"Not all software is created the same. And the challenge is going to be some of the software companies that will have terminal value questions we won't see that for several years because today these credits are performing just fine." - Alex Blostein [00:03:59]
"It's credit. It's not equity. And do I think fundamentals will likely deteriorate from here? Are we going to see more headlines? Yeah... partially because defaults have been zero. They have literally nowhere to go but up." - Alex Blostein [00:06:54]
"There's a common denominator here that the 5 percent redemption limit is the choice of the manager. So, they're not necessarily going to be forced to redeem people at what the ask is." - Alex Blostein [00:10:37]
"We don't use the word semiliquid. We understand what people mean when they use that word. But the reality is that it's not semiliquid, it's illiquid." - Vivek Bantwal [00:22:15]
"For every article that you read or that you might read about something going wrong in private credit... there's 98.5 other companies that are paying their bills on time where there's not an issue." - []
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"If you take a 15 percent default rate and you have a 50 percent recovery value, that means that you've lost 7.5 points... So if you make a 2.5 percent return instead of a 10 percent return... that might not be the worst place to be." - Vivek Bantwal [00:27:20]
The private credit asset class is facing intense market scrutiny driven by rapid AUM expansion, fears of AI disrupting heavily backed software portfolios, and rising redemption requests from retail investors.
Despite negative media narratives conflating broadly syndicated loan fraud with direct lending, the underlying fundamentals of the $3.5+ trillion private credit market remain structurally sound due to massive equity subordination.
Systemic risk and "fire sale" fears are largely contained; retail capital constitutes less than 20% of direct lending assets, and fund managers possess mechanisms like a 5% redemption cap to buffer liquidity shocks.
While aggregate nonaccrual and default rates remain below historical averages, dispersion between asset managers will widen significantly in a downturn, creating attractive opportunities for platforms heavily weighted toward institutional capital and proprietary underwriting.
Part 1: Alex Blostein's Analysis (Goldman Sachs Research)
Market Sizing & The Software Sub-Sector [00:02:00]
The private credit market has exploded, expanding at an annual rate of 15% for the past five-plus years, ballooning into an opaque $3.5+ trillion asset class [00:02:00].
Direct lending comprises approximately $1.6 to $1.7 trillion of this total, with software-related businesses accounting for roughly 25% of that exposure [00:03:46].
Despite headlines about AI disruption, the structural reality of credit relies heavily on subordination; current loan-to-value (LTV) ratios sit between 30% to 40% [00:04:39].
This LTV metric explicitly means that 70% of a software company's enterprise value must be wiped out before the primary loan provider begins to lose capital [00:04:47].
Portfolio fundamentals are currently strong: there has not been a significant increase in non-accruals or PIK (Payment in Kind) dynamics across the space [00:04:25].
Even amidst public markets discounting software valuations by 50%+, cumulative private credit default rates remain far below the Global Financial Crisis (GFC) highs, where defaults hit 10% and recoveries were 50%, netting a manageable 5 to 6 point loss [00:05:46]. This risk is currently counterbalanced by portfolios yielding coupons of 9% to 10% [00:06:10].
Liquidity Dynamics & The Retail vs. Institutional Divide [00:07:36]
Redemption panics are overwhelmingly concentrated in the retail channel, but retail represents less than 20% of total direct lending assets [00:08:03]. Over 80% of industry assets are institutional and structurally blocked from sudden liquidation mechanisms [00:08:08].
Retail growth sales have plunged, running at a 50% lower run rate compared to 2025 [00:08:40].
Simultaneously, retail redemptions spiked to an unannualized rate of 10% in the first quarter [00:08:50].
Funds have the explicit authority to enforce a 5% redemption cap, which places investors in a queue that will likely take a year or more to resolve, keeping evergreen retail funds in net outflows through 2026 and 2027 [00:08:55].
Fears of systemic "fire sales" are mathematically unsubstantiated; retail vehicles hold roughly $230 billion in Net Asset Value (NAV), projecting $50 to $70 billion in total net outflows [00:10:58].
This gap can be effectively bridged by the industry's existing $40 to $45 billion in liquid holdings, standard loan maturities, and available credit facilities without dumping illiquid assets at distressed prices [00:11:14].
As retail money flees, institutional dry powder will exploit widening spreads, creating highly compelling returns for subsequent fund vintages [00:09:53].
Additionally, dormant sectors of the credit market—such as special situations, opportunistic funds, restructuring, and mezzanine debt—will experience a resurgence as mature software companies require complex refinancing structures that standard direct lending can no longer support [00:15:19].
Part 2: Vivek Bantwal's Analysis (GSAM)
AI Disruption & Software Credit Underwriting [00:17:04]
Goldman Sachs Asset Management has actively evaluated software credits through an AI-disruption lens since 2023, when they rejected their first deal based on generative AI terminal value risks [00:17:17].
Public markets display immense dispersion: while average public software equities are down 30%, public credit reactions are muted—Single B names are down only 9.5 points, and Double B names have dropped a mere 2.5 points [00:17:40].
Underwriting mechanics provide intense downside protection. Traditional direct loans are underwritten at roughly 6 times Debt-to-EBITDA with entry LTVs under 30% [00:18:26].
If a borrower's valuation multiple compresses massively from 24x to 16x EBITDA, the lender remains entirely whole because they only hold the first six turns of EBITDA risk [00:18:32].
Protective credit frameworks prioritize software companies that possess proprietary data, own their end-customer relationship, or act as the critical "system of record" with high switching costs [00:18:57].
The Illiquidity Premium & Market Semantics [00:21:26]
Private credit fundamentally trades at a 150 to 300 basis point premium over public credit explicitly to compensate for illiquidity [00:22:08].
The industry has done investors a disservice with marketing terminology; GSAM explicitly bans the term "semiliquid" because these assets are definitively illiquid, and interim liquidity features should not be confused with systemic market liquidity [00:22:15].
As retail capital cycles out, the incumbent institutional base will capture a progressively more lender-friendly spread environment, reinforcing the core value of locking up capital across market cycles [00:21:00].
Default Realities, Stress Testing, and ARR Vulnerabilities [00:23:51]
Media narratives frequently conflate fraud in broadly syndicated loan markets with direct lending Business Development Companies (BDCs), where instances of actual fraud remain virtually nonexistent [00:24:22].
Broadly syndicated loans have a current default rate of 1.3%; this rises to roughly 4% when factoring in creditor-unfriendly liability management exercises [00:25:03].
By contrast, the nonaccrual rate for the top 20 BDCs sits at a remarkably low 1.54% [00:25:25]. GSAM's specific nonaccrual rate currently sits at just 12 basis points [00:26:05].
Even running a "Draconian Downside Scenario" assuming an unprecedented 15% default rate and a devastated 50% recovery rate (down from historical 75%+ averages), the aggregate portfolio loss would be 7.5 points [00:27:20].
Against an average historical return of 10%, this apocalyptic scenario still yields a positive 2.5% return—a highly favorable outcome compared to public equities (e.g., the S&P 500) which plummeted 50% during the GFC [00:27:36].
The singular pocket of intense caution remains ARR (Annual Recurring Revenue) Loans—credits underwritten on revenue multiples for non-cash-flowing companies, which face existential threats if AI disruption prevents them from ever achieving cash flow positive status [00:28:35].
The path forward for the asset class will be driven by higher returns for remaining investors and continued robust earnings reports showing double-digit revenue/EBITDA growth and improving fixed charge coverage ratios [00:29:53].
The Equity Cushion & Multiple Compression Defense [00:18:26]: A mental model for assessing true credit risk during valuation sell-offs. Because lenders only occupy the "first six turns of EBITDA" on a company valued at 24x EBITDA, the enterprise value multiple can compress dramatically (e.g., down to 16x or even 10x EBITDA) without touching the debt tranche. The vast equity cushion absorbs all the initial disruption shock.
The Illiquidity Premium vs. "Semiliquid" Fallacy [00:22:15]: A marketing and structural framework that demands intellectual honesty. Private credit compensates investors with a 150-300 bps premium strictly because the underlying capital cannot be easily sold. Using euphemisms like "semiliquid" creates dangerous behavioral mismatches during panic cycles; true stability requires sizing allocations based on absolute, long-term illiquidity tolerance.
The Defensive Software Resiliency Model [00:18:57]: A framework for underwriting AI-vulnerable technology. A software credit is deemed defensively viable if it possesses three moats: (a) Ownership of proprietary data, (b) Direct ownership of the end-customer relationship, and (c) Acting as the critical "system of record" where the operational or regulatory cost of a client switching providers is punitively high.
The 2023 Generative AI Deal Rejection [00:17:17]: To illustrate that platforms are proactively rather than reactively dealing with AI risk, Vivek Bantwal points out that GSAM actually passed on their first private credit software deal explicitly due to fears of AI disruption back in 2023, well before the recent retail panic began dominating headlines.
The Global Financial Crisis Precedent [00:05:46]: Alex Blostein uses the ultimate modern stress test—the GFC—to ground current fears. He notes that even during the complete meltdown of the levered lending space, cumulative default rates capped at 10% and recoveries held at 50%. The resulting 5 to 6 point loss on capital stands in stark contrast to public equities which lost half their value [00:26:31], proving that the top of the capital structure remains highly insulated even in catastrophic conditions.
Goldman Sachs Research: Macro research division tracking alternative asset manager stocks and market-wide AUM flows.
Goldman Sachs Asset Management (GSAM): The investing arm heavily involved in deploying direct lending and private credit capital.
Business Development Companies (BDCs): Publicly traded pools of capital that buy levered loans, acting as a real-time proxy and pricing mechanism for the broader opaque private credit market.
PIK (Payment in Kind): A financing dynamic where debt interest is paid with additional debt rather than cash, used as a barometer for borrower distress.
Liability Management Exercises: Strategic financial maneuvers by distressed companies that are often creditor-unfriendly, serving as a critical nuance when calculating true default rates in the syndicated market.
ARR (Annual Recurring Revenue) Loans: A high-risk segment of lending focused on non-cash-flowing software companies underwritten solely on revenue multiples.
S&P 500: Referenced as a benchmark for severe public equity drawdown risk (down 50%) during systemic financial crises compared to credit markets.
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GFC Default Peak
10%
The cumulative default rate across levered lending during the Global Financial Crisis.