28 Apr Private Lending Requires Prudent Best Practices

Pasadena Private Lending is clearly in the private credit business. We are experienced lenders trained at a variety of major financial institutions and traditional banks, and frankly, the team are all refugees from firms that because of regulatory abuse by the few, the many were forbidden from exercising prudent judgement that curtailed both profitability as well as the sense of professional accomplishment, and yes, the “fun,” of being able to help companies grow.

PPL chose for its focus a unique niche – to serve the needs of successful entrepreneurs at the lower scale of corporate sizes in the US. As such, we have not seen the excesses that come from intense competition for the big deals, so frankly, for us, the recent media hype has been too much, too late, and even not that surprising given years near perfection.

Indeed, for the last eight years since PPL was founded, when we have had time to attend industry gatherings, we proverbially heard the phrase, “this is the Golden Age of Private Credit.” It was as any good credit person knows, nothing great goes on forever and the time to pull in the welcome mat is far before the party is out of control (so that good times can continue… with a little less punch in the punchbowl). Maybe, but still, when all are having a good, safe, prudent and profitable time.

Of late we have seen a lot of press about a few bad big credits and worries that more are on the way. Likewise, even big, “bulletproof private credit firms” have seemed to have had problems in their credit portfolios. We are also monitoring the recent market liquidity concerns and here are our thoughts.

As to recent bad credits, they are either coming from several years of financing software being hurt by the AI revolution or outright frauds.

More traditional software equities have been hurt by AI encroachment. Why not aggressive tech lending? (BTW, that is not an area PPL has ever engaged in as the collateral value of those firms was always suspect from a lending perspective.) As to fraud, the most experienced lenders will say that “fraud happens to the best of lenders despite intense lender care and scrutiny.”

There are bad people in the world and as Willie Suttton, the 1930s bank robber, said when asked why he robbed banks, “it’s because that is where the money is.” In today’s world, it is less dangerous to think up ways to defraud lenders than it is to rob a bank teller… and there are doubtless people right now trying out new ways to defraud lenders whether they are private lenders… or JP Morgan Chase or any major bank that bad guys know “have more money.”

As to liquidity concerns, this is potentially more of a concern. So-called “interval” funds have been misused by many legitimate managers to offer high yielding yet less liquid investments to investors on the rational basis that not all shareholders are “likely” to want their capital back at the same time under normal conditions and so, offering 5-10% of the investors liquidity per quarter seemed reasonable. That amount would indeed be reasonable based on the amount of cash moving through a portfolio each quarter (interest and principal payments as well as portfolio purchases and sales) as well as the reliability of the fund to perform for investors as it was expected.

However, it is unexpected and non-normal conditions that funds need to also plan for and, because of not doing so, even funds without dire credit problems whose shareholders become uncertain as to liquidity can have an issue. In that case, shareholders would reasonably request maximum redemption to protect themselves resulting in even more redemption requests that, in total, would be more than the fund could possibly handle and an appearance of a “run on the bank” casting doubt on the entire private credit industry. Importantly, PPL has financed itself without any short-term liquidity promises and our portfolio quality and credit loss reserve allows us to provide transparency reporting to all our investors and constituents.

2025 saw a challenging year in credit nationally. Large company default rates rose to 6% levels from historic 3-4% averages reflecting a variety of long-known company specific issues as well as tariffs and issues in healthcare, telecommunications and consumer retail industries. Larger middle market credits also saw an upturn in defaults depending on the lender, their lending sector and leverage levels. And while commercial real estate problems were certainly in the news, PPL has little direct commercial real estate exposure. Recall also that we underwrite all credits at relatively modest leverage levels and monitor all our credits for sensitivity to interest rate and other inflation-related risks. Early in 2025 we screened-out any new credits with high direct foreign import or supply exposure and our borrowers are typically smaller companies with modest international exposure.

With a major Mideast conflict still playing out impacting global oil prices, we are remaining cautious in our credit underwriting despite still mixed views on economic activity for 2026. Continued slow 1-2% growth with inflation seems to be the closest to a consensus. Commercial real estate, in the face of sustained high interest rates, may solidify as a major issue for some banks and possibly for some insurers.

PPL’s default rate continues far below industry norms and to date we have no credit losses since the firm was founded despite making over 80 loans for a total of over $400 million in total exposure. However, the odds of a lender or lending industry subset taking some losses grows over time as more loans are made over more years; the private credit industry, even in PPL’s guaranteed loan niche cannot rationally expect to maintain perfection forever despite fervent efforts to do so. The only way to minimize losses and surprises is vigilance and prudence and putting our shareholders first as we adhere to our standards and apply our experience and judgement.

And, lastly, please keep in mind, the media doesn’t write stories saying “nothing happened today.” But know that for the vast majority of entrepreneurial credit granters, each new loan adds to profits but is also a new opportunity to lose money and professional credibility if their credit approval process made a mistake.