In episode 18, I speak with Stuart Fiertz, co-founder and president of Cheyne Capital. Our conversation comes at an important time for private credit as individuals flood retail-oriented funds with redemption requests and as institutions become more cautious about new investments. With the spotlight on private credit, managers are tightening their standards, raising lending rates, and offering fewer goodies to borrowers, such as allowing them to defer interest payments. 

Although I spoke to Stuart before Jay Clayton, U.S. Attorney for the Southern District of New York, told the audience at a Bloomberg credit event, that his staff was looking into valuation discrepancies in private credit, Fiertz went deep into where the industry could improve, including when it comes to transparency.

The problems that arise in markets are rarely a surprise. 

“What I feel is coming home to roost is some of the long-time concerns that we've been expressing about this particular underwriting cycle,” Fiertz said, on In Conversation with Julie Segal. He discusses the rise of payment-in-kind loans and what that means, concentration in software and technology, and why he believes the industry still hasn't fully absorbed the consequences of the dramatic interest-rate shift that has taken place.

As Fiertz put it: "You just can't have such a momentous change in an interest-rate regime and not have fallout from that."

(Listen to the full conversation on Spotify, Apple Podcasts or by scrolling to the end of this article.)

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But he doesn't expect a dramatic collapse, despite some of the headlines. In fact, the industry has become remarkably good, perhaps too good, at delaying any reckoning. Loose covenants, refinancing activity, continuation vehicles, evergreen capital, and fresh sources of funding are all helping extend the credit cycle. The problems are showing up, Fiertz argues, but they're unfolding far more slowly than many expected.

We also discussed what may ultimately unlock the industry's enormous backlog of unsold private companies. Fiertz has been thinking about this question for a while. When he entered the business, private equity often created significant value by taking public companies private and improving them. Today, many companies are being passed from one sponsor to another, each looking for a way to grow the business and profit. Fiertz’s question is a simple one: "Who is leaving value on the table?"

His point is not simply that valuations remain too high. “I think there's a little bit of a challenge here that is more fundamental than I think people realize. It's part that the lemon's been squeezed. I think it's going to take a meaningful valuation haircut to move them. And I'm just not sure why the PE firms would mark them down.”

We also get into the discussion, again before Jay Clayton’s comments, on why Fiertz believes transparency may be the industry's biggest challenge. He argues that investors, regulators, and managers would all benefit from more consistent reporting and he did warn that private credit firms risk inviting heavy-handed regulation if they don't become more forthcoming about what is happening inside portfolios.

I’ve known Stuart for years and I appreciate his willingness to say things that many people in the industry are thinking but few will say publicly. This conversation was a good example.

Listen in for other topics and tidbits we covered: 

• The difference between "cockroaches" and "termites" when assessing risk in credit markets

• Why semi-liquid credit funds may increase cyclicality and pressure managers to deploy capital

• Whether the industry's push into retail was driven more by asset gathering than investor need and why it matters

• What continuation funds reveal about today's private equity exit environment

• Why Europe remains both attractive and frustrating for private market investors