Why Gulf investors should look past the noise in private credit 

As Gulf investors increase their exposure to private markets, private credit is drawing greater attention as a source of yield, diversification and downside protection.

The trend is reflected across the region. In Saudi Arabia alone, $5.3 billion flowed into private markets last year, according to Saudi Venture Capital Company, accounting for around 60 percent of total private capital investment in the Kingdom.

As allocations to private markets continue to grow, the appeal of senior secured lending is straightforward: disciplined underwriting, contractual protections, and a defined place at the top of the capital structure. 

But as the asset class grows, investors in Saudi and across the wider region should focus on a basic question: are those protections still intact? 

This matters especially in the Middle East, where private credit is growing but the market structure differs from that of the US.

America’s private credit market became exceptionally deep in part because, after the global financial crisis, banks were pushed back from parts of middle-market lending.

In many other regions, including the Middle East, banks still play a more active role, meaning opportunity set, pricing and lender protections can vary. 

Twenty-five years ago, we began making loans to middle-market companies. Our strategy was designed to pursue deals the conventional market, commercial banks at that time, would not or could not.

Nobody called it “private credit” or “direct lending” then. It was simply senior secured lending, and the rules were straightforward: rigorous due diligence, tight loan agreements with actionable covenants, first-lien collateral, and an unwavering focus on getting our investors’ money back. 

Private credit’s recent wave of negative headlines focuses on valuations, fund liquidity structures, fund leverage used, and software/AI-linked exposure of lenders.

These concerns deserve attention and are important. However, we feel there is a more fundamental problem: the steady dismantling of the historical protections that make senior secured lending an attractive and safe destination for capital. 

The senior secured position sits at the top of any capital structure.

In exchange for the lowest cost of capital, the lender receives the most protection: first claim on collateral, priority in bankruptcy, and a loan agreement governing the borrower’s behavior. We view the loan document as the asset class’s unique hedge. 

Since the GFC the value of that hedge has eroded steadily.

Leverage levels climbed as low rates and rising valuations made higher leverage seem manageable. Covenants weakened with “covenant-lite” structures becoming the norm.

Liability management exercises, a maneuver that removes the collateral from the original lenders, entered the vocabulary.

In a benign credit environment, these concessions went largely unpunished. This environment is now changing. 

Base rates have normalized. SOFR is no longer hovering near zero. Economic uncertainty has returned.

For lenders who deployed capital at peak leverage assuming rates would stay low with weaker documentation, the reckoning is beginning.

Rising payment-in-kind provisions, more frequent loan amendments, and deteriorating coverage ratios are warning signs of credit stress in an asset class where many practitioners have never navigated a difficult period.

There hasn’t been one since the GFC. 

For investors navigating this shift, four principles matter. 

Demand the basics. Senior secured lending derives its value from its senior position in the balance sheet: first out, last to lose, with a loan agreement governing a borrower’s conduct.

Verify that your manager insists on these attributes, and that past performance was achieved with them in place, not despite their absence. 

Respect illiquidity. Private credit is inherently illiquid. That is not a flaw; it is a trade-off that justifies the return premium and document protection.

Fund structures promising liquidity inconsistent with underlying loans introduce mismatches that history has shown can become problematic. 

Understand that principal preservation is the only job. In an asset class where success simply means recovering principal plus agreed interest, risk mitigation is paramount. Look for consistent, documented behavior across a full credit cycle. 

Finally, expect the unexpected. Mistakes happen and companies underperform even with thorough underwriting.

The senior secured position offers the best foundation from which to manage a troubled credit, but only if the documentation is intact, the collateral is real and accessible, and the manager has the expertise and critically, the willingness to take control of a business if required. 

Private credit remains a valuable part of the modern investment toolkit, including for allocators in the Gulf seeking resilient income and differentiated exposure. 

The private credit asset class is proven and resilient. We believe it should be considered a safe harbor in a volatile market, especially in places like the Gulf where economic diversification will create demand for innovative sources of capital.

At its core, this is a straightforward business: diligence a borrower, negotiate a loan agreement, monitor performance, and get the money back.

The concern should not be the investment vehicle, structure, scale or leverage; it is the investment manager selected. 

We expect the next few years to separate those who adhered to risk-mitigation focused lending from those who pursued a deployment-first mindset. Investors who understand that distinction will be far better positioned than those cowering from the headlines. 

• Richard Miller, is chief investment officer of TCW Private Credit