Pacific Investment Management Co. (Pimco) analysts predict a "full-blown default cycle" for direct-lending vehicles, citing loosened underwriting standards and macroeconomic risks. This assessment follows a surge in fundraising after the 2008 financial crisis. Recent corporate failures and concerns about exposure to AI-disrupted software firms have intensified worries about private credit's resilience.

Investors in business development companies (BDCs), a type of closed-end private debt vehicle, are already showing signs of unease. Alternative investment firms like BlackRock and Blue Owl Capital have curbed redemptions as a result. Pimco warns that semi-liquid funds, which offer quarterly withdrawals, don't guarantee immediate access to capital. Investors need to carefully assess their own liquidity needs.

Pimco's analysis suggests that heavy exposure to software in direct-lending portfolios will likely underperform public stocks. The firm, with roughly $2.3 trillion in assets under management, was an early critic of the $1.8 trillion private credit industry. However, the analysts also see value in asset-based finance, which they believe offers investment-grade-like risk levels.

Last year, Pimco raised over $7 billion for an asset-based finance strategy. While cautioning about direct lending, Pimco's stance emphasizes the need for careful risk assessment within the private credit market. The firm's long-term view is that the market is due for a correction, and investors should be prepared for potential defaults. The fund is preparing for a bareknuckle fight in private credit.