Thoughts on the Market: "A New Test for Private Credit"

Host: Vishy Tirupator (Morgan Stanley Chief Fixed Income Strategist)
Guest: David Miller (Global Head of Private Credit and Equity, Morgan Stanley Investment Management)
Date: March 31, 2026

Episode Overview

This episode explores the evolving risks and opportunities in private credit as the sector faces heightened investor scrutiny. Host Vishy Tirupator and guest David Miller discuss whether private credit is undergoing a true "stress test," address concerns about liquidity and transparency, and debate the ongoing impact of macro trends—especially in the software sector. The conversation also covers retail investor participation, systemic risk comparisons to the 2008 financial crisis, and where today's greatest opportunities (and challenges) lie for private credit investors.

Key Discussion Points & Insights

1. Is Private Credit Facing Its First Real Stress Test?

[00:11 – 01:47]

• Private credit has grown rapidly in the past decade, now exceeding a trillion-dollar market.
• Past stress events:
  • David Miller asserts that private credit has faced previous stress tests, citing the Global Financial Crisis (GFC), the COVID-19 pandemic, and the 2022–23 rate shocks—all of which the sector weathered well.

    “You could go back to the GFC... but you could certainly look to the pandemic and the rate shocks of '22–'23 as a stress test. And I think private credit performed quite well through that.” (David, 00:54)

• Current focus is on the "non-traded BDC structure" (about 20% of direct lending assets), where liquidity is intentionally limited to avoid forced selling and market disruption.

  "The liquidity provisions in those vehicles are designed to provide some liquidity but not total liquidity... the vehicles are working as intended." (David, 01:29)

• Both agree that liquidity constraints protect the system from fire sales, and that these features are necessary and by design, not flaws.

2. Assessing Fundamental Health and Market Sentiment

[01:47 – 03:14]

• Disconnect noted between negative media sentiment and underlying fundamentals in private credit.

  "I think there is a bit of a disconnect, you know, in the media between the sentiment and the fundamentals that are underlying private credit." (David, 02:18)

• Key metrics, such as leverage and coverage ratios, are trending positively; software sector default rates remain notably low.

  "Fitch reported year to date there have been no software defaults... overall, default rate within the software sector is a little bit less than half of [the average private credit sector]." (Vishy, 02:55)

3. Software, AI, and the Threat of Disruption

[03:14 – 04:57]

• David is optimistic on the sector, seeing AI as a net positive for incumbents, despite some likely losers.

  "Our view is... AI is going to be a net tailwind overall for software over time... well-positioned incumbents will get their share of the upside." (David, 03:21)

• Vishy pushes back against the immediacy and universality of AI-driven disruption:

  "The market assumption is that AI disruption is necessarily going to disrupt all of software companies and that disruption is imminent. I would push back on both of those points." (Vishy, 03:52)

• Both see dispersion in outcomes as inevitable, making portfolio selection and deeper industry knowledge critical.

4. Impact of Retail Inflows and Portfolio Construction

[05:15 – 06:37]

• Retail investors have entered private credit, but Morgan Stanley maintains consistency in portfolio construction and credit selection for retail and institutional clients.
• Retail inflows have tightened spreads and loosened terms as capital flooded in, but this trend is now reversing with more rational pricing expected.

  "The biggest impact...has been to push spreads tighter and weaken some of the terms than they would have otherwise been. You're seeing that trend reverse now as flows have moderated" (David, 05:51)

5. Systemic Risk: Lessons from 2008?

[06:37 – 07:59]

• Vishy compares today’s environment to 2008, emphasizing that systemic risk is much lower now.

  "In any metric, the risks in the system today are nowhere comparable to the kind of systemic risk that existed back then... I would very strongly push back against that illusion [that we are back in 2008]." (Vishy, 07:11)

• Most concerns remain isolated to specific sectors (notably software) rather than system-wide.

6. Risks and Opportunities for 2026

[07:59 – 08:56]

• Opportunities:
  David identifies widening spreads in private credit—especially for direct lending—as attractive for new investors. Hybrid and opportunistic private credit is particularly promising, driven by demand for flexible capital in M&A, non-dilutive growth, and balance sheet restructuring.

  "We believe spreads...have widened quite a bit...and there's also a really nice opportunity in opportunistic or hybrid private credit... you can get paid well for the flexibility." (David, 08:03)

• Fewer capital flows into such opportunities enhance return potential for careful investors.

Notable Quotes & Memorable Moments

• On media narratives vs. fundamentals:

  "There is a bit of a disconnect...between the sentiment and the fundamentals." (David, 02:18)

• On AI disruption in software:

  "I would push back on this notion that's prevalent in the media narrative here, that all AI disruption is imminent and is all bad." (Vishy, 04:36)

• On systemic vs. sector-specific risks:

  "Any allusion to that we are back in 2008, I would very strongly push back against that illusion." (Vishy, 07:37)

• On hybrid private credit opportunities:

  "[There's] a really nice opportunity in opportunistic or hybrid private credit... you can get paid well for the flexibility." (David, 08:09)

• Lighter moment:

  "I used to be tall and good looking before the financial crisis." (Vishy, 07:05)

Timestamps for Important Segments

• 00:11 | Introduction to Private Credit & Its Rapid Growth
• 00:54 | Past Stress Tests for Private Credit
• 02:18 | Disconnect Between Media Sentiment & Fundamentals
• 02:55 | Focus on Software: Defaults and Metrics
• 03:21–04:57 | Debating the Impact and Timetable of AI in Software
• 05:31 | Retail Inflows and Portfolio Strategy
• 07:11 | Systemic Risk Compared to 2008
• 08:03 | Opportunities in Private Credit for 2026

Summary Takeaway

The episode concludes that while private credit faces scrutiny and some isolated pressure points—particularly in software—the fundamentals remain sound, systemic risks are contained, and today's market dislocation offers compelling opportunities for discerning investors. The dialogue balances optimism for sector growth against a cautious, selective approach to risk and highlights the ongoing evolution and maturation of the private credit market.