The headlines have not been kind to private credit. In recent months, redemption gates, rising default rates, and fears of AI-driven disruption in software lending have combined to generate a sustained barrage of negative coverage. But noise and risk are not the same thing — and distinguishing between the two is exactly where sophisticated investors earn their returns.
On BMO Global Asset Management's Open Outcry podcast1, host Bipan Rai, Managing Director and Head of ETF and Alternatives Strategy, sat down with Mark Jarosz, Head of Credit Alternatives, to cut through the confusion. What emerged was a nuanced, technically grounded assessment of where private credit stands today — and why the institutional consensus remains far more composed than the retail reaction might suggest.
The Retail-Institutional Divide
The first and most important distinction Jarosz draws is between liquidity risk and true credit risk. Private credit loans are, by design, illiquid instruments. "They're often held to maturity," Jarosz explains. "In exchange you get that spread pickup. They offer issuers flexible capital solutions with fewer lenders and execution speed." That structural illiquidity is a feature, not a bug — but only for investors whose time horizons match.
The problem is that rapid growth in private credit has drawn an expanding retail investor base into a vehicle originally built for institutional capital. The mismatch is now showing up in redemption requests and gating events. Jarosz is direct about where the pressure is coming from: "Many of the institutional clients that we've spoken to have reiterated their belief and positioning in private credit. They are longer term hold to maturity type investors and unfortunately with a segment of the retail investor base, they see the headline news and whether it's justified or not, they rush for the exits and take on a more emotional response when investing."
The capital base of the private credit market remains overwhelmingly institutional. "I would say largely the private credit space, we're talking north of a trillion dollars is the institutional," Jarosz notes. "Pension plans, life insurance plans — they have been, for probably well north of a decade now, the largest consumer of private credit loans."
The Volatility Question: Accounting Optics vs. Economic Reality
One of the more searching questions Rai raises concerns a persistent criticism of private credit: that its apparent low volatility is partly a function of accounting methodology rather than genuine stability.
Jarosz does not shy away from the nuance. "Private credits are marked to model rather than mark to market," he acknowledges. "There is a potential for subjectivity and judgment in the valuation process." He advises investors to scrutinize how their managers approach valuation — specifically whether they employ third-party marks, which are more likely to reflect economic reality. That said, there are genuine structural buffers in certain corners of the market. Asset-based financing, which lends against hard assets, carries "lower exposure to systematic factors" and offers a more durable form of volatility cushion.
Systemic Risk: Contained, Not Zero
The question of whether private credit poses a systemic threat to the financial system is one Jarosz handles with precision. The concern centres on the roughly two-trillion-dollar direct lending segment, where banks lend to private credit funds. But the mechanics of contagion require a scenario that, historically, has no precedent. "For banks to take a loss, you would need to see most of the fund default when you factor in the recoveries," Jarosz explains. "This is unprecedented in credit markets as typically a default cycle involves one to three years of elevated defaults."
The post-GFC regulatory architecture also provides meaningful protection. Following the global financial crisis, banks were effectively required to adopt more conservative underwriting standards — tighter loan-to-value ratios, stricter leverage constraints. "They are mandated by their respective regulatory body," Jarosz notes, "whether it be here in Canada or in the US." The contrast with the crisis of 2008-09 is structural: "That was largely driven by a certain segment of the lending market, particularly the subprime residential mortgage market, where there was extremely loose lending standards and most of those loans that were being underwritten were outside of the banking ecosystem. I believe we're in a much very different cycle currently."
CLOs: The Most Misunderstood Instrument in Credit
The conversation then turns to collateralized loan obligations — a market Jarosz argues is systematically misunderstood, largely due to its superficial resemblance to the CDOs that amplified the global financial crisis. The comparison, he argues, fundamentally misreads what CLOs actually are.
"The biggest misconception is the belief that CLOs are part of private credit or part of the private credit universe," Jarosz states. CLOs invest in broadly syndicated loans — publicly traded instruments with active secondary markets, daily price transparency, and meaningful structural protections including overcollateralization triggers. During the GFC itself, CLOs accounted for "only about 3% of the impairments in the broader structured finance universe during that period, whereas the vast majority of impairments were subprime residential mortgages."
Post-crisis regulatory refinements have made the market more robust: tighter limits on triple-C loans within pools, greater subordination requirements, improved underwriting standards. Rai adds the rate dimension: "They're also floating rate as well. So you're removing the duration risk." Jarosz confirms: "These are full pass through vehicles. The underlying broadly syndicated loans are floating rates — they're based off of 3 months SOFR plus a spread."
A Cautionary Note on Spreads
Jarosz closes with a frank observation about valuation across the credit complex. Asked what today's market will look like in five years, he lands on a measured concern: "We've seen such a depression in credit spreads more broadly, which have stayed fairly low even considering all the different risks that we've seen so far over the past few years." His conclusion is simple but important: "Investors should be selective and mindful. Spreads should be higher just given all the background noise."
Key Takeaways for Advisors and Investors
Liquidity mismatch is the real risk, not credit fundamentals.
The redemption pressure and gating events in private credit are driven by retail investors whose liquidity needs are misaligned with the asset class — not by deteriorating credit quality across the institutional core. Institutional investors holding north of a trillion dollars in private credit are not moving. The structural case for the asset class remains intact for those with appropriate time horizons.
CLOs are not CDOs — and the distinction is material.
CLOs invest in publicly traded, floating-rate broadly syndicated loans with transparent pricing, structural protections, and a demonstrably different risk profile from the instruments that triggered the GFC. For advisors building yield-oriented, rate-sensitive portfolios, CLOs — particularly at the senior tranche level — offer a combination of credit quality and income generation that is frequently overlooked.
Credit spreads are too tight for the risk environment — selectivity is essential.
With spreads compressed relative to the macroeconomic backdrop — geopolitical uncertainty, monetary policy ambiguity, persistent inflation, rising defaults — investors should resist the temptation to reach for yield indiscriminately. Managers with rigorous valuation processes, third-party marks, and disciplined underwriting are not interchangeable with those who are not. In this environment, manager selection is risk management.
Footnote:
1 Rai, Bipan "The Open Outcry Podcast: What to Make of Private Credit - April 22, 2026." BMO ETF Dashboard, 30 Apr. 2026.
