In every market cycle, there's a moment when quality and quantity diverge. When what looked identical in the spreadsheet reveals itself to be fundamentally different under stress.
We saw it in 2008 with mortgage funds. We saw it in 2020 when "downside protection" became "temporary NAV markdowns." We saw it in 2022 when "strong borrower relationships" meant "we're extending terms because they can't refinance."
We're entering another one of those moments. Not because private credit is broken—it's not. But because the market is at an inflection point where the difference between disciplined managers and yield chasers is about to become very visible.
Four Forces Reshaping Everything (Whether Managers Acknowledge Them or Not)
Force #1: Rate Normalization and Yield Compression
Most private credit is floating-rate debt. When SOFR was 5.3%, loans paid 13-15%. As SOFR drops to 3.5%, those same loans will pay 11-13%. Your 13% net return becomes 10-10.5% through no fault of the borrower—just math.
This is where guaranteed returns become dramatically more valuable. When the market compresses by 200 basis points, investors with variable returns see their distributions drop. Investors with guaranteed returns see nothing change.
The question you should ask your manager: "What percentage of your return came from rate increases versus spread, and how have you modeled forward returns in a 3.5% SOFR environment?"
Force #2: Regulatory Scrutiny
The SEC has flagged private credit as a 2025 examination priority. They're focusing on valuation practices, fee disclosure, liquidity mismatches, and whether marketing materials reflect reality. Managers taking shortcuts on any of these will face problems.
This increased scrutiny isn't bad for the industry—it's good. It separates managers who've been operating with institutional-grade compliance from those who've been cutting corners.
The question you should ask: "Who performs your third-party valuations, how often, and have you ever disagreed with their assessment?"
Force #3: Market Maturation
More capital chasing deals means spreads compress. A deal commanding SOFR + 8% two years ago might only get SOFR + 6.5% today. Natural market evolution, but it means the easy money phase is over.
The winners in this environment will be managers who can either access proprietary deal flow through relationships, underwrite more efficiently through technology, or operate in less-crowded niches like the sub-institutional market.
The question you should ask: "How has your spread capture changed over the past 24 months, and what's your competitive advantage in deal origination?"
Force #4: Retail Capital Changes Market Dynamics
Institutional capital is patient. Retail capital panics faster. Redemption queues form more quickly. This creates a fundamental mismatch: illiquid assets held by vehicles promising liquidity to investors who expect it.
Something has to give. Either funds hold more cash (dragging returns), they gate redemptions (angering investors), or they sell loans at discounts (destroying NAV).
The question you should ask: "What percentage of your investor base has quarterly liquidity rights, and what happened to redemption requests during Q4 2022?"
What Will Break First
With loan modifications already up from 8% to 12% of portfolios year-over-year, certain strategies will show stress first:
Overleveraged funds using fund-level borrowing face a double squeeze: borrowing costs staying elevated while loan income drops.
Covenant-lite loans have no early warning systems. Managers won't know borrowers are struggling until it's too late to fix.
Development and construction debt faces delays, cost overruns, and projects that never get completed. The 15-18% yields come with equity-level risk.
Operators without track records have never managed through downturns. When stress hits, they fold.
Growth-equity-disguised-as-debt will perform like equity in losses but without equity upside. Worst of both worlds.
These aren't predictions—they're patterns that repeat every cycle.
The Guarantee Advantage: Why Predictable Beats Variable in Uncertain Times
Here's what most investors miss: there's a fundamental difference between "we target 16% returns" and "we guarantee 12-14% returns." In uncertain markets, that difference becomes worth more than the percentage point spread.
When a platform guarantees returns, they're absorbing three specific risks:
- Rate compression risk (rates drop, you still get your guaranteed rate)
- Loan performance risk (borrower struggles, you still get paid)
- Portfolio construction risk (deployment delays don't affect your returns)
Compare real outcomes over 5 years:
Guaranteed 12%: $100k grows consistently to $177k
- Total return: 77% or 12% annualized
- Zero surprises. You know this on day one.
Variable "Target 16%": $100k fluctuates, ends at $161k (16% → 15% → 10% → 2% → 8% due to rate compression, modifications, stress)
- Total return: 61% or 10% annualized
- Constant surprises. Distributions fluctuate quarterly.
The "boring" guaranteed 12% delivers $16,000 more because it doesn't lose ground in bad years.
To guarantee returns, you need radically conservative underwriting—60% LTV, 2.2x+ coverage, stabilized assets, experienced operators. You need those cushions because you're taking the downside risk, not your investors.
The guarantee isn't a limitation. It's proof of underwriting discipline.
Platforms offering guaranteed returns—like Nectar's stated 12-14%—can maintain those guarantees through rate compression because they've built portfolios with structural protection that absorbs the interest rate risk. We built the portfolio with enough structural protection that we can absorb 200 basis points of rate decline and still deliver what we promised. Most variable-return funds can't say that.
What Sophisticated Investors Are Doing Now
I spend time with family offices and institutional allocators. Here's what smart money is actually doing:
- Rotating within private credit from development/covenant-lite toward senior secured cash flow lending. Not exiting—repositioning.
- Demanding transparency beyond quarterly NAV statements. Monthly reporting with loan-level detail is becoming the baseline.
- Building cash positions to deploy when stress creates opportunities. The best deals happen when others are forced sellers.
- Emphasizing track records through full cycles. Did the manager navigate 2008-2011? 2015-2016 energy crisis? 2020 pandemic?
- Focusing geographically on supply-constrained, job-growth markets over oversupplied Sunbelt metros or declining gateway cities.
They're not guessing about what's coming. They're positioning ahead of it.
Five Questions That Separate Quality from Marketing
If you have capital deployed anywhere in private credit, ask these questions. The quality of answers will tell you everything:
1. "What percentage of your portfolio is in modification or forbearance right now?"
If they say zero, they're either lying or about to discover problems. The honest managers will give you a number and explain why they're comfortable with it.
2. "Show me your three most stressed loans and your remediation plan."
Every manager has stress. The sophisticated ones can walk you through specific examples, early warning signs they saw (or missed), and how they're resolving it. The ones to avoid claim they've never had a problem.
3. "Walk me through your worst loan from the past 36 months—what happened and what did you recover?"
Real stories reveal workout capabilities. If they can't think of one or blame the borrower entirely, that's a red flag.
4. "If SOFR drops to 3.5%, how do you model my distributions?"
Specific numbers matter. Vague answers like "we'll maintain competitive returns" mean they haven't thought about it or don't want to admit the compression.
5. "If I wanted to redeem today, what's the realistic timeline and would I face any NAV discount?"
Honest answers about liquidity constraints are better than false promises. If they claim "next quarter, full NAV" but hold 5-7 year loans, the math doesn't work.
Positioning Your Portfolio for What's Coming
The next 24 months will reveal which private credit managers were disciplined and which were lucky.
Where to reduce exposure:
- High-leverage strategies (75%+ LTV)
- Development and value-add debt
- Covenant-lite corporate loans
- Funds with opaque valuations
- Managers with no cycle experience
Where to maintain or increase:
- Senior secured positions (sub-65% LTV)
- Stabilized, cash-flowing assets
- Experienced operators with cycle track records
- Platforms with transparent reporting
- Guaranteed return structures that absorb rate compression
Most importantly: Demand transparency. Monthly reporting. Loan-level detail. Property-specific metrics. Third-party valuations.
If your current manager won't provide it, ask why. Then decide if that's acceptable.
What This Means for Nectar Investors (And Those Considering It)
At Nectar, we're watching these same forces play out. Our quarterly investor updates will continue to address:
- How rate compression is affecting our underlying loans (and why our guarantee protects you)
- Which markets we're seeing stress in (and which remain strong)
- How our portfolio composition is evolving
- What early indicators we're monitoring
We're hosting one on October 23rd at 2PM ET to discuss these topics in depth—including specific portfolio performance, our view on the next 12-24 months, and transparent Q&A about anything you want to know. If you're an investor and haven't received details, check your email or reach out directly.
For those considering Nectar: the next 12 months will demonstrate why we've been so insistent on conservative underwriting even when it meant lower headline yields than competitors. When their 16% "targets" compress to 10-12% with variable distributions, our guaranteed 12-14% will look very different than it did in the marketing materials.
The Bottom Line
Private credit isn't broken. But the easy money phase is over.
The next phase requires better underwriting, better risk management, and better alignment between managers and investors. Not everyone will adapt.
Some managers will cling to aggressive strategies until portfolios blow up. Some will discover their liquidity promises can't be kept. Some investors will learn that chasing yield without understanding risk is speculation, not investment.
But for investors who ask the right questions, demand transparency, and position defensively, private credit remains one of the most compelling risk-adjusted return opportunities available.
The difference between excellent outcomes and mediocre ones won't be which asset class you choose. It'll be which managers you choose within that asset class, and whether you understood what you were actually underwriting.
The institutions figured this out years ago. Their capital is already deployed and working. The question for individual accredited investors isn't whether private credit belongs in a sophisticated portfolio—the institutional money has already answered that.
The question is whether you'll access these opportunities through vehicles that maintain discipline when others are chasing yield, that prioritize downside protection when borrower stress is rising, and that offer realistic expectations about returns in a changing rate environment.
That's the question worth asking. And the next 24 months will show you who had the right answer.
Derrick Barker is the CEO and Co-Founder of Nectar, a fintech platform providing flexible private credit solutions to commercial real estate operators. A Harvard graduate and former Goldman Sachs bond trader, Barker has personally acquired, renovated, and managed over $450 million in real estate assets, giving him unique insight into both sides of the lending equation. Under his leadership, Nectar has deployed over $50 million across 150+ loans while maintaining a perfect distribution track record with 15% average annual portfolio wide returns for investors.
