Key Takeaways
- • Morgan Stanley's North American Private Credit team (Michael Occi, Jeff Day, Christopher Remington) describes direct lending as entering 2026 with a supportive backdrop of firm monetary and fiscal policy, deregulatory momentum, easing inflation, ample liquidity and solid earnings.
- • Occi says 2025 was one of the strongest years on record for private direct lending issuance, with activity moderating modestly in the second half as a normalization after rapid growth, and expects the early stages of a multi-year expansion in deal supply.
- • Jeff Day reports that borrower fundamentals remain relatively stable, with loan-to-value ratios generally in the 40% range and stress described as idiosyncratic rather than systemic.
- • The team argues recent software sell-offs driven by AI disruption fears reflect equity repricing rather than widespread deterioration in software cash flows or liquidity, and says it concentrates on mission-critical, system-of-record platforms.
- • Remington and Day cite floating-rate income, low duration and reduced mark-to-market volatility as advantages over public credit, particularly as stocks and bonds have tended to move together when inflation exceeds 3%.
Summary
In a Q&A published by Morgan Stanley, the firm's North American Private Credit investment team (Michael Occi, Jeff Day and Christopher Remington) said direct lending enters 2026 with a constructive backdrop. Remington attributed this to monetary easing that has stabilized, fiscal dynamics supporting corporate earnings, and early signs of deregulatory momentum around capital formation and financial intermediation. He argued direct lending offers higher spread premiums, lower mark-to-market volatility and limited duration and curve risk relative to public markets.
Occi described 2025 as one of the strongest years for private direct lending issuance on record. He said activity moderated modestly in the second half, which he attributed to normalization after rapid growth rather than weakening demand. Momentum cited includes sponsor-led refinancings, LBO activity and early signs of a pickup in exits, with private equity dry powder remaining elevated. Many borrowers extended maturities during the rate-hiking cycle and are now re-engaging the market.
On fundamentals, Day said earnings growth has been resilient, margins have held up and leverage remains manageable, with loan-to-value ratios generally in the 40% range. He said borrowers can generally pay principal and interest in cash, in contrast to the lower middle market where PIK usage is more prevalent. On demand, Occi said non-traded BDC flows moderated late last year but remained positive, and redemption requests had been met without forced selling.
On software, the team said AI-related headlines have prompted rapid repricing in equity markets, but credit outcomes depend on cash flow durability and liquidity, which Remington said remain intact across most of the software exposure. Day said the firm favors mission-critical, system-of-record platforms with high switching costs, while Remington said the firm avoids single-function tools and lightweight workflow applications that generic AI models could replicate. Occi argued AI tends to reinforce scaled incumbents through distribution, proprietary data and workflow integration, and said the volatility may create lending opportunities. The firm said AI risk is assessed during underwriting and in quarterly reviews.
Occi described 2025 as one of the strongest years for private direct lending issuance on record. He said activity moderated modestly in the second half, which he attributed to normalization after rapid growth rather than weakening demand. Momentum cited includes sponsor-led refinancings, LBO activity and early signs of a pickup in exits, with private equity dry powder remaining elevated. Many borrowers extended maturities during the rate-hiking cycle and are now re-engaging the market.
On fundamentals, Day said earnings growth has been resilient, margins have held up and leverage remains manageable, with loan-to-value ratios generally in the 40% range. He said borrowers can generally pay principal and interest in cash, in contrast to the lower middle market where PIK usage is more prevalent. On demand, Occi said non-traded BDC flows moderated late last year but remained positive, and redemption requests had been met without forced selling.
On software, the team said AI-related headlines have prompted rapid repricing in equity markets, but credit outcomes depend on cash flow durability and liquidity, which Remington said remain intact across most of the software exposure. Day said the firm favors mission-critical, system-of-record platforms with high switching costs, while Remington said the firm avoids single-function tools and lightweight workflow applications that generic AI models could replicate. Occi argued AI tends to reinforce scaled incumbents through distribution, proprietary data and workflow integration, and said the volatility may create lending opportunities. The firm said AI risk is assessed during underwriting and in quarterly reviews.
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