The recent sell-off in software has sparked a broader reassessment of risk across private credit. But are managers pulling back from risk, or just recalibrating how they price it?
In this episode of Cloud 9fin, private credit reporter Anna Russi sits down with Patrick Warren, head of private credit research at MSCI, to unpack what’s driving the shift. Drawing on new data, they explore where signs of stress are emerging in software lending and venture debt, how valuation marks could be masking underlying pressures, and what this reveals about risk, performance, and portfolio assumptions in today’s market.
Episode transcript
This transcript was generated with AI assistance. Report any material inconsistencies or inaccuracies by emailing podcast@9fin.com.
Anna Russi:
Hi everyone and welcome back to Cloud 9fin. I'm Anna Russi, a private credit reporter at 9fin, and I'm really pleased to be joined here today by Patrick Warren, Head of Private Credit Research at MSCI. There's been a lot of noise in private credit lately, from concerns around software lending to questions about valuation marks and liquidity. And today we are digging into one of the biggest questions right now. Is stress starting to build beneath the surface? But before we jump into the discussion, Patrick, to kick us off, it would be great if you could just introduce yourself, tell us a little bit more about you, and maybe a quick overview of MSCI.
Patrick Warren:
Sure. Great to be here today. I'm Patrick Warren. I'm the Head of Private Credit Research at MSCI. And kind of like we did with indexes in the public market, our goal is to kind of bring that level of transparency and visibility to private markets. So that spans private equity, private real assets, and private credit.
Anna Russi:
Okay. Amazing. Thank you. And you recently published some new research on private credit, right? Particularly in software lending and BDCs, and it points out to emerging pressure in parts of the market. Can you give us a quick summary of what the data is telling us?
Patrick Warren:
Yeah, absolutely. So on January 30th, Claude Cowork, or Anthropic announced some Claude Cowork plugins that kind of sent some jitters through the tech markets, in particular a fear that automation was going to kind of put a lot of software as a service companies in a sort of uncomfortable spot in the near future. And so one of the things that we saw in listed private credit BDCs in the month and a half, basically since that January 30 announcement, the BDC index that we have dropped about 11%, but it wasn't really uniform across BDCs.
Anna Russi:
Okay. Okay. Interesting. And then, I mean, the data shows the stress, but it's not really necessarily showing up in defaults just yet, right? Where is it actually showing up first?
Patrick Warren:
Yeah. So on the listed BDC side, basically we saw some differentiated repricing and BDCs with more software exposure experienced bigger sell-offs. Some of these BDCs have more than 30% of their assets in software, and those were generally the BDCs that took bigger price hits. If you account for the leverage that's in these BDCs, it looks kind of like a 6% repricing of software assets, basically in the one week since the Claude Cowork announcement.
Anna Russi:
Okay. Interesting. And then, do you think we're looking at a fairly typical cyclical repricing here, or are these early signs of something more systemic in private credit?
Patrick Warren:
Yeah. So kind of in late 2025, I think we saw some more systemic concerns around the Tricolor and First Brands bankruptcies. There was kind of a broader sell-off at that point. This looks more targeted at IT, more cyclical, something that doesn't necessarily look like it's going to obviously expand beyond IT at this point. I think one of the interesting areas, if you switch from BDCs to drawdown funds, which is where we have a lot of our kind of loan level data, when you look at venture debt, those loans were kind of experiencing increasing fair value write downs back in Q3. It turns out that wasn't in IT yet. That was healthcare. That kind of predated the IT concerns. But the prospect that IT jitters might make their way into these private credit drawdown funds where there is significant IT exposure, I think is kind of the thing to watch. Interesting.
Anna Russi:
Interesting. And then, I mean, you mentioned the healthcare point. Why would you say that stood out more?
Patrick Warren:
Yeah, it's an interesting kind of divergence. So if you compare venture debt healthcare loans to direct lending healthcare loans, there was completely different behavior. So on the direct lending side, healthcare looks pretty solid, kind of no surprise and write-down rates there. It was really isolated to venture debt healthcare where we saw issues. So part of that could be that they're smaller borrowers. And generally, smaller borrowers might be more susceptible to kind of changes in the economic environment than larger borrowers. Healthcare borrowers also tend to be relatively highly levered compared to some other industries. Not quite as highly levered as IT borrowers, but there are a couple of reasons that venture debt healthcare might be a little more vulnerable than other corners of the private credit market.
Anna Russi:
Got it. Got it. And how does that differentiate from the software sector in the venture debt side?
Patrick Warren:
So we didn't go down to the software level. About 40% of assets in venture debt are in IT generally. A lot of that obviously is in software. And like I said, these are Q3 numbers on the drawdown side. We're coming up pretty soon on the Q4 numbers being released. And it'll be a little longer still until the Q1 numbers show up. And that's really where we'll be looking for the kind of stress that we've seen in BDC software to really be reflected on the venture side.
Anna Russi:
Okay. Okay. Gotcha. And I guess a big part of this conversation comes down to valuations and valuation gaps. How reliable are private credit marks today as indicators of true underlying performance?
Patrick Warren:
Yeah. So just to be explicit, the fair value write-downs I'm talking about are based on GP marks. So this is a really important question. I think there's kind of broad recognition that private credit marks are lagged or smoothed to the extent that they're based on comps. Obviously there's valuation modeling going into this, but certainly there is more smoothing than we see in like the high yield bond market where you get market prices. So to the extent that that is true, I would say the kind of write down numbers that we're looking at probably understate the level of stress because GPs generally aren't eager to mark down their loans. So we could be looking at something more severe than what these numbers would really suggest.
Anna Russi:
Interesting. Interesting. So is it fair to say, for instance, that perhaps we are facing a delayed recognition of losses?
Patrick Warren:
Definitely. So not only is this Q3 data, but to the point we just discussed, it's Q3 data that's somewhat backward looking. It hasn't fully incorporated all of the information even as of September 30, 2025. So that will continue to kind of percolate through marks. And then, of course, we're a few months away from seeing what the Q1 numbers look like still.
Anna Russi:
Okay. Okay. Wow. And then I guess to what extent are lenders managing stress rather than recognizing it?
Patrick Warren:
Yeah. So things like PIK toggles or amendments via maturity extensions, that kind of thing. I think those are all tools that GPs generally look to before kind of announcing a markdown on their value. So that's something that we're going to be looking for as we kind of collect more data. But I don't think we have a kind of a solid answer that that's absolutely what's going on just yet.
Anna Russi:
Okay. Okay. I guess that's a, you know, the $1 billion question there, like if those tools are actually masking underlying credit deterioration, right? Right.
Patrick Warren:
And there's the masking option, but there's also, I think, a management option, a kind of a credit management option. So to the extent that it is a short-term shock that a borrower might be able to get through with a little bit of an amendment, that's not as bad as if it really is purely masking. Okay. But it kind of remains to be seen which of those it really is.
Anna Russi:
Okay. Interesting. Looking forward to when you guys do have that data. Let's zoom in on software, which has been a major focus area, right? There's been increasing scrutiny on the sector, especially software lending within private markets. What's the current picture there?
Patrick Warren:
Yeah. So on the drawdown side, software has become a major component of private credit funds. So I think I mentioned 40% of venture debt is in IT assets. On the direct lending side, it's almost 20%. Across private credit, corporate lending in total, it's 16%. So this is a really significant kind of share of NAV, net asset value, that is kind of subject to scrutiny that it hasn't been in the last couple of years. So there's certainly something to keep an eye on there. And if the kind of repricing that we saw in liquid BDCs were to start showing up in the Q1 numbers on these private credit funds, that's a significant risk to their performance.
Anna Russi:
Okay. One of the things that I see and hear about people asking about it, it's could that have been in the original underwriting assumptions?
Patrick Warren:
Yeah. So it's tricky to assess if that was optimistic in part because if you focus on the Claude Cowork shock, I'm not sure that that's easy to anticipate. But one of the things that we have observed is that a lot of deals were done a few years ago when valuations were quite high. There was a lot of money being deployed. And now when it's time for those assets to, if their loans mature or if it's a private equity position to kind of liquidate that position and sell it, they kind of have higher expectations because of their entry conditions. And those aren't necessarily being supported by the current market right now. So there's a combination of underwriting and just the situation they were in when they originated these loans that I think we need to keep in mind.
Anna Russi:
Okay. Okay. That's fair. And then another key question for investors is the diversification of the portfolio, right? Do you see any signs that correlation risk is being underestimated across portfolios that are assumed to be diversified?
Patrick Warren:
Yeah. So I think this is really important. If you think of something like private credit, you probably imagine it going in like a fixed income sort of allocation for an asset owner. But one of the really interesting things that we've seen in our data is the extent to which they're just pure equity positions inside of private credit funds. And apart from kind of more distressed like debt, which can behave kind of equity like and introduce correlations with your equity portfolio, the ownership of actual equity inside of a private credit fund induces a very explicit correlation with equity that I think I'm not sure everybody fully appreciates. And then of course, on the kind of sectoral software side, if you were trying to kind of get away from or reduce your IT exposure on your equity book where it might have ballooned in the last few years, private creditisn't a safe haven from IT exposure anymore, given the extent to which those investments have really ramped up in the last five years. And we've seen significant increases in IT exposure within private credit over that period.
Anna Russi:
Okay. Okay. Turning back to venture debt again, one statistic that jumped out in your in your research is that loans marked at least 20% below par, right? And I think like that number is the double from like comparing to 2022. Correct me if I'm wrong on this, but what is driving that sharp increase?
Patrick Warren:
Yeah. So the way I would describe it is loans kind of marked at 80% of their cost basis. So you can think of that as basically a 20% fair value write down at least. And we've seen that rise from 9% in early 2022 to over 24% as of Q3 2025. So that's a fairly alarming rise on the venture debt side. And again, that was driven largely by healthcare. We have not seen that kind of increase in write downs on the direct lending side or opportunistic debt side. So it is kind of surprisingly isolated in venture debt at this point.
Anna Russi:
Okay. Okay. Interesting. That's fascinating. And then what differs in the venture debt side from direct lending, specifically, I guess, in the healthcare sector, right?
Patrick Warren:
Yeah. So I think that kind of goes back to the borrower size discussion. And usually if you start entering an economic cycle or a rate increasing cycle, small borrowers generally have less ability to manage that than large borrowers. And these are overwhelmingly floating rate loans. So when interest rates start to rise, it does dramatically increase the debt burden on borrowers because their interest payments are going to rise with rates. So I think that size factor is the primary driver. And again, healthcare borrowers are generally more leveraged. So a relatively leveraged small borrower is in the perfect position to get adversely affected by rising rates.
Anna Russi:
Right. Right. Well, Patrick, really fascinating insights. And yeah, thank you so much for joining us today and giving those insights and overview of your research.
Patrick Warren:
Yeah, my pleasure. Thank you for having me.
Anna Russi:
Yeah. Really looking forward to keep updated to your next one. And thank you all for listening.
