Make Private Credit Diversified Again

By Jeffrey Kivitz, Partner & CIO, Corporate and Asset-Backed, Canyon Partners

By Robin Potts, Partner & CIO, Real Estate, Canyon Partners

The growth in private credit has been truly astounding, rivaling anything we have seen in our 35+ years in business. In just the last decade, global private credit AUM has grown by 7x, reaching an estimated $3.5 trillion.ⁱ More striking than the growth itself is its complexion; a disproportionate share of capital has essentially gone into the same thing: corporate senior secured direct lending to primarily sponsor-backed middle- to upper-middle-market companies. In fact, direct lending now represents nearly half of the entire private credit market.ⁱⁱ

Over the last four years, the number of private credit funds closed has shrunk by roughly 30%, even as the funds themselves grew materially larger.ⁱⁱⁱ As they grew, they were forced to move up-market, leading to an escalating food fight for the same deals. The result has been spread compression, loose covenants, and a whole lot of groupthink. If AUM is the ultimate reward, homogeneity of all forms — portfolios, asset types, investment processes, and even sectors — was rewarded, and rewarded materially. Origination and deployment became the number one goal and software lending, easy to deploy at scale, became one of the most popular ways to meet the ever-increasing demand to get capital in the ground. Simultaneously, semi-liquid vehicles aimed at capitalizing on the asset growth opportunity provided by the wealth market saw fundraising explode from $10 billion in 2020 to $74 billion in 2025.^iv

In late 2025, the Tricolor and First Brands bankruptcies sent jitters through the market, which was shortly followed by “SaaSmageddon,” a sharp selloff driven by concerns about AI disintermediation risk. The homogeneity baked into private credit portfolios was laid bare. The Cliffwater BDC Index was down 10.7% over the trailing six-month period ending February 2026, a striking move given that the underlying assets are meant to be stable, performing, senior secured loans. More telling, it occurred against a benign macro backdrop of roughly 4% GDP growth and a relatively resilient public credit market: broadly syndicated loans and high-yield bonds were up roughly 1.7% and 4.3%, respectively, over the same period.^v 

Regardless of what the actual impact of AI will be on software lending, we believe the private credit market will never be quite the same. The lesson learned from this recent disruption will be seared into memory: no matter how “safe” your assets are, you can never see around every corner. This lesson has taught us the importance of the following:

1. Differentiated underwriting models that can create private credit alpha. Sector expertise, particularly within long-tenured teams that have navigated prior cycles and developed the restructuring skills to work out loans when they sour, provides a perspective that generalist platforms lack.

2. Alignment between liquidity terms and the underlying portfolio. Not all evergreen structures are created equal, and offering liquidity on inherently illiquid assets comes with tradeoffs that become visible under stress.

3. Portfolio diversification can provide exposure to opportunities beyond traditional private credit, such as:

   1. Real estate lending opportunities at attractive rates and low LTVs, particularly in a fragmented middle market that the mega-managers have largely overlooked

   2. Asset-backed finance opportunities that are benefiting from record levels of home equity and the lock-in effect among prime borrowers with low-rate first lien mortgages

   3. Non-traditional corporate credit opportunities that fall outside the narrowly defined credit box of vanilla direct lending funds

None of the above dynamics signal the end of private credit; they signal maturation. As the asset class navigates what may be its first true credit cycle, we believe the managers and portfolios best positioned will be those built on specialized underwriting expertise, structural alignment, and diversification — not scale alone.

About Canyon Partners 

Founded in 1990, Canyon Partners manages $30 billion in assets and employs a deep-value, credit-intensive approach across public and private corporate credit, asset-backed credit, and real estate. The firm seeks to capture the excess returns available to investors with specialized expertise, rigorous research capabilities, and the ability to underwrite complexity, and invests on behalf of a broad range of institutions globally.

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