đ Hey, Nick here. Youâre reading the 2nd Edition of Three Questions with The Credit Crunch.
Iâm delighted to welcome Patrick Marshall as this weekâs 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 Hermesâ 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 â those who can afford to wait, or who source enough transactions to remain selective and disciplined â 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 â across the capital structure â and generate attractive returns. There may be businesses with a certain history, in segments that arenât 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 lendersâ 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 isnât 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 â 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 âthis time itâs differentâ 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.