By Stephanie Link
Stress in private credit makes the relative stability of major U.S. banks look increasingly attractive
Valuations in private markets are likely to remain under pressure.
Big U.S. banks offer solid fundamentals, diversified revenue streams and relatively compelling valuations.
Investors increasingly are concerned about private-credit funds’ liquidity and loan quality. The question is whether these cracks signal a deeper problem – like the seeds of a widespread financial crisis – or if this is simply a period of growing pains in a maturing asset class.
Private credit is not a systemic crisis – but it does warrant careful evaluation and selectivity. Private credit by its nature has less visibility than public markets, which can amplify uncertainty when issues arise. As a result, a few high-profile missteps can lead to broader concerns that extend beyond the companies directly involved.
Currently, much of the concern focuses on specific situations where underwriting standards and governance fell short. Cases involving firms including Tricolor, First Brands Group, 777 Partners and MFS highlight the risks that can emerge in less transparent areas of the market.
But it’s critical to distinguish between weaker firms and established operators with disciplined processes. Managers with experienced investment teams, rigorous underwriting standards and strong risk controls are structurally better positioned to navigate periods of stress. At the same time, even experienced managers are not immune to market or credit risk.
Moreover, it’s important to compare the current environment against the conditions that led to the global financial crisis in 2008-’09. That period was defined by a broad-based breakdown in mortgage and credit markets, ultimately exposing systemic weaknesses across the financial system.
The current backdrop is fundamentally different. While pockets of stress are emerging within private credit, the issues appear isolated rather than indicative of widespread deterioration in lending standards or balance-sheet quality.
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Large U.S. banks now are operating from a position of strength.
In contrast to the pre-2008 period, large U.S. banks now are operating from a position of strength, supported by more than a decade of regulatory reform and oversight. The capital position of the largest banks further reinforces this point: Collectively, the major U.S. banks hold roughly $170 billion in excess capital – a figure expected to rise closer to $200 billion following updates tied to Basel III Endgame and GSIB requirements. This surplus provides flexibility to expand lending activity while also supporting increased capital return through share buybacks and dividends.
Importantly, the current environment may also mark a shift in competitive dynamics. For much of the past decade, private markets have gained share as regulatory constraints limited banks’ lending capacity. With stronger capital positions and evolving regulatory frameworks, large banks are now in a position to re-enter areas of the market.
Investors should focus not only on underlying private-credit assets, but also on how these funds are structured.
Interval funds, for example, warrant particular attention. These products have grown in popularity due to their relative transparency, simplified onboarding and 1099 tax reporting. However, those benefits come with trade-offs. Interval funds operate with defined liquidity windows and often include redemption limits, which can lead to gating in periods of elevated withdrawal requests.
This dynamic underscores a broader issue: Many investors may not have fully appreciated the liquidity profile and structural limitations of these private-capital funds. In stable environments, these constraints are less visible. But when market sentiment shifts or volatility rises, investors may find that liquidity is more constrained than expected.
Some areas within private credit appear more resilient. Structures such as tender-offer funds, along with strategies focused on asset-backed securities and collateral-based lending, typically offer more predictable cash flows and clearer downside protection.
Private-market companies may look inexpensive, but that discount reflects the uncertainty and headwinds they face.
Credit cycles are normal. Currently, the level of discipline major financial institutions show will be key. Large public banks operate with stronger underwriting standards, improved risk controls and more diversified business models than in prior cycles. This positions them well to navigate potential credit stress while continuing to generate earnings across multiple segments. From an investment standpoint, shares of the so-called Big Six banks in the U.S. appear attractive, given a combination of solid fundamentals, diversified revenue streams and relatively compelling valuations.
In contrast, private-market companies may look inexpensive, but that discount reflects the uncertainty and headwinds they face. Private credit remains an evolving part of the investment landscape and may offer diversification and income potential for certain investors. However, it is not without risk, including credit risk, liquidity risk and manager-specific risk.
Until there is greater clarity around credit conditions and liquidity dynamics, valuations in private markets are likely to remain under pressure. Over time, well-managed private-credit platforms should stabilize and recover – but near term, the biggest U.S. banks appear better positioned to offer investors predictable return for less risk.
Stephanie Link is chief investment strategist and portfolio manager at Hightower Advisors.
Read: Finally you can invest like the 1% – use this stress test before getting locked into private markets
Plus: How the economy would weather private-credit defaults rising to financial crisis-like levels
-Stephanie Link
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04-04-26 1256ET
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