Private Credit Dislocation Is a Great Opportunity, TCW CEO Says

TCW CEO Katie Koch said on Bloomberg Television that the current sell-off in private credit — driven by fears about AI disrupting software companies that are heavily financed by private credit — creates buying opportunities as 'the crowds go for the exit.' The comments imply potential near-term dislocations in private credit where selective deployment could capture price concessions, while stressing the need to monitor credit exposure to software/AI-driven borrowers.

Analysis

Forced repricing in private credit is creating asymmetric entry points: lenders that can originate senior, first‑lien paper with tight covenants should be able to earn 200–400bps more yield than in 2021–22 vintage deals while still preserving recovery economics. That repricing typically takes 6–24 months to realize because deployment is lumpy (quarterly/annual underwriting cadence) and because covenant enforcement and workouts drag returns into year‑two and year‑three.

The clear winners are scaled direct‑lenders and credit managers with dry powder, control rights and workout capability — they capture higher coupons, original issue discounts and potential equity upside from restructurings. Conversely, growth‑stage / venture‑debt lenders and any credit lines where repayment depends on pro‑rata follow‑on equity raises are second‑order losers; their borrowers face both revenue disruption from rapid AI adoption and a capital‑markets tightening that can convert covenant breaches into equity dilution.

Principal tail risks are a sharper macro downturn (pushes private credit default rates from single digits toward mid‑teens for the weakest cohorts) and a liquidity squeeze that forces fire sales of portfolio companies, compressing recoveries; these play out over 6–36 months. A fast reversal catalyst would be a chunky inflection in public equity markets or a policy pivot that narrows public credit spreads quickly — that would pull private spreads tighter but also reduce the selective buying opportunity. The trade is therefore highly selective: favor senior secured originations with covenant protections and equity kickers, avoid broadly syndicated, covenant‑light exposures even if yields look attractive on the surface.

Key Decisions for Investors

• Buy ARES (ARES) — scale into a 12‑month position targeting ~20% total return (price appreciation + dividend). Entry: tranche purchases on 3–6% drawdowns; stop‑loss 12% below average entry. Rationale: large private credit origination platform, dry powder to deploy into widened spreads; risk: credit impulse worsens and NAV markdowns widen.
• Buy Ares Capital (ARCC) — 6–12 month trade to capture yield and discount-to‑NAV compression; target 10–15% total return including dividends. Entry: initiate on any >5% share weakness or if discount widens >300bps versus 12‑month avg; reduce if net charge‑offs accelerate >150bps QoQ. Rationale: BDC access to senior secured paper; downside is BDC leverage in a stress cycle.
• Pair trade: Long ARES/ARCC (60%) vs Short IGV (iShares Expanded Tech‑Software ETF) (40%) — 3–12 month horizon. Expect private credit income + selective NAV recovery to outperform high‑multiple software should AI‑led re‑rating persist; size to limit pair delta to ±0.25. Hedge risk: if both credit and software rally, cap exposure and use buy‑writes on the long leg.
• Buy protective puts on IGV (6–12 month, ~10–15% OTM) as insurance — small premium to protect carry positions in managers; target cost <1.5% of portfolio notional. This asymmetry buys time for private credit deployment while limiting downside from a rapid tech multiple contraction.