Private Credit Redux: Credit Cycles, Structural Frictions, and Emerging Litigation Themes

By Richard Marin

Private credit has grown from a niche financing strategy into a 1 trillion‑plus asset class in little more than a decade. As with most rapid expansions in credit markets, the current debate is no longer about growth but about resilience. Rising interest rates, increasingly complex loan structures, and valuation practices unique to private markets are beginning to test the system. None of these developments are unprecedented, but they are precisely the kinds of conditions that historically give rise to restructurings, disputes, and, in some cases, litigation. For disputes lawyers, these same dynamics shape the arguments that may emerge around valuation, disclosure, liquidity rights, and governance.

Andrew Ross Sorkin's account of the 1929 crash, 1929: Inside the Greatest Crash in Wall Street History and How It Shattered a Nation, highlights a recurring belief in markets that "this time is different." Yet financial history tends to repeat itself—not because the instruments remain the same, but because the underlying dynamics of credit and human behavior rarely change.

Over the course of several decades in asset management—including running large investment firms—I have seen successive waves of financial innovation reshape markets. These ranged from the dismantling of Glass‑Steagall and the emergence of merchant banking, to the development of derivatives markets, high‑yield debt, distressed sovereign trading, hedge funds, securitization, and structured credit. More recently the center of gravity has shifted again—this time toward private markets, particularly private credit.

Despite these innovations, the lifecycle of financial products and markets has rarely strayed far from historical precedent.

The Historical Logic of Spread Lending

Banking has ancient roots, evolving over millennia into the complex financial system we recognize today. The Code of Hammurabi (circa1754 BC) codified lending practices and interest rates. Medieval financial networks—from the Knights Templar's early international banking operations to the Medici Bank's innovations in letters of credit and double‑entry bookkeeping—demonstrate that the central challenge of finance has always been the same: connecting capital providers with those who require financing.

At its core, the business model is simple: borrow short and lend long while capturing a spread. As modern banking expanded in the 19thcentury, institutions funded themselves through deposits and short‑term instruments while investing in longer‑term loans and bonds. The resulting duration mismatch created structural vulnerabilities that contributed to repeated boom‑and‑bust cycles. Regulation repeatedly attempted to constrain the excesses of spread lending, but the underlying economic logic remained unchanged.

Disintermediation and the Evolution of Modern Credit Markets

The inflationary crisis of the 1970s disrupted traditional banking models. As interest rates rose, depositors shifted funds into money market instruments and Treasury securities, effectively disintermediating banks.

Financial institutions adapted by transferring credit risk into capital markets through securitization and derivatives. Banks increasingly originated loans but distributed them to investors rather than holding them on balance sheet.

The 2008 financial crisis ultimately reflected the same fundamental tension. Short‑term funding markets such as repo and money market funds financed long‑duration mortgage securities. When confidence collapsed, the funding base evaporated, triggering a modern equivalent of a bank run.

Post‑crisis regulatory reforms attempted to address these vulnerabilities, particularly for banks. Yet while regulation tightened around banks, the credit intermediation function itself began migrating elsewhere—into asset managers and private credit vehicles.

The Rise of Private Credit

Over the past decade, private credit has emerged as one of the fastest‑growing segments of global capital markets. Originally a complement to private equity financing, private credit has evolved into a substantial asset class in its own right.

Institutional investors seeking yield during prolonged low‑interest‑rate periods allocated significant capital to direct lending strategies. For much of the past decade, the strategy appeared straightforward: deploy capital into floating‑rate senior loans and collect attractive spreads.

More recently, however, market commentary has grown more cautious. A series of leveraged loan defaults and increasing use of payment‑in‑kind (PIK) toggles have drawn attention to potential stress within parts of the market.

Structural Features and Emerging Stress Indicators

Payment‑in‑kind toggles allow borrowers to satisfy interest obligations by issuing additional debt rather than making cash payments. The feature provides liquidity flexibility for borrowers experiencing operational pressure while allowing lenders to preserve accrual status.

However, the widespread use of such structures can sometimes signal broader financial stress. Historically, similar contractual features became more prevalent late in credit cycles when competitive lending conditions encouraged greater flexibility for borrowers. In contested situations, one narrative tends to emphasize that increasing PIK usage masks underlying weakness and delays necessary restructurings, while an opposing narrative views PIK as a contractually agreed tool to preserve enterprise value in the face of temporary dislocation.

Valuation and Transparency in Private Markets

Unlike publicly traded loans or bonds, private loans rarely have observable secondary market prices. Private credit funds therefore rely on mark‑to‑model valuation approaches when determining net asset values.

This approach can reduce short‑term volatility and allow managers to manage illiquid assets over longer horizons. At the same time, it may delay recognition of deterioration in credit quality compared with public markets.

In contentious scenarios, one line of argument often stresses that valuation methodologies or assumptions understated or lagged emerging credit stress—especially where PIK usage, covenant erosion, or missed business plans were visible. A contrasting line of argument emphasizes that valuation necessarily involves judgment under uncertainty, that methods were disclosed and applied consistently, and that divergence between model values and outcomes reflects evolving market conditions rather than flawed process.

When disagreements arise regarding valuation assumptions, disclosure practices, or performance reporting, these issues can become focal points in disputes involving investors, lenders, and fund managers.

Liquidity Dynamics and Investor Expectations

Another emerging dynamic involves the expanding participation of individual investors in private credit funds. Historically dominated by institutional investors with long investment horizons, the asset class is increasingly accessible to high‑net‑worth and retail investors, often through semi‑liquid structures.

This expansion introduces potential tension between the illiquidity of underlying loans and investor expectations regarding liquidity. Redemption restrictions or gating provisions—longstanding features of private market funds—can become contentious if investors seek liquidity faster than underlying assets can reasonably be sold.

Disputes in this area typically turn on whether fund documents and marketing materials fairly aligned investor expectations with the practical constraints of managing illiquid portfolios, and whether decisions around gates or suspensions were made consistently with those documents and in the interests of the investor base as a whole.

Potential Litigation Themes

As credit cycles mature, disputes often follow. In the context of private credit markets, potential areas of litigation may include:

• Valuation disputes – for example, challenges to discount rates, recovery assumptions, or treatment of PIK interest in mark‑to‑model NAVs.

• Disclosure and investor communication – including whether PIK usage, covenant loosening, sector concentration, or liquidity risks were described with sufficient granularity.

• Interpretation of loan covenants and restructuring provisions – such as amendment thresholds, cross‑default mechanics, or the operation of PIK and other optional features in stressed situations.

• Fund liquidity and redemption rights – including timing and application of gates, suspensions, or pro‑rata redemptions in semi‑liquid vehicles.

• Governance and fiduciary duty questions – for example, how boards, investment committees, and advisory bodies balanced competing interests across different investor cohorts and vehicles.

Importantly, such disputes frequently arise not from misconduct but from differing interpretations of contractual structures, evolving market conditions, and the inherent judgment calls required in illiquid credit markets.

Market Context in Litigation

When disputes arising from credit markets reach courts or arbitral tribunals, the central questions often extend beyond the specific contractual provisions at issue. Judges and arbitrators are frequently asked to interpret those provisions in the broader context of prevailing market practices, valuation methodologies, and the economic realities of credit markets at a particular point in the cycle.

As a result, disputes in private credit markets often involve detailed examination of industry norms, underwriting standards, and valuation frameworks. Expert evidence is typically directed not only to what the documents say, but also to how reasonable market participants would have understood and implemented those documents in the circumstances.

Conclusion

Credit cycles remain one of the most consistent patterns in financial markets. Periods of expansion are typically characterized by abundant capital, intense competition among lenders, loosening underwriting standards, and increasing leverage. Eventually the cycle turns.

Private credit markets may appear relatively new, but their underlying mechanics remain rooted in centuries‑old credit intermediation. As the current cycle evolves, some restructurings and disputes are likely, and with them may come litigation examining how risks were structured, disclosed, valued, and governed along the way. The outcome of those cases will depend heavily on the alignment between documents, practices, and contemporaneous market conditions—not just on the ex post performance of individual loans or funds.

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EXPERT INVOLVED

Richard Marin - Manging Director

Richard Marin as a former finance senior executive with over 40 years of industry experience, and as a former clinical professor at Cornell University is a world class testifying expert in asset management, alternative investments, private equity investments, securities lending, retirement and pensions, and real estate / project financing.

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