Masters in Business · Wednesday, August 5, 2026
Mike Kelly addressed concerns about a potential private credit bubble, arguing that growth has kept pace with the economy and market share has shifted from banks to direct lenders. He acknowledged pockets of crowdedness and loosening covenants, particularly in large-cap lending and software exposure, which led to some redemptions. However, he maintained that private credit remains valuable for generating income and that illiquidity, while a trade-off, is a feature that allows for enhanced returns, emphasizing the need for investors to have a long-term horizon (4-5 years or more).
“So I'd start by saying that there is a misconception that private credit generally is becoming a bubble. And I consider myself a student of history and calamities, and I try to think about and if you look at the build of what we call private credit, the asset management's direct lending to private companies matching up against you know, various you know situations in the past where we had true bubbles, you had an outgrowth of capital versus the economic driver of activity. We don't have that today.”
“Now, having said that, in this search for yield that we talked about, there was an outgrowth of evergreen strategies and selling to the private wealth community, particularly within private credit strategies, in this demand for income, and we did see an explosion and concentration and crowdedness in particular funds and pockets of large cap lending that did result in you know, very tight spreads, covenants being loosened, an increase in paying kind or pick over cash financing, and we also sort of a concentration of lending to software companies as rates were being cut and distributions were being cut.”
“Well, I'd start by saying by investing is all about trade offs. There's no right or wrong, no black or white. You know, alternatives aren't better than traditional in forms of investing. There's just trade offs. And the trade offs within private market strategies and the structures that offer them is that you have the advantages of the potential for enhanced return through an illiquidity premium or enhance diversification from your public holdings. The tradeoff of that is these are ill liquid strategies, They are complex, and they are higher fees than public market strategies. ETFs and indices and things of that nature, and so you have to balance those before determining whether or not the trade offfs make sense for you, for your clients, for an institution, what have you.”
“And so the determination of suitability is at the advisor level, and I think that's where it sits. You could make the argument that this should be relegated to those with net worth or income of a certain bracket of level. The regulators, you know, have their policies on that. But when it gets a little bit fuzzy where someone is accredited but may or may not be suitable, I think the advisor is most positioned to be able to and we would rather have fewer but more suitable investors or as a client base than more and less suitable investors as our client base.”