Private Credit Fears Creating Valuation Gaps in Equity-Focused Funds

Market sentiment has recently been clouded by concerns over a potential systemic crisis in the private credit sector. The prevailing narrative suggests that software firms, heavily reliant on direct lending, may struggle to service debt as artificial intelligence disrupts their profit models, leading some observers to describe the situation as a slow-motion bank run. However, empirical data suggests these fears are overstated. According to Fitch Ratings, the default rate for private credit currently stands at 5.8%. More tellingly, default rates for leveraged loans—which share a similar risk profile—have declined to 4.9% from a peak of 5.7% in late 2025. This trend indicates that corporate credit risks are actually receding rather than intensifying. Further evidence is found in the frequency of Liability Management Exercises (LMEs), which are collaborative efforts between creditors and borrowers to avoid bankruptcy. Data indicates that LMEs peaked in early 2025 and have since faded, signaling a stabilizing credit environment. Apollo Global Management has similarly noted that loan defaults have remained largely flat over the past two years. This disconnect between media narratives and fundamental data has created significant discounts in equity-focused closed-end funds (CEFs). Specifically, the Liberty All-Star Growth Fund (ASG) is currently trading at an 11.2% discount, or approximately 89 cents on the dollar. This is a sharp deviation from its five-year average discount of 3.7%. ASG remains well-positioned through its holdings in mega-cap technology leaders, including Microsoft, Amazon, and NVIDIA.