A decade ago, private credit was the preserve of a handful of specialist funds. Today it commands over $2 trillion in global AUM, with institutional allocations growing across pension funds, sovereign wealth vehicles, and family offices alike. The asset class has arrived — and with arrival comes a different set of challenges.
The Maturation Paradox
Maturation is good for the asset class's legitimacy. It is not uniformly good for returns. When capital floods into any market, spreads compress, documentation weakens, and deal terms drift in favor of borrowers. We have seen exactly this dynamic play out in the US and European private credit markets over the past three years.
The response from many managers has been to move further out on the risk curve — accepting lower coverage ratios, thinner covenants, or more complex capital structures — in order to maintain yield targets. This is a pattern worth watching carefully.
Our view: the current environment rewards discipline over deployment velocity.
Where Returns Have Held
Not all segments have experienced the same spread compression. Several areas remain structurally attractive:
- Smaller deal sizes ($5M–$30M tickets) where institutional capital cannot efficiently participate
- Emerging market jurisdictions where information asymmetry and execution complexity create natural barriers to entry
- Bespoke structures — royalty financing, revenue-based lending, asset-backed facilities — where standard credit underwriting does not apply and specialist knowledge is required
These pockets share a common characteristic: they require operational capability, not just capital. The return premium, in other words, is compensation for expertise — which is a far more durable source of edge than size or cost of capital.
What Institutional LPs Are Asking
In our conversations with institutional allocators over the past twelve months, three questions recur consistently:
- How do you differentiate sourcing? — LPs are aware that top-quartile returns in private credit depend heavily on proprietary deal flow rather than auction-process competition.
- How do you handle credit losses? — Loss avoidance, not just gross yield, determines net returns. LPs want to understand workout capabilities and loss history.
- How does the strategy hold up in a downturn? — With the credit cycle maturing, stress-testing has become a central part of manager due diligence.
These are the right questions. They reflect a market that has grown more sophisticated — and a capital allocation environment where differentiation must be earned, not assumed.
Our Position
Kaji Kapital operates in the segments of the private credit market where scale works against larger participants. We do not compete with the large-cap direct lending platforms. We operate where their attention is absent and our regional knowledge is an advantage.
Questions about our approach to private credit? We are always open to direct conversations.