The End of Easy Private Credit and What Comes Next with Michael Gross

This week’s episode of Industry Insights: Exclusive Interviews delivers a comprehensive examination of private credit’s evolution through the lens of Michael Gross, CEO and co-founder of SLR Capital Partners. Host Julie Miecamp and Octus reporter Katherine Schwartz explore three decades of market transformation, from the asset class’s niche origins to its current commoditized state.

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The Post-Golden Age Reality

Gross addresses the current state of private credit markets amid ongoing volatility. Drawing from his 30-plus years of experience, including his foundational role at Apollo, Gross provides candid insights into how the industry continues to shift.

“Five to ten years ago, private credit focuses on financing middle market companies that otherwise can’t access the public markets,” Gross explains. “We get a 200 to 300 basis point illiquidity premium for making those loans.”

However, the dramatic growth of non-listed Business Development Companies (BDCs) creates unprecedented liquidity in the marketplace. This influx of capital pushes private credit providers into direct competition with public markets, effectively eroding the traditional illiquidity premium that once defines the sector.

Gross highlights what many industry participants call the “golden age of private credit” in 2023, when liquid loan markets shut down and private credit steps in to execute billion-dollar transactions at yields of 12-13%. However, that golden age proves short-lived as liquid loan markets roar back in 2024, forcing private credit providers to either reprice their loans at lower returns or lose assets to refinancing.

Strategic Positioning in a Commoditized Market

Gross emphasizes the importance of strategic differentiation in today’s environment. Rather than competing solely in cash flow lending, SLR develops a multi-strategy approach encompassing life sciences lending, receivables financing, and inventory finance.

“The way you make money in private credit for your investors is to truly act as an investor and focus on those strategies that not only bring in a liquidity premium, but more importantly, bring a complexity premium,” Gross notes.

This complexity premium creates barriers to entry and ensures borrowers must access private markets regardless of their size, providing more sustainable competitive advantages than scale-focused strategies.

The Retail Capital Revolution

Gross examines the proliferation of retail-oriented private credit funds and their impact on market dynamics. He offers a measured but critical perspective on this trend, noting that while retail capital provides tremendous fee-generation opportunities for asset managers, it fundamentally alters investment strategies.

He cites an unnamed successful asset manager whose average portfolio company EBITDA grows from $100 million to $330 million over recent years due to fundraising success. At $330 million EBITDA, these companies compete directly with liquid loan markets, resulting in yields declining from 10-12% to 7-9%.

Gross also addresses how institutional investors become more sophisticated, recognizing they have sufficient exposure to traditional cash flow lending and now seek different yield sources through asset-based lending and asset-based securities.

Asset-Based Lending: The Overlooked Opportunity

Gross highlights asset-based lending as an area that remains relatively overlooked despite its structural advantages. Unlike cash flow lending, where covenant erosion becomes standard, asset-based lending maintains highly negotiated documentation with robust borrowing base protections.

“The beauty of the asset-based lending business is that if you look at documents today and compare them to documents five or ten years ago, they haven’t changed,” Gross explains. “There’s no such thing as covenant-lite and there’s no such thing as no borrowing base.”

SLR’s current pipeline reflects this strategic focus, with over 80% of their $10 billion backlog concentrated in specialty lending strategies and only 20% in traditional cash flow lending.

Rapid-Fire Insights: Market Outlook and Personal Reflections

The episode concludes with rapid-fire questions that reveal Gross’s current market concerns and strategic thinking. He expresses particular attention to the continued proliferation of retail-oriented funds and their impact on traditional private credit opportunities.

When asked what keeps him up at night, Gross emphasizes the fundamental responsibility of lenders: “As a lender, we don’t get paid to take risk. We only get paid to get paid back.”

Regarding overlooked areas of private credit, he points to traditional working capital financing, which remains underserved as regional banks retreat from the space. However, he notes that the complexity required to build these platforms creates natural barriers that benefit established players.

Gross predicts higher default rates and loss severity than market participants currently expect, citing the lack of documentation protection in many senior secured loans today.

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Produced and edited by two-time Emmy Award-winning producer Tanya Hubbard.