Private credit has grown from roughly $500 billion to over $3.5 trillion in global assets under management in approximately a decade, according to AIMA's Financing the Economy 2025 report. Capital has flowed in because the pitch is compelling: consistent income, reported low volatility, and insulation from public market swings.

The speed of that growth carries a question investors should examine carefully. Is the risk being fully understood, or do the very features that make private credit attractive obscure it?

IN BRIEF

Private credit's appeal — stable reported returns and low visible volatility — may mask risks that build gradually through covenant erosion, competitive lending pressure, and declining underwriting discipline. Because private credit does not reprice daily, deterioration in credit quality may not surface until losses arrive abruptly rather than gradually.

Why is cash a more expensive hedge than it appears?

The case for holding cash during uncertainty seems straightforward: preserve capital, reduce volatility, wait for clarity. But this framing treats risk as a single variable, the chance of loss. In practice, risk has two dimensions: the risk of losing capital and the risk of failing to grow it.

What do stable reported returns actually obscure?

Unlike public markets, private credit does not reprice daily. That creates a different perception of risk, not necessarily a different reality. Losses don't appear gradually. They surface later, and often more abruptly, than public market equivalents.

A portfolio showing 8% annual returns with minimal volatility for three consecutive years may be accumulating credit risk not yet recognized in the marks. When that risk surfaces through a borrower default, a covenant breach, or a broader credit cycle turning, the adjustment tends to be sudden.

As more capital has entered the space, competitive pressure has intensified. Deployment reached $592.8 billion in 2024, up 78% from the prior year. That surge in capital deployment has produced four predictable consequences:

1. Lending standards loosen. Borrower quality thresholds decline as managers compete for deal flow. Credits that would not have been approved three years ago are now funded at comparable terms.

2. Covenant protections weaken. Covenant-lite structures (loans with fewer borrower restrictions and reduced lender intervention rights) were once confined to the broadly syndicated loan market and the largest borrowers. They have since moved downstream into the middle market. For borrowers above $100 million in EBITDA (earnings before interest, taxes, depreciation, and amortization), maintenance covenants are increasingly negotiated away. This reduces the lender's ability to intervene early when a business deteriorates.

IMF research confirms the trend: covenant-lite loans now dominate new issuance across the leveraged lending market. In 2024, covenant-lite loans accounted for 85% of all leveraged loan defaults, up from 54% in 2023, as these weaker structures now dominate both the stock and the default population.

Covenant-Lite Defaults Chart
Covenant Erosion in Numbers
Covenant-lite loans as a share of all leveraged loan defaults
In 2024, covenant-lite loans accounted for 85% of all leveraged loan defaults, up from 54% in 2023, as these weaker structures now dominate both the stock and the default population.
Source: IMF research; PitchBook LCD data.
Behavioral Patterns That Undermine Protection
Three traps — each with a hidden compounding cost
Understanding these is necessary. Applying the structural tools when markets are falling sharply is harder.
Selling based on price, not thesis
When a high-conviction position declines 15% or 20%, the instinct to sell is strong. But if the investment thesis is intact — if the leadership team is still executing and the capital allocation framework is unchanged — selling locks in a temporary loss and eliminates the position's participation in recovery. Capital protection means having the analytical framework to distinguish between a price decline that reflects deteriorating fundamentals and one that reflects temporary market stress.
Hidden Cost
Locks in a temporary loss and eliminates participation in recovery
Hedging after volatility has already increased
The most common hedging mistake is purchasing protection after option premiums have already risen — when the cost of hedging is highest. Effective hedging programs are maintained through calm periods when the cost is low, not initiated during panic when the cost is prohibitive.
Hidden Cost
Pays the highest premium at the worst moment — protection when it costs most and helps least
Treating all risk as equivalent
A 15% decline in a company with strong leadership and improving fundamentals is a different situation than a 15% decline in a company where the CEO is making increasingly aggressive capital allocation choices. Treating both the same — reducing exposure to both equally — sacrifices the position with the highest expected recovery while maintaining the one with the highest fundamental risk.
Hidden Cost
Exits the best recovery candidate; holds the position with the highest fundamental risk

How capital protection connects to long-term portfolio construction

Capital protection is about maintaining a portfolio structure that can absorb setbacks, act on opportunities, and compound capital through full market cycles.

What makes an investment strategy durable over time is the same set of structural disciplines that protect capital in the short term: dynamic sizing, selective hedging, leadership screening, and the analytical framework to distinguish temporary price declines from genuine deterioration. Applied consistently, not reactively.

For family offices, endowments, and foundations evaluating how to allocate capital in uncertain markets, the structural approach to protection is more reliable than the timing approach. The investors who have historically preserved and grown capital through volatile periods were not the ones who predicted market direction correctly. They were the ones whose portfolio structure could absorb the surprises they did not predict.

We assess leadership quality,
capital allocation discipline,
and decision-making patterns

We build portfolio structures around those assessments that protect capital without requiring us to predict market direction. If you're thinking about how to structure your portfolio for protection and participation, we're always open to a thoughtful conversation.

Schedule a Confidential Discussion

Cash eliminates the first and guarantees the second.

JPMorgan Asset Management's Guide to the Markets, one of the most widely referenced datasets in institutional investing, tracks what happens to a hypothetical $10,000 investment in the S&P 500 depending on whether the investor stays fully invested or misses the strongest recovery days. Their data shows that $10,000 invested in 2005 would have grown to approximately $71,750 by the end of 2024 if the investor stayed fully invested. Missing just the 10 best trading days over that period would have cut the ending value to roughly $32,871. That is a 54% reduction in total accumulated wealth from missing fewer than 0.2% of trading days. Missing the best 60 days would have left the investor with less than the original $10,000.

Why has private credit become a core allocation?

The appeal is straightforward. Private credit has offered advantages difficult to find elsewhere in recent years.

Yield above public fixed income. With public bond yields compressed for much of the past decade, private credit offered a meaningful premium. T. Rowe Price research, which compares new-issue spreads between private direct lending and broadly syndicated loans from 2019 onward, found a persistent premium of 150 to 340 basis points (1.5% to 3.4%), compensating lenders for illiquidity and complexity.

Reported low volatility. Because private credit positions are not marked to market daily, reported return streams appear smoother than public equivalents. For investors whose boards or investment committees evaluate portfolio performance quarterly, that smoothness is attractive.

Structural protections. Historically, private credit transactions included maintenance covenants, lender-favorable terms, and meaningful recourse provisions. These gave lenders genuine influence over borrower behavior and early warning when businesses deteriorated.

Each of those advantages, however, rests on assumptions that deserve scrutiny.

Global Private Credit AUM Growth Chart
A Decade of Expansion
Global private credit AUM — approximate growth trajectory ($B)
The speed of that growth carries a question investors should examine carefully. Is the risk being fully understood, or do the very features that make private credit attractive obscure it?
Source: AIMA Financing the Economy 2025. Pre-2024 figures are approximate interpolations based on the cited growth trajectory in the report.
Capital Protection Framework
Six structural tools — how Eagle Talon structures protection
Each mechanism replaces a reactive, emotion-driven decision with a pre-built analytical framework.
1
Dynamic position sizing
Position sizes adjust based on conviction and market conditions, not based on fear. When analytical confidence in a holding is high and valuation is attractive, the position is larger. When conviction is lower or valuation is stretched, the position size shrinks. This differs fundamentally from reducing all positions by the same percentage, which treats every holding as equally risky regardless of its specific characteristics.
2
Selective hedging through options
Options are a precision tool for managing specific risks without liquidating positions. A put option on a concentrated position protects against a defined downside scenario while keeping the position intact to capture upside. The cost of the hedge is explicit and bounded, unlike the implicit and open-ended cost of selling the position entirely. Cambridge Associates found that systematically buying put options eroded almost two-thirds of equity returns over nearly thirty years. Selective hedging, by contrast, targets specific positions where the risk is identifiable and the cost of protection is justified.
3
Long/short flexibility
The ability to hold short positions alongside long ones reduces the portfolio's overall sensitivity to market direction. A carefully selected short position — typically in a company where leadership quality has deteriorated or capital allocation discipline has weakened — can generate returns in declining markets. Those returns offset losses in long positions. This flexibility means overall exposure adjusts without liquidating high-conviction holdings.
4
Cash as deliberate optionality
When cash is held, it should be held with a specific deployment thesis, not as a general hedge. Optionality cash is available to deploy into dislocations — into positions that become available at attractive valuations during market stress. The distinction between defensive cash (held out of fear) and optionality cash (held for deployment) is worth maintaining explicitly.
5
Leadership-quality screening as the primary risk filter
The most effective form of downside protection is owning companies led by management teams that navigate difficulty well. This is where our approach diverges most from conventional capital protection. CEOs who maintain discipline in how they allocate capital when revenue growth decelerates, who resist the temptation to pursue acquisitions that mask organic weakness, and who hold their course despite short-term market pressure typically lead businesses that emerge stronger from difficult periods. Companies led by weaker management teams often emerge diminished. We use leadership assessment as a primary risk management filter, not just an investment selection tool. In our experience, the quality of decision-making at the top of a company is the single most underpriced variable in institutional investing.
6
Systematic income generation through options
We opportunistically sell calls and puts against core positions, functioning as a market maker buying and selling around the edges of holdings we know well. During choppy, range-bound markets, this generates consistent income that compounds alongside the portfolio's long-term returns. It also reinforces disciplined behavior: selling calls at prices where we would be willing to trim and selling puts at prices where we would be willing to add. The strategy embeds buy-low, sell-high discipline into the portfolio's structure, replacing emotional reactions to irrational market movements with predefined decision points.

Which signals should shape portfolio exposure decisions?

Rather than watching market direction, we focus on signals that indicate when and how to adjust exposure:

Portfolio Exposure Signals
Four signals to watch — not market direction
These are the indicators that actually tell you when and how to adjust. Market direction is noise; these are signal.
Changes in leadership behavior at portfolio companies
When a CEO's tone on earnings calls shifts from specific to vague, when capital allocation priorities change without clear explanation, when execution becomes inconsistent — these behavioral signals often precede the financial deterioration that drives stock price declines. Identifying these shifts early is the most effective form of capital protection available to fundamental investors.
Volatility levels and hedging costs
The cost and effectiveness of hedging tools change significantly across different market environments. Maintaining hedging programs when volatility is low and adjusting them when volatility spikes is a structural discipline, not a timing decision.
Conviction levels across the portfolio
Regular reassessment of analytical conviction — not just price performance — determines whether position sizing should adjust. A position where conviction has declined warrants reduction regardless of whether it is showing a gain or loss.
Emerging dislocations as deployment opportunities
The most attractive entry points tend to emerge during periods of market stress. Having optionality cash available and a pre-built watchlist of high-quality companies at defined entry points turns market dislocations from threats into opportunities.

What behavioral patterns typically undermine capital protection efforts?

Understanding these tools is necessary. Applying them when markets are falling sharply is harder. Three behavioral patterns tend to undermine capital protection, and each carries a hidden cost: