That Was Then. This is Now.

• Private credit markets show deteriorating quality with 22% exposure to software sector vulnerable to AI disruption, compared to 13% in public loans; shadow default rates could reach 15-30% under stress scenarios similar to prior crises
• Iran conflict halted tanker traffic through Strait of Hormuz (from ~150 vessels/week to zero), causing oil prices to surge from $56 to nearly $100/barrel and 2-year inflation expectations to jump 100bps to 3.4% annualized
• Diversified portfolios and value stocks outperformed: U.S. large value gained 2% while growth fell 10%, emerging markets value stayed positive, and commodities rose 40%; BDCs trade at 15% discount to book value, steepest since COVID

Market Summary: Private Credit Concerns and Iran Conflict Reshape 2026 Outlook

Key Developments

Private Credit Market Stress

The private credit sector faces mounting pressure following fraud cases at Tricolor and First Brands Group. Current default rates stand at approximately 9%, but Fitch Ratings estimates a "shadow default rate" 6% higher when including pay-in-kind (PIK) arrangements. Worst-case scenarios project defaults reaching 15%, potentially exceeding 30% under severe stress—comparable to the tech bubble and Great Financial Crisis.

Sector Concentration Risks

Goldman Sachs data reveals 22% of Business Development Company (BDC) lending targets software companies, raising concerns about AI disruption. Public high yield markets show improved credit quality (BB-rated loans now 56% vs. 43% long-term average), suggesting lower-quality borrowers migrated to private markets.

Investor Flight

Major firms including Apollo, BlackRock, Cliffwater, and Morgan Stanley face redemption requests exceeding quarterly limits. BDCs fell roughly 10% in Q1 2026, trading at 15% discounts to book value.

Iran Conflict Impact (Operation "Epic Fury")

U.S. military strikes beginning February 28 closed the Strait of Hormuz, disrupting 20% of global oil supply. Oil prices surged from below $56/barrel in January to nearly $100/barrel by quarter-end.

Market Effects:

• S&P 500: -8% since conflict began
• Emerging Markets: -12% (South Korea -22%)
• High-yield spreads widened 73bps; investment-grade spreads up 18bps
• 2-year inflation expectations jumped 100bps to 3.4% annualized
• Fed rate cut expectations eliminated

Regional Variations:

Large-cap U.S. value stocks gained 2% while growth stocks fell nearly 10%. Commodities rose approximately 40%, providing diversification benefits.

Portfolio Implications

The firm maintains lowest U.S. corporate bond allocation in 20 years, avoiding below-investment-grade issues while favoring high-quality treasuries, U.S.