Private Credit After the Boom: Why Underwriting Discipline Is Back

For most of the past decade, private credit was the fastest-growing corner of the capital markets. Banks pulled back from lending to privately held companies, institutional and individual investors went looking for yield, and direct lenders filled the gap. The asset class grew from a niche into a mainstream source of financing for privately held businesses. Growth on that scale always invites a test, and the first half of 2026 delivered one.

What changed this year

The pressure has come from several directions at once. Investors in some of the semi-liquid vehicles that brought private credit to individual investors asked for more of their money back than those funds were built to return in a single quarter, and several managers limited withdrawals. Default and restructuring activity moved higher, though from a low base and not to crisis levels. And a sharp sell-off in public software stocks, driven by fear that AI will erode the economics of many software businesses, turned attention to how much private credit has been lent to software companies, often on the strength of recurring revenue rather than cash flow.

None of this means the asset class is broken. Most loans are performing, most borrowers are paying, and private credit's core advantages remain real: speed, certainty of execution, and the ability to tailor a structure to a specific company. What the year has done is separate lenders who underwrote carefully from those who competed mainly on price and terms when capital was abundant.

Where discipline slipped

When too much capital chases too few deals, the first casualty is structure. Over the past several years, competition for sponsor-backed loans pushed leverage higher, thinned or removed maintenance covenants, and allowed generous adjustments to the earnings that leverage is measured against. Payment-in-kind features, which let borrowers pay interest with more debt instead of cash, became more common, sometimes from the first day of the loan. Each concession is defensible on its own. Together they leave a lender with less warning, less control, and less recovery when a business underperforms.

Concentration was the other blind spot. Lending heavily to one sector because it looks safe, with high gross margins, sticky customers, and recurring revenue, is a bet that the sector's economics will not change. In 2026 the market started asking whether that bet still holds for some software businesses. A loan underwritten against recurring revenue is only as good as the durability of that revenue.

What good underwriting looks like now

We think the fundamentals are coming back into fashion, and we welcome it. Good credit underwriting starts with the business, not the model: how it makes money, what could break that, and who would want to own it if things went wrong. It sizes leverage to cash flow the business has actually produced, not to projected synergies. It keeps covenants that give the lender a seat at the table early, while there are still options. And it prices risk honestly rather than matching the most aggressive term sheet in the market.

It also means knowing the assets. Asset-based and specialty structures, secured by receivables, inventory, equipment, or contracted cash flows, have held up well because the collateral is tangible and monitored. For many essential businesses in healthcare, manufacturing, and business services, those structures are a better fit than a cash-flow loan sized to a multiple of earnings.

Where we see opportunity

As the largest direct lenders have grown, many have moved toward bigger companies and larger loans, where they can put capital to work efficiently. That leaves a meaningful set of well-run, founder-owned businesses underserved: companies too complex for a bank's credit box and too small to be a priority for the largest funds. Those borrowers value a lender who understands their industry, can move quickly, and can design a structure around a real plan, whether that is an acquisition, a recapitalization, a growth investment, or an ownership transition.

Periods of stress also tend to improve terms for disciplined lenders. When capital becomes more selective, structures tighten, documentation improves, and pricing better reflects risk. Lenders with patient capital and sector knowledge can be a source of stability for companies when other financing sources hesitate.

The Kiron take

We do not think private credit's growth story is over, but we think its easy chapter is. The next phase will reward lenders who know the businesses they lend to, keep structural protections, avoid crowding into whatever sector looks safest this year, and treat every loan as if they may one day own the company. That is how we approach credit at Kiron: underwritten by people who have run businesses in the sectors we finance, and structured around how each company actually makes money.