Private credit: size, definitions, and misconceptions

This week Mark Farrington and I are joined by Zoso Davies, formerly Managing Director in European Investment Grade Credit Research at Barclays, where he spent over 15 years analysing major credit cycles including the European sovereign crisis, Brexit, and COVID. Now at a leading London based hedge fund and author of Macro Credit Thinking, Zoso brings a rare combination of top down macro perspective and deep credit market expertise.

The discussion reframes how to think about credit risk as markets from stable but nervous about private credit to the realization that Iran-related disruptions likely will be more severe. That transition threatens to turn credit risk from narrative-driven volatility to broad-based concerns over defaults. In investment grade markets, realized losses so far are minimal, yet spreads remain elevated as investors demand conpensation for uncertainty, liquidity, and mark to market risk..

The Iran conflict thus is acting as an accelerant to earlier concerns. What had been a relatively contained concern around private credit now sits within a broader macro shock, as energy and petrochemical disruptions begin to feed into growth, revenues, and confidence. The risk is a transition towards tighter financial conditions that, once underway, can become self fulfilling (Being is believing) through institutional channels such as pension funds.

Key themes

* Credit typically is narrative driven: Market pricing reflects volatility and uncertainty far more than expected defaults

* Investment-grade fundamentals are good: Default rates are minimal, but spreads compensate for liquidity and mark to market volatility

* Private credit is heterogeneous and often misunderstood: The asset class spans a wide range of quality and structures, masking the narrower segment where risks actually sit

* Iran risks changing that: The Iran conflict amplifies existing vulnerabilities but also risks undermining fundamentals

* Energy and supply shocks matter for credit: Disruptions feed through to growth, earnings, and ultimately credit quality

* Europe appears most exposed: Greater sensitivity to energy shocks and structural fragilities increase vulnerability

* Institutional structures can amplify tightening: Pension fund behaviour and regulation may reinforce credit contraction once it begins

Timestamps

00:00 Introduction00:25 Who is Zoso Davies01:38 Iran, private credit, and broader credit risks02:39 From chemistry PhD to credit analyst04:31 Breaking into finance in the 2008 crisis06:45 AI job fears versus the 2008 reality10:00 Careers, adaptability, and rolling with change12:02 How Zoso thinks about credit13:00 What investment grade credit actually is14:15 Why credit spreads are about more than defaults16:10 Credit as story and narrative shift17:22 When investment grade credit really breaks19:01 Why private credit gets all the attention21:24 What private credit actually includes22:43 How the private credit story got out of control26:18 BDCs, leverage, and where the real stress sits28:23 The real issue is confidence, not defaults32:00 Is this systemic before defaults rise35:24 You go bankrupt when no one will lend to you36:01 Why software was the original pressure point38:35 How tightening becomes self fulfilling42:34 Tightening credit conditions and rising defaults44:14 Iran, oil shocks, and macro spillovers46:00 Why Europe looks most exposed47:35 The market may be reading Trump wrong50:33 When credit damage starts to become real51:26 From software risk to cyclical sectors52:48 Final thoughts54:22 Where to find Zoso’s work

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thematicmarkets.substack.com/subscribe