CONTRIBUTORS
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
In the latest episode of the Alternative Allocations podcast, I sat down with Anant Kumar, Global Investment Strategist, Benefit Street Partners. Anant and I discussed all of the commentary and speculation around private credit and tried to separate the noise and reality. Private credit has been in the news quite a bit lately, but a lot of the commentary has not been accurate and creates undue concerns for advisors and investors.
We began our discussion by addressing some of the noise surrounding private credit over the past few years. In particular, I asked him about Jamie Dimon’s infamous “cockroach” comment suggesting there was a systemic risk. Anant was quick to point out that the two companies that generated the initial headlines in 2025 and 2026—First Brands and Tricolor—were not traditional private credit transactions, and both companies were found to have committed fraud.1 (For more information see our paper: “Public Insights on private credit: Only one of private credits ‘four horsemen’ is real.”)
Both Benefit Street Partners and the Franklin Templeton Institute have been tracking default rates in private credit. We see no evidence of mass defaults and believe that any issues will likely be isolated.
Direct Lending Default Rates Have Been Considerably Below Broadly Syndicated Loans Since 2021
Sources: JPM Research, Cliffwater Direct Lending Index. Benefit Street Partners (BSP). As of December 31, 2025.
Note: Views expressed are those of BSP. *JPM US Loan default rates including distressed exchanges. Indexes are unmanaged and one cannot directly invest in them. Past performance is not an indicator or a guarantee of future results. Important data provider notices and terms available at www.franklintempletondatasources.com.
The second issue that we wanted to address was concerns regarding the concentration of Software-as-a-Service (SaaS) in private credit. The concern was triggered by the pronouncement from Anthropic’s Claude in early 2026 that SaaS would become obsolete given the impact of artificial intelligence (AI). (See our paper “Software-as-a-Service selloff and the implications for private markets” for further analysis.)
Anant noted that AI will impact all industries. Companies will need to evolve, and some will be more dramatically impacted than others. He went on to distinguish between horizontal and vertically integrated software. “Horizontal software is software that can be used across multiple industries. Think about generic, general-purpose software, like something from the Adobe suite, Microsoft Teams or Excel or PowerPoint. Many different industries can use the same piece of software for their use cases. That is horizontal software.”
“Vertical software is more niche. It is tied to a particular industry and is specialized for that industry. Bloomberg is vertical software that is applicable to financial services companies.” He noted that “The horizontal software companies are the ones most ripe for disruption because they're making generic software and the cost of making software, which used to be their moat, has come down.”
The bottom line is not all companies will be impacted uniformly. Some companies will evolve and others will be disrupted. We shouldn’t paint them all with the same brush.
The last issue that we tackled was the one that I have heard about the most in my travels: the liquidity of private credit funds. Specifically, advisors and investors are concerned with business development companies that limited their redemptions. This issue has been exacerbated by marketing evergreen funds as “semi-liquid,” when in fact, the underlying investments are illiquid.
Anant and I both feel that the fund structure has worked as designed. These funds should be viewed as long-term investments that have quarterly liquidity provisions for changes in client circumstances. Advisors and investors should view these fund structures differently from their liquid mutual fund cousins.
In order to allow the managers to execute their long-term strategy, and unlock value, they need the freedom to tie up capital for an extended period of time. Managers will maintain a “liquidity sleeve” to meet anticipated redemptions. If they were required to be daily liquid for the entire fund, they wouldn’t be able to allocate capital to the private markets. This is part of the tradeoff with private markets.
We both suggest that advisors address the inherent nature of private markets upfront. These are illiquid investments. Over the long run, private markets have delivered an illiquidity premium relative to their public-market equivalent. (See “The cost of being too liquid” for further analysis.) Investors therefore need to change their mind-set, adopting a “patient capital” approach.
Given all of the noise surrounding private credit, and the misinformation being spread, we encourage everyone to listen to this thoughtful episode. To keep apprised of the changing private markets landscape, please subscribe to the Alternative Allocations podcast wherever you get your podcasts.
If you missed this episode, or any of the previous Alternative Allocation podcast episodes, don’t forget to subscribe wherever you get your podcasts. We encourage you to subscribe so you never miss an episode.
Endnote
- Source: US Department of Justice.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Past performance does not guarantee future results.
Investments in alternative strategies may be exposed to potentially significant fluctuations in value.
Investment strategies involving Private Markets (including investments in private companies and/or securities) are complex and speculative, entail significant risk, should not be considered a complete investment program, and are suitable only for persons who can afford to lose their entire investment. Such strategies may have limited liquidity in both the investment products and their underlying investments. Underlying investments may never list on a securities exchange and lack available information due to their private nature. These factors may negatively impact such investments’ market value and a manager’s ability to dispose of them at a favorable time or price. Additionally, certain investment fund types mentioned are inherently illiquid and suitable only for investors who can bear the risks associated with the limited liquidity of such funds. Such funds may only provide limited liquidity through quarterly repurchase offers that may be suspended at the discretion of the manager or the fund’s board. There is no guarantee these repurchases will occur as scheduled, or at all. Shareholders may not be able to sell their shares in the Fund at all or at a favorable price.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Diversification does not guarantee a profit or protect against a loss. Past performance does not guarantee future results.
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