Semi-liquid fund structures, not credit quality, are being tested, says Andreas Klein
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While private credit is “getting a lot more scrutiny than it has in recent years”, the narrative around the asset class may prove to be more sensational than substantive.
That's the view of Andreas Klein, head of private debt at Pictet Asset Management, who argues the current anxiety gripping the market is more structural than fundamentals.
"We went very quickly from the golden age of private credit just two years ago, to a much different narrative today, some of which, I think is possibly slightly exaggerated and overblown," said Klein. “I'm not going to say that private credit is completely immune to wider risks and structural issues. There are certainly things that warrant a little bit closer scrutiny, and there's a lot of nuances within the private credit scope and field. I think bundling everything into one single narrative is probably slightly disingenuous, and you really have to dissect that into its core components."
To that end, Klein believes several separate concerns have been lumped together in ways that distort what is actually happening in private credit.
For one, a handful of high-profile defaults helped create the impression that the market was entering a broader default cycle, even though the underlying data doesn't support that view. He underscored that anxiety was amplified because many investors, especially retail investors, don’t have easy access to detailed default data and are therefore more vulnerable to headline-driven narratives.
He also believes the media has overstated private credit’s direct exposure to some of the most troubled deals. According to Klein, those losses were spread across a range of lenders, including banks, hedge funds, and various asset-backed and supply chain finance players, while traditional private credit managers were often less exposed than the coverage suggested. As a result, he sees some of the reporting as wrongly framing these events as a broad private credit problem.
On the technology side, Klein acknowledges that the rise of AI has created real uncertainty around software businesses, which matter because private credit often follows private equity into those sectors. While he believes lower coding costs, weaker barriers to entry, and reduced pricing power could further pressure valuations, he pushes back on the more extreme idea that software as a category is about to collapse.
Klein believes that software companies still derive value and have moats from things such as integration, compliance, reliability, and interoperability, and that the key question is which businesses adapt best. That’s why he ultimately sees fear, not collapsing fundamentals, as the main force driving current market behaviour. Notably, he points to default rates which have remained relatively contained, with somewhat higher stress in the US than in Europe.
Where he does see pressure is in semi-liquid fund structures. Those vehicles, Klein suggests, are now being tested as anxious investors seek redemptions and managers impose withdrawal limits, which in turn increases investor unease. That feedback loop is the real issue, he said.
For Klein, there are two ways to read that dynamic. One is to see gated withdrawals as a run on funds where investors want to but can't get their money out. The other is to see those limits as the mechanism these products were always meant to use, offering only limited periodic liquidity so managers are not forced into fire sales that hurt remaining investors. He clearly leans toward the second interpretation.
Still, he thinks the bigger failure may lie in how these products were sold. His concern is that many buyers didn’t fully understand what semi-liquid actually meant, while some intermediaries had incentives to push the funds without bearing much risk themselves.
“I think that's something that obviously needs to be addressed. People need to know what they're buying, and people need to know how these funds operate,” said Klein. "But I think I would say more than the asset class being tested, it's the structures that are being tested at the moment, and more the distribution of those structures that are being tested.”
Yet, Klein sees two core strengths in private credit for institutional investors. The first is its yielding nature, particularly as the asset class delivers reliable, predictable distributions, typically on a quarterly or at least semi-annual basis. The second is its track record of valuation resilience, though he acknowledges that is now drawing heavy scrutiny, with questions about whether managers are marking assets too generously.
Still, he concedes there is room for more transparency around valuations but argues that for investors holding these assets to maturity, the mark matters less than whether capital is actually being lost.
"That's where private credit has been really strong. Less volatility in the marks but also less absolute loss rates. And that gives institutional investors predictability, allows them to match asset liabilities on their balance sheets," he said.
That predictability, in his view, remains the dominant reason institutions are drawn to the asset class and expects it to stay that way.
Looking ahead, Klein expects a modest increase in private credit allocations but no seismic shifts.
"I don't think that the current noise around the BDC's and redemption waves in the US is going to cause investors to reduce their exposure to private credit," he said, underscoring the real catalyst would be a pickup in deal flow and M&A activity. "Obviously, if the situation in the Middle East stays prolonged, oil prices remain high, that's going to have a knock-on effect on inflation, cost of food, et cetera. That's bad for any asset class."
"Get that merry-go-round of capital rolling, so that investors can recycle their capital into the same GPs, new GPs, expand their relationships. Whatever it may be, it is the velocity of capital that's key for the next 12 to 24 months," he said.
