Lately, some hedge funds have turned bearish on private credit, betting that macroeconomic headwinds will expose structural flaws. But they’re mistaking a cyclical reset for systemic weakness. And in doing so, they ignore the nuance that separates the rookies from the seasoned specialists.
Private credit isn’t broken. It’s being tested—and that’s exactly when its true value shows.
Critics have zeroed in on technical concerns: NAV, PIK toggles, and the illiquidity of underlying assets. But this reflects a public markets mindset – one that assumes price discovery must be instantaneous and volatility is always a proxy for risk. That assumption is misguided. Private credit is intentionally illiquid. Its assets are long-dated, heavily negotiated, and anchored in enforceable claims. NAV is not intended to mimic mark-to-market pricing. It reflects a model of expected outcomes, contract enforceability, and cash-generating potential. Conflating NAV with market-clearing price misses the very premise of the asset class.
As for PIK? It’s not a distress signal. It’s a deliberate structuring tool – used, when appropriate, to preserve liquidity and stabilize borrowers through temporary turbulence. It allows lenders and borrowers to align incentives, manage through short-term disruptions, and avoid value-destructive actions. A well-structured PIK feature is often a sign of lender engagement, not detachment. At Third Eye Capital, we don’t chase returns by following the herd into crowded deals. We structure our own opportunities, define our own terms, and take risks with discipline, not desperation. Ours is a strategy built on credit fundamentals, not credit cycles.
The reality is that many lenders entered private credit in search of easy yield. They relied on volume, standardized documentation, and model-based underwriting. Now, as economic pressure mounts, some of those strategies are cracking. But that doesn’t indict private credit as a whole—it reveals who wasn’t doing the hard work in the first place.
Private credit done right isn’t formulaic. It’s hands-on, bespoke, and deeply analytical. We lean into complexity because that’s where outsized returns are created. It’s also where real partnership matters.
Traditional lenders retreat when uncertainty rises. Regulators tighten standards. Banks pull back. And many so-called “alternative” lenders freeze. But these are the moments when we move. Why? Because we’ve built our model for this environment. We understand how to assess creditworthiness when the numbers look messy, but the fundamentals still hold. We understand how to structure around volatility and create resilience.
The hedge funds shorting private credit are taking a macro view and applying it indiscriminately. But they’d do well to look more closely at who they’re betting against. Those with real structuring expertise, rigorous underwriting, and deep operational insight are built for this environment. We’ve seen cycles before. We know how to protect downside, preserve optionality, and capitalize on dislocation.
The lenders with experience, judgment, and the scars of past cycles are built for this moment. So while others pull back, we’re leaning in. Not because we’re blind to risk, but because we know how to price it, structure around it, and turn it into opportunity.