The Case for Private Credit: Why Structure Is Everything 

Private credit: opportunity, but not uniformly so 

Private credit continues to attract significant attention. Headlines have oscillated between warnings of systemic stress and enthusiasm for the asset class’s long‑term growth, alongside isolated cases of fraud within the London market. For investors, the more productive question is no longer whether private credit deserves a place in a portfolio, but which part of it does, and why that distinction matters more today than it did even a year ago. 

An asset class that is not one thing 

Private credit is often discussed as though it were a single, homogeneous category. It encompasses a broad and heterogeneous ecosystem: sponsor‑backed direct lending, growth and technology finance, leveraged loans, venture credit, real estate lending, and an expanding range of specialty and asset‑backed strategies. These segments differ materially in their risk drivers, collateral frameworks, refinancing dependence, and sensitivity to economic conditions. 

Legal protections for lenders also vary significantly by jurisdiction, with the US and Europe differing markedly in enforcement, recovery processes, and creditor rights. 

In benign environments, these distinctions can appear secondary. When conditions tighten, they become decisive. Credit cycles rarely create new weaknesses; they expose those embedded during periods of abundant liquidity. 

What the current environment is revealing 

Recent market conditions have brought several structural features of private credit into sharper focus. In direct corporate lending, a large cohort of loans originated in 2021 and 2022 is now refinancing at materially higher rates, creating stress in weaker or more highly leveraged borrowers. Payment‑in‑kind mechanisms – while not inherently problematic – have become more prevalent, often signalling liquidity management rather than underlying cash‑flow strength. Historically, such patterns have preceded broader deterioration in credit quality. 

Performance dispersion between managers is also widening. AI‑driven disruption is affecting software‑heavy portfolios. Yields in parts of the direct lending market have normalised as capital inflows compress the premium that once made certain strategies compelling. Meanwhile, recent governance failures in parts of the UK lending market have reinforced a familiar lesson: opacity in lending structures carries real cost when conditions tighten. 

None of this argues against private credit. It argues for precision in what is owned. 

The structural case for asset‑backed finance 

Against this backdrop, asset‑backed finance has attracted renewed and well‑founded interest. These strategies are secured against pools of underlying assets – such as equipment, receivables, consumer credit, and real estate – rather than a single borrower’s enterprise value and projected cash flows. That distinction is consequential. 

The structural tailwind behind asset‑backed lending has been building for over a decade. Post‑GFC regulation increased capital and risk‑weighting requirements for banks, making many asset‑intensive lending activities less attractive. Following the regional banking stress of 2023, this retrenchment accelerated. Private capital still represents a modest share of a large global asset‑backed lending market, and that gap continues to widen as banks pull back. Structural under‑penetration is precisely where durable opportunity tends to reside. 

Asset‑backed structures also offer meaningful diversification. Rather than concentrating risk on a single borrower, collateral pools comprise many individual cash‑flow streams backed by a wide range of assets. Performance depends on borrowers making scheduled payments, a dynamic driven more by employment and household balance sheets than by corporate strategy or competitive positioning. 

A further advantage lies in capital recovery. In corporate direct lending, principal is typically returned in a single bullet payment at maturity, concentrating refinancing risk. Asset‑backed investments, by contrast, naturally deleverage through self‑amortising cash flows, returning capital progressively over time without reliance on favourable exit markets. In an environment where refinancing conditions remain uncertain, this characteristic matters. 

How we approach private credit at Hundle 

At Hundle, private credit exposure is deliberately concentrated in real estate and asset‑backed lending structures where downside protection is established at origination, not inferred later. We focus on first‑lien senior positions, conservative loan‑to‑value ratios – typically 45-65% LTV – and clearly identifiable, verifiable collateral. Income is expected to derive from contractual cash flows rather than refinancing assumptions or growth projections, and recovery pathways are underwritten before capital is deployed. 

Within the UK market, we prioritise senior secured structures with shorter contractual durations, between four and twenty‑four months. This reduces exposure to regime changes, improves visibility over capital recovery, and allows portfolios to adapt as conditions evolve. The UK and European legal environment typically provide stronger lender protections than comparable US structures, a factor we explicitly incorporate when underwriting downside scenarios. Diversification across borrowers, sectors, and collateral types, combined with disciplined position sizing, remains central to our approach. 

Recent failures in the UK lending market, including the widely discussed MFS case, we view as isolated instances of governance failure and fraud rather than evidence of systemic weakness. They illustrate the risks inherent in opaque structures where collateral verification and monitoring are insufficient. They also highlight why our emphasis on transparency, independent validation, and ongoing oversight is not optional but foundational. Periods of stress tend to reward higher‑quality operators, and we believe they create opportunities for disciplined managers to gain market share. 

Private credit within the broader income framework 

Private credit complements, rather than dominates, our income allocation. Short‑duration investment‑grade fixed income provides liquidity and capital resilience, particularly as longer‑dated bonds have proved less reliable as defensive hedges amid persistent inflation and fiscal pressure. We have therefore concentrated fixed income exposure in shorter‑duration instruments offering attractive carry with lower rate sensitivity. 

Asset‑backed private credit, structured with shorter horizons and contractual cash flows, sits alongside this allocation. Together, they form a diversified income framework that avoids reliance on any single return driver and is designed to remain resilient across varying macro conditions. 

Selectivity as the source of return 

The key distinction for investors today is not between public and private credit, but between lending structures that rely on favourable market conditions – open refinancing markets, stable sentiment, and sustained growth – and those supported by robust collateral and contractual cash flows that can absorb stress.  Across credit cycles, outcomes follow a consistent logic. Seniority determines access to collateral; loan‑to‑value defines the buffer against loss; duration shapes exposure to regime change. These structural characteristics determine whether portfolios are positioned to withstand credit stress or become exposed to it. 

Private credit remains an attractive allocation. The case for it has not weakened but it has become more selective. At Hundle, it is this structural selectivity, applied with discipline, that defines our approach and underpins our conviction in the asset class.