This chart shows why investors should fear for private equity more than private credit

MW This chart shows why investors should fear for private equity more than private credit

By Steve Goldstein

Wall Street may be fearing the wrong asset class.

The struggles of the nascent private-capital market, weighed down by lending to software companies whose businesses are under threat from artificial intelligence, has captured the eye of the market and the news media.

But, as Greg Obershain and Daniel Rasmussen of Boston asset management firm Verdad point out, whatever struggles private-capital investors will have are likely to be dwarfed by those investing in private equity.

After all, the equity is junior in the capital stack to debt.

Return on high-yield bonds and matched public equities from ratings downgrade. Each number on X axis represents the notches of downgrades.

They cite data from the public markets to illustrate their point. They looked at the return of high-yield bonds to the matched public equities for every notch deterioration in credit, over the last 20 years. The equity returns were always worse than the debt returns at each downgrade level.

"The logic is obvious: if you heard that the bank was marking the mortgage on a property down from 100 cents on the dollar to 80 cents on the dollar, wouldn't you assume that the home equity was close to wiped out," they say.

They do concede that it's possible that private equity would do better than private credit, in a scenario where a few big winners offset the losses.

"Let's say, in a worst-case scenario, that 40% of a private equity fund's deals go to zero. If the remaining 60% of the fund returns 2x, the fund is still profitable overall. A small number of big winners can make up for a lot of losses. This is not the case for private credit, where the winners just return their yield, but the losers subtract from returns," they say.

Investment firms that manage business development companies which invest in private capital have struggled in 2026. Blue Owl Capital $(OWL)$, which reports Thursday, has seen its stock tumble 40% this year, as Ares Management $(ARES)$ shares have dropped 30%.

The S&P listed private-equity index has lost 11% this year.

-Steve Goldstein

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April 28, 2026 05:05 ET (09:05 GMT)

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