Jeffrey Griffiths, co-head of private credit at placement agent Campbell Luytens, says the funds that have done less well than people may have predicted are typically those where managers are taking oversized positions. Funds that have 15-20 loans will be more substantially impacted by the bad performance of one or two companies than those funds that have 50 positions with an average 2-3% position.

“There are managers trying to stretch to do that really large transaction and putting it into their fund,” he says. “These larger deals will continue to occur and managers will need to get a hold on fund diversification. It’s tempting to do a billion-dollar deal, as you’ve deployed your capital in one go and that means you don’t have to do a lot of other deals to deploy the fund. The flip side, of course, is if the outsized deal turns sour in two or three years, then fund investors could have a problem.”

Jason Proctor, managing director of Truffle Invest, agrees and says investors are not looking for lenders to maximise their returns from conviction in single names (unlike in the structured credit market — see cover story), but rather for downside protection delivered through diversification.

“There are no prizes in private debt for having a concentrated portfolio because you can’t outperform — you can only hit your target yields,” says Proctor. “We will probably see that minimising company-specific risk in private debt portfolios will likely prove the correct way to go.”

Investor attention has also turned to asset management functions as they assess whether firms can dedicate sufficient resources to companies that start to underperform.