> Private equity has to be effectively a 0 before private credit takes any losses

Technically yes. But the overlap between private equity as it's commonly described and private credit is slim.

> average "recovery rate" for senior secured loans is 80%

Oooh, source? (I'm curious for when this was measured.)

> A loan modified and extended with added PIK that ultimately gets repaid is not a "true" default

True. It's a red flag, nonetheless.

> Every Asset Manager today could go out tomorrow, mark NAVs down by 20% and suddenly there is no crisis

Correct. The question is if 20% is enough, and if a 20% markdown creates a vicious cycle as funding for e.g. re- or follow-on financing dries up.

You seem knowledgable about this. I'm coming in as an equities man. Would you have some good sources you'd recommend that make the dovish cash for private credit today?

> Oooh, source? (I'm curious for when this was measured.)

It depends when you measure, but you can Google around and find figures in the 60-80% range. 80% may have been a bit on the optimistic end of the range. But it's important to note that a "default" doesn't imply a 0.

Of course this will depend on the covenants, underwriting standards, type of collateral.

I would guess software equity collateral recovery rates are lower than hard assets like a building. (Which is why I personally don't like Software loans, nothing to do with AI)

> Correct. The question is if 20% is enough, and if a 20% markdown creates a vicious cycle as funding for e.g. re- or follow-on financing dries up.

I think it's almost certain that new fundraising for private credit will be materially hindered going forward. But this just limits the growth rate of these firms, does not introduce any "collapse" risk.

They may move from net inflows to net outflows and bleed AUM over a period of some years.

If NAVs were inflated previously, they may be forced to mark down the NAV to meet redemptions rather than using inflows to payoff older investors.

In the world of credit, 20% is an enormous haircut. Again, senior secured loans fell by around 30% peak to trough in 2008.

We have the public BDC market as a comparison point where the average price/book is around 0.80x. So the public market is willing to buy credit strategies at a 20% discount to stated NAV.

The real systemic risk here, if we were to reach for one, is really that these fears become self fulfilling.

If investors pull funds out of credit strategies en-masse, there is no first order systemic issue, but it means borrowers of many outstanding loans may not be able to secure refinancing as money is drying up.

This could lead to a self-fulfilling default cycle. But this would be a fear driven default cycle, there is no fundamental issue with cash flows of borrowers or otherwise (in aggregate, currently).

Finally, in regards to the asset managers themselves, many are quite diversified.

Yes, they have private credit funds, but many have real estate funds, buyout funds etc. OWL is one of the biggest managers of data center funds, for example (which they also got hammered for on AI bubble fears)

Given how depressed pricing is in public REITs, for example, I expect a lot of asset managers to pivot towards more real asset funds.