👋 Hey, Nick here. You’re reading the 2nd Edition of Three Questions with The Credit Crunch.

I’m delighted to welcome Patrick Marshall as this week’s guest. Patrick is CIO & Head of Private Credit at Federated Hermes. He is responsible for the day-to-day management of the direct lending funds, and he oversees which transactions to put forward for investment by the funds.

Federated Hermes is a global active investment manager providing investment solutions across equities, fixed income, liquidity, and private markets. As of June 30, 2026, Federated Hermes managed approximately $912 billion of assets, alongside $2.3 trillion of assets under advice through its stewardship business.

Federated Hermes’ Private Credit platform invests across European direct lending, real estate, and other private credit strategies, with approximately $3.4 billion of assets under management as of June 30, 2026. Its Direct Lending strategy focuses primarily on senior loans to UK and European mid-market companies, supported by an origination model built around relationships with European banks and financial sponsors.

1. Where do you see the market making mistakes right now?

There is a lot of dry powder chasing a limited number of quality deals in the market. With some direct lenders needing to deploy, the market has become very aggressive for companies operating in popular sectors of the economy. This has led to aggressive transactions, where Federated Hermes feels the risk is not appropriately priced, and where lenders are not benefiting from the usual protections. A number of these aggressive transactions were undertaken in 2020 and 2021, and these loans are now being restructured as borrowers have struggled to meet expectations under the weight of aggressive leverage levels at a time when the economic outlook has softened.

What opportunities does this open up?

The more aggressive lenders of the past few years are now having to deal with internal portfolio issues, such as defaults or restructurings, and are therefore not able to focus on deployment. This has meant that managers who have stayed disciplined and adopted conservative lending strategies in the past are now benefiting from less competition to deploy in the current market. We anticipate that the more established players — those who can afford to wait, or who source enough transactions to remain selective and disciplined — will be well positioned to seize the most attractive opportunities going forward, although, with a number of risks on the horizon, this will remain a market where the disciplined lender will outperform the more aggressive lenders.

2. What have you changed your mind on in the last year?

The Direct Lending market has become increasingly crowded, but there remains significant opportunity the provide financing to lower-middle-market companies in Western Europe with more complex financing requirements — across the capital structure – and generate attractive returns. There may be businesses with a certain history, in segments that aren’t particularly popular, or with some other aspect that makes financing more challenging. These types of opportunities could be attractive if the lender really understands the business and is experienced at dealing with these types of companies.

3. What advice would you give investors navigating difficult portfolio situations?

In the current market environment, we are seeing an increase in defaults, and I would suggest that hiring in-house restructuring experience is essential. Over the last 18 months, investors have increasingly been asking questions about lenders’ in-house restructuring knowledge to reassure them that their recoveries are maximised in the event of distress in the portfolio. This concern has become more acute, and those relying on external restructuring resources may struggle to raise further capital. At Federated Hermes we only hire people with experience of dealing with restructuring so that if the team must deal with a difficult situation, we are able to deal with it inhouse rather than being a forced seller because the expertise isn’t available to maximise recovery for our investors.

What bad advice do you hear repeated most often?

That bigger is always better. A number of direct lenders are chasing AUM and raising mega funds – and this has forced the direct lender to migrate away from the real mid-market towards the large cap market (with all the risks that the large cap market presents) in order to deploy, because mid-market loans are too small to deploy a full mega fund. In many cases performance has suffered, as managers have become less able to pick the right credits to deploy. Managers with smaller funds can maintain their focus on the real mid-market and also can be more disciplined in who they lend to as they have less pressure to deploy.

Finally, I would also say that it always very worrying when a lender says that “this time it’s different” when discussing the state of the market and why it is acceptable to provide very aggressive structures to borrowers. History has shown that disciplined lending always pays off in the longer term.

👋 Hey, Nick here. You’re reading the 1st Edition of Three Questions with The Credit Crunch.

I’m delighted to welcome Marcel Schindler as this week’s guest. Marcel Schindler, Partner and Head of Private Debt at StepStone Group, leads the firm’s global private debt activities.

StepStone Group Inc. (Nasdaq: STEP) is a global private markets investment firm focused on providing customized investment solutions and advisory and data services to its clients. As of June 30, 2026, StepStone was responsible for approximately $913 billion of total capital, including $245 billion of assets under management. StepStone’s clients include some of the world’s largest public and private defined benefit and defined contribution pension funds, sovereign wealth funds, and insurance companies, as well as prominent endowments, foundations, family offices, and private wealth clients, which include high-net-worth and mass affluent individuals. StepStone partners with its clients to develop and build private markets portfolios designed to meet their specific objectives across the private equity, infrastructure, private debt, and real estate asset classes.

Stepstone’s Private Debt program leverages the Firm’s global platform to target privately negotiated debt transactions across corporate, real estate, and infrastructure debt. As of June 30, 2026, Stepstone Private Debt has total capital responsibility for $88 billion.”

1. Where do you see the market making mistakes right now? What opportunities does this open up?

“LPs exiting private credit strategies — such as BDCs — on the assumption of an impending credit downturn may be unintentionally positioning themselves for greater downside if that very scenario unfolds.”

Let me start with a simple premise: the market is generally right. However, while markets ultimately reflect aggregate information, they also tend to express periods of clear over- and underestimation, often driven less by fundamentals and more by investor sentiment.

At the moment, sentiment appears strongly influenced by a combination of risk aversion and return-seeking behaviour. We see this reflected in current allocation behavior. For example, some investors – mainly in the segment of wealth advisors - are rapidly reducing their exposure to credit, largely in response to negative media narratives suggesting a potential breakdown of credit markets. At the same time, proceeds are reallocated into equities.

This raises an important question: in what scenario would equities meaningfully outperform during a genuine credit dislocation? Historically, a credit downturn has typically been accompanied by falling equity valuations. In that context, moving from credit into equities may not reduce risk but increase it. In fact, LPs exiting private credit strategies — such as BDCs — on the assumption of an impending credit downturn may be unintentionally positioning themselves for potentially remaining exposed to downside risk if that scenario unfolds.

What this highlights, particularly in private markets and in comparison to public markets, is the importance of patience and persistence as core investment principles. Short-term sentiment-driven allocation shifts often come at the expense of long-term value creation.

That said, it is fair to acknowledge that credit markets have experienced a period of rapid growth. Such expansion inevitably requires adjustment, both at the GP level and in the quality of underlying investments. Increased competition has, in some cases, resulted in weaker manager selection and less disciplined transaction execution. GPs have often been incentivized to raise and deploy capital quickly, not only in primary strategies but also in secondaries.

This dynamic is particularly visible in the credit secondary market, where capital raised has significantly outpaced transaction volumes. As a result, discounts have compressed and, in my view, we believe credit tail risk may not be fully reflected in current pricing.

Some market participants argue that secondary volumes in credit will evolve in a similar way to private equity secondaries. However, this comparison overlooks a fundamental difference in the nature of the underlying assets. Credit instruments are typically shorter in duration and inherently more exposed to tail risk. As a result, the structural development of credit secondaries is unlikely to mirror that of private equity and underwriting discipline is even more required.

It is true that we have seen an increase in secondary activity, but this growth has been largely one-sided. It has primarily been driven by GP-led transactions, often used as a tool by managers to restructure portfolios and address tail exposures.

Taken together, these dynamics create opportunities for “patient” capital that focuses on providing liquidity to off-market transactions and on strategies that are not simply the flavour of the season.

2. What have you changed your mind on in the last year?

“The resilience of the corporate market has proven significantly stronger than most of us anticipated.”

Over recent years, the market has absorbed a series of major disruptions—COVID-19, rapid interest rate increases, energy price shocks stemming from both the Russia–Ukraine conflict and more recent geopolitical tensions in the Middle East, and now the accelerating impact of AI.

What stands out in particular is the adaptability of sponsor-owned companies. Their ability to adjust business models in response to unforeseen challenges, while maintaining competitiveness against both private and public peers, is remarkable. While this resilience is not yet fully reflected in returns—given that private equity is currently underperforming public equity over a ten-year horizon—it is clearly visible at the level of underlying business fundamentals.

In an environment characterized by increasingly rapid and frequent disruption, this reinforces the view that private market strategies may offer long-tern advantages when supported by disciplined selection and portfolio construction. However, realizing this advantage requires patience, as well as an ever-increasing level of selectivity and skill in manager and asset selection to achieve the desired outperformance.

3. What advice would you give investors navigating difficult portfolio situations? What bad advice do you hear repeated most often?

Diversification benefits are often not fully understood, and structural risks—such as increasing overlap in underlying positions across GPs—are frequently underestimated in today’s market environment.

Two areas that are frequently underestimated in private markets—not just in private credit—are portfolio construction and monitoring & reporting (M&R) capabilities.

Some investors focus heavily on manager selection and invest in building strong underwriting capabilities. While important, this alone is not sufficient to prevent fundamental issues when constructing and overseeing a portfolio.

When challenges arise in an existing portfolio, we believe investors should consider first performing a thorough, expert-level analysis of the underlying drivers, rather than reacting prematurely or “throwing out the baby with the bathwater.” Over the past 30 years, StepStone has led numerous portfolio analyses and restructurings, designed to help investors evaluate potential paths forward. While secondary transactions are one potential solution, there are often less obvious, more effective alternatives that remain underutilized by investors.

One of the most common misconceptions we encounter relates to portfolio construction and how portfolios should be monitored—particularly in credit. Diversification benefits are often not fully understood, and structural risks—such as increasing overlap in underlying positions across GPs—are frequently underestimated in today’s market environment.

Adopting a holistic portfolio construction approach, rather than focusing solely on GP selection, may help improve portfolio stability and support more resilient risk-adjusted outcomes over the medium term. This requires not only a deep and broad understanding of the investment landscape and GP universe, but also the ability to design and implement structurally diversified multi-credit portfolios.

Moreover, the rationale for domain expertise and asset-class specific tooling has grown in lockstep with the expansion of Private Credit as a proportion of institutional portfolios. Logically, as exposure increases, and commensurate regulatory scrutiny ensues, more light-touch or generalist processes become inadequate, and primed for optimization. For example, broad-brush comparisons between the syndicated loan universe and direct lending portfolios are now increasingly limited as a point of comparison given the emergence of specialist tools such as the Kroll StepStone Private Credit Benchmarks – a solution StepStone developed jointly with Kroll, a leading independent provider of private market valuations, in order to bring transparency to the market.

Bespoke and representative benchmarks are but one piece of the portfolio monitoring evolution, however. Absent the correct context, data and relative yardsticks may still evoke more noise than signal. It is here that the most prudent allocators are also soliciting the expertise of asset-class specialists who, by virtue of decades of skin-in-the-game investing experience, can significantly enhance their internal portfolio monitoring process. Whether via time-tested methods that challenge creditworthiness and valuation assumptions, or via proven scenario analysis that helps transform historical data into forward-looking risk intelligence, partnerships that externalize monitoring and reporting are helping unlock the private markets scale that LPs require.