What's Going on in Private Credit?

THE ARGUMENT

Direct lending has run the standard arc from useful innovation to overfunded crowd, and standards fell along the way. Marks argues the reckoning is arriving through an unexpected door — AI pressure on the software companies that direct-lending portfolios are unusually concentrated in — and that managers who declined to deploy into the rush are the ones positioned for what follows.

What it actually claims

1. The direct lending market grew from a niche into a scale that, by his account, could not have been filled by good borrowers alone.

   • •about $2 trillion of direct loans made over 15 years
   • •the entire private credit sector was about $150 billion 20 years ago

2. Direct lending carries far heavier software exposure than the public credit markets do, which turns a sector-specific AI shock into a portfolio-level one.

   • •software is 4-5% of high yield bonds
   • •10-15% of broadly syndicated loans
   • •20-30% of direct lending

3. Those software borrowers were financed at multiples and leverage that assumed durable growth.

   • •often acquired at EBITDA multiples of about 20x, with high leverage

4. The four-decade tailwind that made leveraged strategies work has not merely stopped but reversed.

   • •a 40-year, 2,000-basis-point decline in rates from 1980 to 2020, 22¼% to 2¼%
   • •fed funds went from zero to 5¼-5½% starting in 2022

5. Private equity returns have already lagged the public index over the recent period, undercutting the premium the asset class is sold on.

   • •MSCI: US private equity funds annualized 5.8% between 2022 and Q3 2025, versus 11.6% for the S&P 500

6. He discloses Oaktree’s own restraint in the same strategy he is describing, rather than writing from outside it.

   • •direct lending is less than 15% of Oaktree AUM
   • •just over $10 billion in public vehicles

Figures are the author's own, as cited in the memo.

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