Recent stress in private credit reflects a normal tightening of credit conditions rather than an industry-wide crisis, according to AllianceBernstein.

Matthew Bass, head of private alternatives, said artificial intelligence (AI) disruption, asset valuations and borrower stress had placed the asset class under increased scrutiny after a decade of rapid growth.

“Today’s environment feels less like an existential turning point than a case of credit conditions normalizing as part of the cycle. Sentiment has weakened in some areas, but overall underlying fundamentals are strong.”

Bass said higher interest rates were squeezing some middle-market businesses and consumers, while weaker underwriting from the low-rate era was also beginning to show.

Read more: BSP: Private credit must prepare for higher rates and greater dispersion

“High interest rates are squeezing some borrowers, whether they’re middle market companies or consumers with credit card and auto payments. But we think a good amount of the current stress in private credit stems from lax underwriting earlier in the decade when interest rates were at cyclical lows. We see a cyclical tightening of credit conditions, not a crisis.”

He added that performance across direct lending strategies during the first half was driven mainly by wider spreads and mark-to-market volatility, rather than deteriorating credit quality or borrower distress.

“While investor sentiment has weakened and there’s less capital chasing deals, we think underlying fundamentals remain strong. In our view, this should create attractive opportunities over the next 12 to 18 months for investors with dry powder to invest in diversified portfolios of performing loans at attractive valuations.”

Read more: Redemptions rise across private credit funds in Q2 as software risks build

He highlighted signs of mispricing across the $6tn (£4.5tn) asset-based finance market, including opportunities in consumer finance and aviation leasing, but said this could spark an opportunity.

“For lenders who can adjust their underwriting and structure deals accordingly, we see an opening to advance while others retreat.”

Bass said disciplined underwriting and asset selection would become increasingly important as the credit cycle progressed.

“For investors who focus on quality over quantity, we still see an asset class with the potential to deliver attractive risk-adjusted returns. At this stage in the cycle, we expect disciplined underwriting and asset selection to matter more than simply deploying capital.”