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Welcome to The Bridge by iCapital. I'm Shonali Basick, the Chief Investment Strategist at iCapitl, and today's episode is just a little different. We're going to recap one of the biggest stories of 2026, that's private credit. Every asset class eventually hits an inflection point after years of explosive growth. And for private credit, 2026 may have been that moment. It was a year marked by tough questions and growing debate about where risks were hiding beneath the surface. Some investors saw some warning signs, where others saw one of them. Most compelling opportunity sets in years. But as I spoke with some of the industry's leading investors this season on the bridge, one theme kept emerging, that this story was more nuanced than the headline suggested, because this wasn't just a year of challenges. And perhaps no issue captured the year's debate better than the idea of liquidity. As private credit has become more accessible, many investors have gained access through vehicles that offer limited liquidity. But the underlying reality hasn't changed, that these are fundamentally illiquid assets. Redemption features may provide flexibility, but they're often intentionally limited because the underlying loans cannot be sold overnight without creating an asset liability mismatch. That distinction became one of the defining lessons of 2026. With 2027 on the horizon, here are five lessons from private credit's biggest test yet. Lesson number one, the age of dispersion has arrived. Not all managers are created equal. And for much of private credit's rise, differences between managers were harder to see. Capital was abundant, markets were supportive, and many portfolios performed very well. But conditions have changed. And what had once looked similar began producing very different outcomes across different managers. I really believe we're in the age of dispersion. For the prior 18 years, the performance of the asset class has been excellent. And if you looked at sort of the dispersion around the average, we were all pretty tightly clustered. So it was very hard to distinguish between the different managers. You're going to see some winners and losers within software. That's going to create winners and loses within software portfolios. I think that's going create dispersion in returns. You've got economic growth in the United States. You've Got equity markets on a tear. And then at the same time, these are Moody's default rates. Default rates are 6% a year. I've been doing this for 25 years at SVP, never seen it. Now the lesson isn't that private credit suddenly changed. It's that the market is finally revealing differences that were always there. Underwriting, portfolio construction, and discipline. For years, manager selection may not have been the story, and now it is. It's also showing up in how investors think about valuations, marks, and payment-in-kind structures, or PIC. Not all PIC is the same. Some structures are built into the original underwriting, and others emerge later when borrowers are under pressure. And in 2026, investors began paying closer attention to that distinction. You also have a marking issue where there's just, you know, not everybody, it's not using the same pricing service. Some self-mark with a process. Others will be third party. Some will, you'll see on private credit, will be increasing their picks, which means for whatever reason, the ability to pay cash interest, which would not be there. That raises an important question. When does a pick structure reflect the original design of an investment? And when does it reflect growing stress inside a portfolio? And good pick versus bad pick, as we've always defined it, is if you're doing it at kind of the time of the underwriting. Exactly. It's good. But if you're doing it retroactively to hide some issues, then that would be bad. Totally. As performance becomes more dispersed, investors may pay closer attention not just to returns, but to how those returns are generated, valued, and being reported. Lesson two, attention and fundamentals aren't the same thing. Headlines don't always reflect the fundamentals. But, if you followed the headlines in 2026, private credit looked like it was under pressure from every direction. There were liquidity concerns, software exposure, and the all-encompassing rise of AI, questions about redemptions. But many investors drew a distinction between the attention surrounding the market and what they were actually seeing inside their portfolios. I think credit fundamentals are actually very strong. I Think when we look at our book, you know, we don't see any underlying credit quality concerns. And when we look at our competitors' books and we look in the market, we generally feel the same about how they're positioned. And so I think, you know, ultimately, the concern is not so much about the credit quality. It's about the liquidity in the market. And it's about how people are looking at potential risks out in the future. It's very difficult to dispel the notion that credit quality is weak when it's strong. You know, all the data supports the continued health of these portfolios. The concerns were real, but many investors argued that the extra scrutiny and fundamentals had become two different conversations. The market was focused on what could happen next. Managers were focused onwhat was happening inside of portfolios today. Lesson three, private credit is not one market. Private credit is an umbrella, not a trade. One of the biggest mistakes investors make is treating private credit as a single asset class. And it's not. Private credit today is such a broad category. The words private credit by itself don't even do it. Behind that label are corporate loans, asset-backed finance, real estate credit, secondaries, and dozens of ways to take risk. There are different structures, protections, and outcomes to accommodate for. Unlike corporate credit where you're lending against cash flows, on the asset backside, you're typically buying assets that are held inside of an SPV. You have a number of very strict contractual protections so that ultimately if things do go sideways, you can run those pools of assets off and generate recoveries that are usually much better than a corporate credit loan that goes into default. Broad conclusions about private credit can be misleading. Different structures face different risks, and when markets get tougher, those distinctions start to matter. Lesson four, every yield comes with a trade-off. Returns are only part of the story, and one lesson became impossible to ignore this year, that private credit is still private credit. As new vehicles have brought the asset class to a broader audience, investors have gained greater access to private markets, but the underlying loans haven't changed. They're still fundamentally illiquid assets. Some vehicles may offer periodic liquidity and others redemption windows, but those features don't change the nature of the underlying investments. And 2026 reminded investors why that distinction matters. When you think about risk in your portfolio, it's not just about returns and volatility, because those are the two areas that private credit really shows its value proposition very clearly, right? These are generally lower volatility loans than the broadly syndicated market, and the returns are a significant premium. So it's a great story in that regard. There's no free lunch. The trade-off to that is the liquidity profile. And so people need to consider liquidity alongside the Sharpe ratio. Sometimes it'll be liquid, sometimes it'll be illiquid, and you want to match the liquidity with the vehicle that you're putting it in. The lesson wasn't that private credit failed the test. It was that investors became more focused on understanding the trade-offs behind the returns. Lesson 5. Private Credit 2.0. The reset may be the opportunity. If one theme emerged repeatedly this year, it was that periods of disruption can create opportunity. Not because the challenges disappear, but because the markets become more discerning. Capital becomes more selective and discipline matters again. Private credit secondary will follow the same trend, but at a multiple because there is twice or three times more debt in any given deal than equity. So the volumes are going to be bigger. The investors who put a lot of money into the primary market over the past 10 years, they're looking at rebalancing. And this is, in my view, one of the biggest opportunities we've seen over the last two decades of a new asset class into something that is very basic, which is this credit market. The reset is creating new opportunities and reinforcing old principles such as patience, discipline, and underwriting. Part of the reason that we're seeing so much institutional interest right now is institutions are seeing this kind of this phenomena happening and saying, oh, wow, this is a great, you know, we're already in private credit. This is a good entry point for us to actually lean in even more because we're now getting double digit unlevered returns on first lien senior secured. you know, when we kind of got to the tail end of 2025, some of these deals were having an eight something percent sort of unlevered return. And so if we can go from an eight something percent to a kind of a 10% plus type return, you know that's really, really attractive for that type of risk. Private trade 2.0 will look like much more what was basic leverage finance, 30 years ago. If we come back to a good sense, discipline in the underwriting, and as I said, a bit of honesty in the way you're approaching your mark and the way you deploy. I mean, credit is the basic of the financial industry and the modern financial industry. I really believe we are in a situation where it bodes well for the cycle that we are facing right now. The takeaway isn't that private credit survived a difficult year. It's that the market may be entering a more mature phase, one defined less by asset gathering, and more by underwriting discipline. Whether the debate is software, valuations, marks, or payment-in-kind structures, the market is becoming more focused on fundamentals and more demanding of discipline. As the industry calls it, private credit 2.0. If 2026 revealed anything, it's that there is no single story in private credit. The year didn't produce a verdict on the asset class, more so a reality check. Some risks proved overblown. Others proved very real. But perhaps the biggest lesson was that outcomes are no longer moving in lockstep. For years, abundant capital made much of the market look the same, yet this year revealed who is different. The next chapter of private credit won't be defined by headlines, but by discipline, manager selection, and the managers who adapt as the market evolves. I'm Shonali Basick. Thank you for watching The Bridge by iCapital. Thank you.