Global Perspectives: Private Credit myths versus market realities

Lara Castleton: Thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications that they have for investors. I’m your host for the day, Lara Castleton, and today we’re cutting through the headlines on private credit. More and more clients are allocated into this space, especially as we’ve seen a continued surge in AI debt financing that doesn’t seem to be slowing down. But our clients are concerned whether the timing is right and are looking for insights into what type of private credit offers attractive opportunities today. To talk about the environment, I’m thrilled to be joined by Brendan Carroll, senior partner and co-founder of Victory Park Capital, a firm that Janus Henderson took a majority stake in last year as we wanted to expand our capabilities into private credit. Brendan, thank you for being here.

Brendan Carroll: All right, thanks for having me.

Castleton: So, let’s just address the headlines up front. Every day there seems to be a new one about private credit being a bubble. Can you talk about what you see on the ground and the truths and facts behind that statement?

Carroll: Sure. Not all private credit is created equal. Corporate lending is very different from real estate lending, which is very different from asset-backed lending. And a few instances in the press don’t necessarily define trends across the entire industry. For our type of private credit in terms of asset-backed lending, we still feel very comfortable about where we are. The situations that have been in the press recently have been situations where there was nefarious activity, fraud, if you will, and while that’s grabbing headlines, that doesn’t mean that the rest of the industry has those same issues. So, we still feel very good about where we are in the asset class.

Castleton: And it’s probably fair to say we need to take a historical view of where we’ve been. It’s probably okay if we do see a couple of companies defaulting. That is normal. So that, again, does not mean the entire system is broken.

Carroll: No. Defaults happen. You go into lending expecting certain types of defaults. Now, it’ll vary between those different types of lending that I’ve mentioned, whether it’s real estate or asset-backed or sponsor-backed lending, but defaults happen and defaults are expected. It’s more around, are you building your portfolio or are you structuring your loans in such a way that are expecting a certain level of default so that you’re protected against it?

Castleton: Perfect. So that’s what I want to get into then a little bit with you. Victory Park specializes in what you had just mentioned, asset-backed lending. Most clients that we’re talking to when we’re doing portfolio calls, think of private credit as one universe and they’re most likely thinking of the traditional just bank lending private credit. So can you just define asset-backed? What is different about your space versus traditional?

Carroll: Sure. I think it’s easiest to start with what we don’t do or what we are not. And we are not cash flow lenders. So, while I care about the cash flow of the companies we’re lending to, I care about the equity value of the companies we’re lending to. Neither of those things determine how much capital we’re actually going to lend to a business. We’re not financing private equity buyouts or dividend recap. or anything along those lines. The businesses that are using our capital are using it to operate their day-to-day business model and their business models that have tangible collateral on their balance sheet. So whether that’s inventory, receivables, a coffee cup, a table, real estate, a pool of consumer or small business loans, something that you can look, touch, and feel and value on a daily, weekly, or monthly basis to determine what’s the amount of capital we’re comfortable lending against those assets?

Castleton: And why have we seen this? I feel like it’s just been growing tremendously over the recent years. Is it just because there has been a lot more interest or has this always been out there?

Carroll: I think it’s a combination of things. One, banks have pulled back even more in terms of their lending to businesses in general. Combined with, like any industry, as people become more comfortable, more educated on an asset class, they get more comfortable allocating to it. If you look 15 years ago, private credit really wasn’t a mainstay in asset allocation models. And if it was, it was typically direct lending, cash flow driven lending, and sponsor-backed lending. Then over time, as you see, more and more types of people wanting exposure to it, you see more and more types of variations of private credit that make sense in their portfolios. In a higher rate environment, what we do still clears that benchmark that most institutional allocators want for private credit. So, I think as a result of all those things, people have gotten more and more comfortable and they want it as part of their portfolios.

Castleton: Right. So, you mentioned at the beginning, kind of debunking the whole bubble theory, especially mentioning that not all private is created is created equal. So let’s talk through a couple of the different risk measures. Maybe first, just from a high-level Victory Park standpoint, what type of, you know, structures and philosophies do you bring into your business to specifically manage risk in the market?

Carroll: Sure. First, we’re typically going to be the sole lender to the businesses that are taking our capital. Or if it’s a larger business, we’re going to be the sole lender to whatever product or service that we’re financing. So that right away takes away any of the risk we’ve read in the headlines recently about the double pledging of assets or anything along those lines. So, we’re controlling the documentation. We’re setting the covenants. It’s our risk management systems that are plugging into our borrowers to pull the information in regard to that collateral. We’re not relying upon a third party or the company to provide us information to tell us what that collateral is worth. We’re making sure that we have the ability to take that and accumulate that data on our own and look at it ourselves to make those decisions. Combined with that, when we lend money to a business, it’s typically for three to four years initially. We like that shorter duration. Three to four years is long enough in our eyes to say, do we like the business? Is it performing as we thought during diligence? We’re narrowing that information gap between what we think was going to happen versus what is actually going to happen. And then far more often than not, we’ll extend beyond that. At the same time, three years is short enough in the eyes of our borrowers to agree to a cost of capital they obviously would, you know, they’d like to get out of sooner rather than later, a very tightly coveted package and a use of proceeds that’s very specifically defined. Everybody that borrowed from us, they have the goal of being able to grow their business, get to a lower cost of capital, a more traditional bank facility or securitization market. So yeah. There’s an understanding of that on both sides, which I think makes what we do pretty easy to understand.

Castleton: So very purposeful in being that sole lender, intentional in the duration, and being alongside these companies to help them grow, which sounds like something that echoes what we hear in general on this podcast from all of our portfolio managers and at Janus Henderson. We do take a lot of steps in being fundamental partners with the companies that we work with. It sounds like very much how Victory Park operates as well.

Carroll: 100%.

Castleton: Great. So outside of just your specific firm, which again, in private credit land, there will be firms that do better at-risk management than others. So, thank you for walking through that. What about in the asset-backed lending space? So, you mentioned this is tangible collateral. So sometimes it’s not what you traditionally think. There are examples where, you know, it’s GPUs or things that our audience may not be very well aware of. in a structure of private credit? How do you manage risk with those types of assets?

Carroll: Sure. The main, the most important ones for us are the attachment point and the duration of the collateral. And I’ll get into those. So my attachment point, if I think this coffee cup is worth a dollar, and that coffee cup could be a pool of loans, it could be an Nvidia, Blackwell chip, whatever that tangible collateral may be, we want to make sure that the amount of money we’re lending against that dollar holds up in any scenario, right? So, whether that’s 75 cents on the dollar, 80 cents, 92 cents, it’s going to vary based upon what’s the type of collateral we’re lending against, how long have we been a lender to the business, how much do we know about it, et cetera. So, we want to make sure that the attachment point or the loan to value that we have against that asset will hopefully hold up in any scenario. The second piece around the duration of that collateral, I want to know that if for whatever reason the company we’re lending to it’s going to go out of business, it’s not going to continue that business line, whatever it may be. The way that we’re going to get paid back is the wind down of the collateral we’re lending against. So, we don’t want to lend against something that’s very long in duration. 30-year mortgages, 10-year interest only consumer loans, things where our ability to exit will be more determined by the interest rate environment and the macro environment in general versus just an orderly wind down in liquidation. So typically, the average duration of the collateral we’re lending against is sub 12 months. So that if we had to turn off the loan and start to wind it down, it would come back much quicker than if we had to sit on it and wait for the right environment to sell, so to say.

Castleton: So, Victory Park at the outset, robust due diligence in terms of how you structure your deals. And then if things happen in the market, unforeseen circumstances, the asset-backed lending nature seems like you actually have more of an ability to help if the company starts to go in a downturn. Does that make sense?

Carroll: Yes, and I should have added a third piece. We structure the vast majority of our facilities as delayed draw term loans. So, we commit $100 million to a business, but you only have enough coffee cups at that time on day one to draw 30 million. And then over time, as you add new coffee cups to the balance sheet, you can come make additional draw requests of that capital. But every draw request is a re-review and approval process by the investment committee and the risk committee. And we’ve got great risk management systems, and I could talk about the technology at length, but it really starts with structure. And when that borrower has to come and sit in front of us, every time they want to draw additional capital, and we’re then taking a look and another look at the performance and the collateral and having that back and forth conversation with that borrower, that helps prevent a lot of problems before they happen. So, these are very actively managed credits.

Castleton: So, this is great. You’ve been able to walk through the robust risk processes in place, especially for clients that have been looking at the headlines. and worried about the potential downside in private credit. But obviously, you have done a tremendous job at also getting performance. That is one of the goals of why clients go into private credit is for outperformance. So as private credit becomes more scalable, we’re seeing more evergreen and, you know, semi-liquid instruments coming to the market. How do you maintain that performance as the market just becomes more scalable?

Carroll: Sure. We’ve been doing the same thing for two decades. We’ve been lending against the same type of collateral since we started. What changes is the particular business that has that collateral on its balance sheet. A business that needed us 10 years ago doesn’t necessarily need us today because they’ve grown, they’ve graduated, so to say. But as long as you believe there’s going to be the next iteration of a business model or a new product or service offered by a larger business, it doesn’t matter where interest rates are, it doesn’t matter who’s in the White House, it doesn’t really matter what’s going on in the world. If you haven’t been around for the five, six, seven years to generate enough scale and data accumulation, you’re typically not going to be able to get a bank facility. You’re not going to be able to access the securitization markets or get a rating. So, our type of capital will remain something that companies will need. I don’t see banks stepping into what we do anytime soon. There’s fewer banks than there was when we started this business two decades ago. So, the demand for what we do from our borrowers is immense, and I don’t see that changing. It’s been a competitive industry since we started the business. So maybe today there’s different people that are looking to compete or different types of investors that want exposure. But we’ve stuck to our strategy from the beginning. We haven’t deviated from it and we don’t see a need to.

Castleton: Well, very important, two decades. While Janus Henderson recently took a majority stake in your firm a year ago, and so our clients are starting to hear about private credit more from us recently, you’ve been doing this for two decades. So that’s very important to mention. Maybe just end as we look forward to 2026, what does get you very excited about the space in terms of potential opportunities?

Carroll: So again, from the side of the business where we’re focused on finding great deals, at any given time, we’ve got a portfolio of borrowers drawing capital from us, like I just mentioned. These aren’t one-time fundings like you see in sponsor-backed finance. Next year and the year after, we’re still going to have 20, 30, 40 businesses that are still using and drawing our capital. We continue to do new deals all the time, but it’s never a scenario where if we raise a new fund, we have to go find 30 deals that were just as good as the 30 we did in the last fund. We always have that stable set. And I think that’s attractive to investors that are looking at the asset class because you’re going to have very good transparency into where a significant portion of your capital is going to be deployed. You can see how it has performed. You can learn about the individual companies that we’re lending to. At the same time, because of the partnership with Janus Henderson, we retain our boutique-like feel in terms of our focus in the asset class, but now we have the benefit of a global distribution system and team, as well as the infrastructure to offer all the different types of fund structures and wrappers that different investors want around the world. To try to do that on our own would have been impossible. So now it’s a bit of the best of both worlds. We can continue to focus on the asset class that we’ve had for the last two decades. And now we have the ability to raise capital from different parts of the world and different types of investors that we’ve never been able to before.

Castleton: Thank you, Brendan. Those were great insights. And I, for one, am very happy that Janus Henderson decided to partner with a firm such as yourselves. It’s clear that the questions from clients about private credit are not going to slow down, but it’s wonderful to be able to address an area such as asset-backed lending with a firm that does such robust due diligence, such as yourselves, as a way to diversify overall portfolio allocations. Thank you very much for your insights today, and we hope you enjoyed the conversation. For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts, or check out our website at janushenderson.com. I’m Lara Castleton, thank you, see you next time.