The meteoric rise of the private credit market has been one of the most significant shifts in global finance over the last decade. As traditional banks pulled back from mid-market lending due to stricter regulatory requirements, private equity firms and specialized lenders stepped in to fill the void. This shift has created a multi-trillion-dollar industry that many proponents claim is more stable than public markets. However, Dan Rasmussen, the founder and portfolio manager of Verdad Capital, is sounding a sophisticated alarm that suggests the optimism surrounding this asset class may be dangerously misplaced.
At the heart of the concern is the fundamental lack of transparency and the potential for skewed valuations within private portfolios. Unlike public debt markets, where prices are discovered through constant trading and real-time data, private credit relies heavily on quarterly appraisals. Rasmussen argues that this creates a ‘volatility laundering’ effect. By failing to mark assets to market during periods of economic stress, lenders can maintain the appearance of stability even when the underlying credit quality of borrowers is deteriorating. This artificial smoothness can lead investors to believe they are holding a lower-risk asset than they actually are.
The current macroeconomic environment adds a layer of urgency to these warnings. For years, private credit thrived in a world of near-zero interest rates. Borrowers could easily service their debt, and lenders enjoyed consistent returns. But as central banks raised rates to combat inflation, the cost of servicing floating-rate loans jumped significantly. Many of the companies tapping into private credit markets are highly leveraged mid-sized enterprises that lack the diversified revenue streams of larger corporations. Rasmussen points out that these firms are now facing a double whammy of higher interest expenses and slowing economic growth, which puts their ability to repay at serious risk. 
Furthermore, the structure of the private credit market itself may be contributing to systemic fragility. Because these deals are negotiated behind closed doors, the true level of leverage and the specific covenants—or lack thereof—are often obscured from the broader market. In recent years, competition among lenders to deploy dry powder has led to ‘covenant-lite’ agreements that offer fewer protections for investors. If a wave of defaults were to occur, the recovery rates might be significantly lower than historical averages because lenders have signed away their ability to intervene early when a borrower’s financials begin to sour.
There is also the issue of liquidity. One of the primary selling points for private credit is the premium earned for locking capital away. However, in a systemic downturn, the inability to exit positions can turn a manageable problem into a crisis. If institutional investors like pension funds or insurance companies suddenly need to raise cash, they cannot easily liquidate their private debt holdings. This could force them to sell their most liquid public assets, such as stocks and government bonds, potentially triggering a wider market sell-off. Rasmussen’s critique suggests that the illiquidity premium may not be high enough to compensate for the structural risks currently embedded in these portfolios.
While industry advocates argue that private credit lenders have closer relationships with borrowers and can navigate restructurings more efficiently than public bondholders, Rasmussen remains skeptical. He suggests that the sheer volume of capital that has flooded into the space has inevitably led to a decline in underwriting standards. When too much money chases too few quality deals, the result is almost always a mispricing of risk. For Rasmussen, the narrative that private credit is a safe haven from market volatility is a facade that will eventually be pierced by the reality of rising defaults.
As the credit cycle matures, the distinction between perceived safety and actual risk will become clearer. Investors who have flocked to private credit in search of yield may find that the lack of volatility was merely a delay in accounting for losses. By highlighting these discrepancies, Dan Rasmussen is providing a necessary counter-narrative to the prevailing Wall Street sentiment, urging a more disciplined and realistic appraisal of an asset class that has grown too large to ignore.
