Excess Returns Podcast: “The Private Credit Apocalypse That Isn’t Coming”
Guest: Larry Swedroe
Hosts: Jack Forehand, Justin Carbonneau, Matt Zeigler
Date: March 26, 2026
Episode Overview
In this episode of Excess Returns, the hosts are joined by prolific finance author and investment expert Larry Swedroe to offer a deep-dive into the world of private credit. Against the backdrop of rising media alarmism and uncertainty in credit markets, Swedroe seeks to dispel prevalent myths and clarify what private credit really is, the risks and opportunities it presents, and how well-managed funds like Cliffwater operate in contrast to the broader narrative. Additional topics, such as the relevance of academic research and AI in finance, are briefly touched upon.
Key Discussion Points and Insights
1. What is Private Credit? [04:25]
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Swedroe explains that private credit was a small niche until the 2008 financial crisis, after which stricter regulations forced banks to curtail lending. This led to explosive growth in private credit, now estimated near $2 trillion.
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Key Features:
- Provides quicker, more flexible loans compared to banks.
- Borrowers pay higher interest rates in exchange for the illiquidity and speed.
- Institutional investors (e.g., Yale, Harvard) were early adopters, but more liquid “interval fund” structures have broadened access.
“Another advantage of private credit… is unlike going to a bank, which you have to go through committee after committee... Private credit doesn't have that bureaucracy.” – Larry Swedroe [05:18]
2. Biggest Misconceptions and Risks in Private Credit [08:08]
A. Liquidity Risk
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Illiquidity is compensated with an “illiquidity premium”—often 1.5% to as high as 4–5% per year.
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Swedroe notes investors frequently overstate their need for liquidity:
- At large advisory firms, “virtually none” of clients draw down principal over required minimum distributions.
- With interval funds, even 10–30% portfolio allocation to less-liquid assets is feasible for high-net-worth individuals.
“I think one of the big mistakes individual investors make is… vastly overstate their need for liquidity.” – Larry Swedroe [10:20]
B. Credit Risk
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Private credit loans are now mostly senior and secured, limiting downside, especially in diversified funds.
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Data: Cliffwater’s Senior Secured index (CDLIS) shows annual loss rates of just 0.25% since 2010.
“If you do a good job… then the risks are not that great. They're still there. You shouldn't assume they're zero.” – Larry Swedroe [15:40]
C. Concentration Risk
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Typical BDCs (Business Development Companies) are much more concentrated—top 25 loans = ~61% of assets.
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Diversified interval funds like Cliffwater have far less concentration (top 25 loans = 12%).
“Diversification… is the only free lunch in investing, because you get the same expected return with much less risk...” – Larry Swedroe [17:00]
3. Recent Private Credit Losses & Media Narratives [20:03, 39:59]
- Defaults: Rising interest rates post-2022 have increased strain on “legacy” loans. But losses remain moderate in diversified senior-secured portfolios.
- Media Critique: Swedroe criticizes hysteria, stating,
“They want to create a panic so that people tune in and read their articles. It's not an unbiased job of the media... it's to create noise...” [39:59]
- Example: Losses reported in headlines (e.g., Cliffwater’s $60M on $33B) are small in percentage terms. Media often ignore net inflows and risk controls.
4. Systemic Risk to the Economy? [25:52]
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Private credit’s footprint (~$2T) is dwarfed by traditional banking credit. Direct exposure to private credit is limited for banks.
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In the case of a downturn, individual investors are at risk, but the banking system’s exposure is insufficient to trigger a crisis.
“There is far less risk... I don't think it creates a crisis. The banks would worry much more about their direct loans... than the loans to the private credit.” – Larry Swedroe [26:13]
5. Liquidity Management and Redemption Scenarios [34:30]
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Funds like Cliffwater use:
- Multiple Liquidity Sources: Cash reserves, public asset sleeves, guaranteed bank lines of credit, natural portfolio turnover, and reinvestments.
- Scenario Modeling: Claimed ability to withstand two years of stress (akin to 2008 scenario).
- Large, diversified portfolios allow sale of performing loans at close to par, unlike the fire-sale prices implied by media narratives.
“What the media fails to talk about is... there are several sources of liquidity.” – Larry Swedroe [34:34]
6. Appropriate Investors & Structures [32:26]
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ETFs: Not viable for illiquid private credit due to regulatory liquidity requirements.
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401ks/DIY Investors: Swedroe strongly cautions against private credit exposure unless under the guidance of skilled advisors, with explicit client consents and education.
“I don't believe that this should be allowed in 401ks or things like that because you're not going to have the advisor holding the individual investor's hand...” [32:36]
7. AI & Tech Disruption Within Private Credit [44:59, 60:35]
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AI Disruption Risk: Differentiates between easily replicable SAS products and deeply embedded enterprise software.
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Well-run funds actively analyze exposure; those with diversified portfolios and prudent underwriting are less vulnerable to industry-specific shocks.
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Academic Research & AI:
- AI is transforming risk modeling and research, but “story-first” hypotheses remain essential to avoid spurious correlations.
“Firms like Cliffwater have been using AI tools now for many years to improve their ability to... uncover, call it, you know, nuances in the market that they can exploit.” – Larry Swedroe [60:51]
8. Best Practices for Private Credit Investing [52:29]
Key Considerations:
- Open Architecture & Diversification: Access both scale and manager diversity; thousands of loans, not hundreds.
- Deep Underwriting: Ensure the fund has a sizable, dedicated team for independent underwriting.
- Liquidity Management: Prefer firms willing to pay for multi-year guaranteed credit lines and practice daily liquidity risk monitoring.
- Concentration & Leverage: Avoid concentrated portfolios and excessive leverage; low costs and low leverage are better aligned with long-run risk control.
- Culture: Focus on credit discipline, avoiding asset growth for its own sake and shunning the temptation to chase yield at the cost of quality.
“Culture is really critical. Also, I would look at leverage. Remember, leverage is good when you have a low volatile asset and you can earn a spread. But... if you add leverage to a high risk asset, you can blow up quickly.” – Larry Swedroe [57:06]
Notable Quotes & Memorable Moments
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“Much less risky for the economy than when the banks are lending because the banking system provides the liquidity for the whole economy... There is far less risk.”
– Larry Swedroe [26:13] -
“If private credit losses go up to the extent like in 08... that year, but it will far outperform public equity, far outperform junk bonds.”
– Larry Swedroe [24:41] -
“They want to create a panic so that people tune in and read their articles. It's not an unbiased job of the media, is not to inform. It's to create noise and get people to pay attention.”
– Larry Swedroe [39:59] -
On AI risk:
“There’s two sides to this AI disruption thing. Yes, there are clearly risks... But it's not limited to private credit. It's there for public equities and it's there for public credit.”
– Larry Swedroe [49:36] -
On Due Diligence:
“You have to have an advisory firm that has the talent and the depth of skill knowledge to ask the right questions.”
– Larry Swedroe [28:55]
Segment Timestamps
- [04:25] Defining Private Credit and its rise since 2008
- [08:08] Key risks: liquidity, credit, concentration
- [20:03] Losses, defaults, and media coverage
- [25:52] Systemic risk for the broader economy
- [34:30] Liquidity management and stress scenarios
- [44:59] Tech disruption, software lending, and AI risks
- [52:29] Best practices and investor checklists
- [60:35] Trends in academic research and AI’s role in finance
Summary Takeaways
- Private credit is large, diverse, and mostly well-structured—media panic on systemic risk is overblown.
- Main risks: liquidity, credit, and concentration; sophisticated underwriting and diversification are key defenses.
- Not for every investor—should be approached with expertise, proper vehicles, and realistic expectations.
- AI presents both opportunities and new diligence challenges in both credit investing and finance research generally.
- Investors should focus on large, diversified, open-architecture funds (like Cliffwater), low leverage, and strong underwriting culture to mitigate risk and capture the real “illiquidity premium.”