Private credit concerns are not overblown, says Verdad's Dan Rasmussen

Private credit has expanded massively to fill the void left by banks, lending to risky LBOs (40% in software) at rates that imply "low single B" credit quality. Lenders are seeing a rise in "PIK interest" (borrowers not paying cash). The entire premise of this lending was based on software "recurring revenue" and high equity valuations acting as a cushion. With software equities collapsing and revenue quality questioned, the collateral backing these loans is vaporizing. In a recession, this credit tier historically sees ~30% default rates. Short the sector. While "gold standard" firms like ARES might have better underwriting, the asset class as a whole is opaque, illiquid, and facing a "race to the bottom" in lending standards. A "soft landing" where rates drop quickly, allowing borrowers to refinance before defaults cascade; the "gold standard" firms (ARES) proving resilient enough to gain market share from collapsing smaller players.

Private credit lenders lent against "recurring revenue" because software companies lack hard assets (factories/trucks) and often lack profits. As software stocks fall, the "equity cushion" supporting the credit market disappears. If private credit (the primary lender to these LBOs) faces a liquidity crunch or losses, the funding lifeline for leveraged software companies will be cut off, leading to further equity compression. Avoid or Short highly leveraged software companies dependent on private credit financing. A resurgence in tech/software valuations driven by AI speculation or rate cuts.