overvaluation and rising defaults will erode profitability. But is this skepticism warranted, or are short sellers overlooking the sector’s enduring appeal?
The Allure—and the Risks—of Private Credit
Private credit lenders have thrived in a world of low interest rates and pent-up demand for yield. By providing loans to businesses shunned by traditional banks, these firms have capitalized on a market that grew to over $1.5 trillion in 2023. Yet the same factors that fueled this growth now haunt it. With central banks globally hiking rates to combat inflation, borrowers—especially those in leveraged buyouts or real estate—are facing mounting refinancing pressures.
The data paints a stark picture. reveals a decline in valuation multiples, with BX’s stock down 25% since early 2022 and APO’s market cap shrinking by nearly 40%. Meanwhile, short interest as a percentage of float has surged for these firms, with KKR’s short ratio hitting 18% in Q3 2023—its highest level in a decade.
Why Shorts Are Smelling Blood
Short sellers argue that private credit lenders face a perfect storm:
- Economic Deterioration: A recession could trigger a wave of defaults, particularly in cyclical sectors like energy or retail. Moody’s estimates that speculative-grade corporate defaults could rise to 4.5% in 2024, up from 1.8% in 2023.
- Overvaluation: Many private credit funds have relied on "evergreen" structures that roll over debt indefinitely. As investors demand liquidity, lenders may struggle to exit underperforming loans at favorable prices.
- Regulatory Scrutiny: The SEC’s push to tighten rules on alternative asset managers, including mandatory liquidity disclosures, could reduce fee income and operational flexibility.
Countering the Bear Case: Bulls’ Defenses
Bulls counter that short sellers are underestimating the sector’s resilience. Private credit’s illiquid nature and high barriers to entry mean lenders can negotiate favorable terms in distressed scenarios. Additionally, demand for alternative lending remains robust: institutional allocations to private credit hit a record 7.6% of total alternative assets in 2023, up from 3.2% in 2018.
Furthermore, shows that private credit has historically outperformed traditional leveraged loans during downturns, with lower losses on defaults. This track record suggests that disciplined underwriting—rather than pure economic conditions—may determine outcomes.
Conclusion: A Sector Divided, but Not Doomed
The battle between shorts and bulls hinges on two critical variables: the severity of an impending recession and the quality of lenders’ underwriting. While short sellers have valid concerns about valuation and macro risks, their bearish bets may be premature.
Consider this: Even in a moderate recession, private credit’s default rate would need to triple from current levels to match the sector’s 2009 peak. Meanwhile, highlights that these firms derive over 60% of income from management fees—a recurring stream insulated from market swings.
The smarter play may lie in distinguishing between lenders. Those with diversified portfolios (e.g., Apollo’s focus on real estate and infrastructure) or low exposure to overleveraged borrowers (e.g., KKR’s emphasis on corporate growth loans) could weather the storm. Investors should pair caution with selectivity: short sellers may win in the near term, but the sector’s long-term fundamentals remain intact for those who pick the right bets.
In short, while the private credit market is far from immune to the economic cycle, its structural advantages—tailored lending, high fees, and low correlation to public markets—suggest that short sellers are fighting a tide, not riding it.
