Podcast Summary: Exchanges – "The Case for Private Credit"

Host: Alison Nathan (Goldman Sachs)
Guests: James Reynolds (Global Co-Head of Private Credit, GS Asset Management), Latvi Karawi (Chief Credit Strategist, Head of Credit Mortgages and Structured Products Research)
Date: April 15, 2025

Episode Overview

This episode explores the remarkable growth and key dynamics of the private credit market, an increasingly significant player in global finance. Host Alison Nathan is joined by James Reynolds and Latvi Karawi, who share their perspectives on what is driving investor interest, how private credit is weathering market uncertainty, and whether systemic risks exist as this asset class becomes more prominent.

Key Discussion Points & Insights

1. The Growth and Nature of Private Credit

• Definition & Scale:
  • Private credit is broadly any debt claim privately negotiated between a borrower and a lender, bypassing public issuance or banks ([00:50], Latvi Karawi).
  • The asset class has exploded from less than $100 billion in 2010 to ~$2.1 trillion, now rivaling public markets like high yield bonds and syndicated loans.
• Different Strategies:
  • Senior direct lending is the core, but the space also includes mezzanine, distressed, special situations, real estate, and infrastructure lending.
• Attractiveness:
  • Offers flexibility, certainty, confidentiality, speed, and creative capital solutions to borrowers, especially in volatile markets ([02:28], James Reynolds).

2. Impact of Market Volatility

• Private Credit's Insulation:
  • Private credit is less sensitive to daily market sentiment compared to public markets. Even during recent volatility (2022–2025), private credit has remained relatively insulated ([04:18], Latvi Karawi).
  • “By design, private credit and private markets actually more generally are insulated from these fluctuations in sentiment.” – Latvi Karawi [04:18]
• Investor Perspective:
  • Investors (pension funds, insurance cos, sovereign wealth, mass affluent) view private credit as defensive, attracted by floating-rate returns (hedge against inflation) and stability of closed-end structures ([05:40], James Reynolds).
  • A growing trend is the shift from public fixed income to blended portfolios with a higher allocation to private credit ([05:40], James Reynolds).

3. Resilience and Risk Management

• Sector Resilience:
  • Private credit portfolios tend to avoid cyclical or highly volatile sectors, positioning themselves defensively ([05:40], James Reynolds).
• Uncertainty in a Severe Downturn:
  • Although untested by a major recession since the market is still young (2008–09 crisis occurred when the asset class was much smaller), parallels are drawn to leveraged finance: losses and defaults will rise in recessions, but private credit’s flexibility can cushion the impact ([08:25], Latvi Karawi).
  • “I agree with James. I think there's more flexibility on the private side and so you can reduce frictions that typically arise when you have rising financial distress.” – Latvi Karawi [08:25]
• Manager Dispersion:
  • In a real crisis, losses in private credit will be unevenly distributed—manager selection becomes critical since there are no public benchmarks ([08:25], Latvi Karawi).
  • “Manager selection [in private credit] is a far more important ingredient than on the public side.” – Latvi Karawi [10:58]

4. Sector Opportunities

• Where’s the Value?
  • Default and restructuring situations tend to arise in smaller, more cyclical businesses—specifically, older vintage buyouts (2016–2019) now facing stress, especially in Europe.
  • Greatest current opportunity: senior direct lending to US and European companies, especially where private equity seeks certainty of execution ([11:42], James Reynolds).
  • Direct lending also plays a vital role in large-cap buyouts when bank lending dries up.
  • Growth areas: flexible/junior debt solutions, energy transition, and replicating public fixed income portfolios with private credit vehicles ([11:42], James Reynolds).

5. Systemic Risk and Market Concerns

• Transparency and Stability:
  • Some narratives suggest risk is building in private credit due to opacity and size. Karawi strongly disagrees, noting that most private credit capital is well-matched to its liabilities and more conservatively leveraged than banks pre-2008 ([14:43], Latvi Karawi).
  • “I struggle a little bit to see some of the amplifying channels that we had back in 2008, 2009, and those were really mismatches between assets and liabilities… those two amplifying channels are just not there today [in] private credit.” – Latvi Karawi [15:48]
  • Private credit has instead acted as a stabilizing force, especially during the 2023 regional banking crisis ([16:52], Latvi Karawi).
• Transparency Trade-off:
  • While acknowledging less transparency vs. public markets, Karawi argues this is inherent to the private negotiation process and manageable as long as the lender-investor-borrower relationship is robust ([17:27], Latvi Karawi).

Notable Quotes & Memorable Moments

• On Growth:
  • "That figure in 2010 was less than 100 billion." – Latvi Karawi [01:50]
• On Value Proposition:
  • "Certainty of funds is something that is very important for the owners of these businesses… flexibility, confidentiality, ability to move fast, creativity, flexible capital." – James Reynolds [02:45]
• On Investor Perspective:
  • “They see credit as being very defensive… a good hedge against potential inflation, as most of what we do is exposed to floating rates.” – James Reynolds [05:48]
• On Crisis Response:
  • “Private credit has acted as a very solid line of defense against the risk of a credit crunch, in my view.” – Latvi Karawi [16:52]
• On Manager Risk:
  • "In aggregate, losses will go up across the board in a bad state of the world, with the economy in a recession.… [but] on the private side those losses are going to be very unevenly distributed.… That makes manager selection a far more important ingredient than on the public side." – Latvi Karawi [10:58]

Key Timestamps

• 00:50 — Defining private credit, recent growth, and asset class composition (Latvi Karawi)
• 02:28 — James Reynolds on private credit’s evolution and advantages for borrowers
• 04:18 — Private credit’s insulation from public market volatility (Latvi Karawi)
• 05:40 — Investor trends and portfolio shifts toward private credit (James Reynolds)
• 08:25 — Risks, resilience in downturns, and importance of manager selection (Latvi Karawi)
• 11:42 — Sectors and strategies with greatest opportunity (James Reynolds)
• 14:43 — Systemic risk discussion: is private credit a danger to financial stability? (Latvi Karawi)
• 17:27 — Transparency and inherent private market limitations (Latvi Karawi)

Conclusion

This episode demystifies private credit’s rapid expansion and scrutinizes both its risk and its resilience compared to public markets. While private credit is not immune to economic downturns, its defensive nature, flexibility, and importance for borrowers and investors alike are highlighted. The conversation challenges systemic risk narratives, emphasizing the asset class’s differences from bank lending pre-2008 and the critical role of manager selection. Overall, James Reynolds and Latvi Karawi offer a nuanced, data-driven, and accessible tour of today’s private credit landscape.