If there's a single theme running through private credit markets in 2026, it's this: manager selection has never mattered more.
For years, a rising tide lifted most boats. Benign credit conditions, declining rates, abundant liquidity, and strong sponsor support meant that even mediocre underwriting produced acceptable outcomes. Losses were rare, and the few that occurred were absorbed by strong portfolio returns elsewhere.
That environment has shifted. Spreads have compressed. Rates remain elevated. Fundraising has become more challenging. Defaults are normalizing. And regulatory tailwinds may be turning to headwinds. In this environment, the gap between skilled and unskilled managers will likely widen.
Why Dispersion Is Likely Increasing
Several factors point toward greater dispersion in manager outcomes.
Credit cycles expose underwriting differences. In benign environments, loose underwriting is forgiven by favorable conditions. As defaults normalize, the difference between rigorous and sloppy underwriting becomes apparent. Managers who cut corners during competitive conditions will see those compromises reflected in loss rates.
Workout capabilities vary substantially. When defaults were rare, workout capability mattered little. As defaults increase, the ability to navigate restructurings, negotiate with sponsors, and maximize recoveries becomes a key differentiator. Managers with dedicated workout teams and relevant experience will likely outperform those learning on the job.
Spread compression reduces margin for error. When spreads were wide, managers had cushion to absorb losses while still delivering adequate returns. As spreads compress, loss levels that were tolerable at wider spreads become return-destroying. Manager skill in avoiding losses matters more when there's less cushion.
Regulatory changes create competitive pressure. If banks re-enter leveraged lending more aggressively, managers will face pressure to compete on terms. Those who maintain discipline will lose some deals but preserve credit quality. Those who match bank terms without bank cost of capital will see returns suffer.
What Good Manager Selection Looks Like
Identifying skilled managers requires looking beyond track records. Past returns may reflect favorable conditions more than genuine skill. Forward-looking analysis should focus on:
Process quality. How does the manager actually underwrite? What independent verification occurs? How are credits monitored post-closing? What triggers heightened scrutiny?
Workout capability. What dedicated resources exist? What is the team's experience in restructurings? How have past workouts been resolved?
Alignment and culture. How is the team compensated? What is turnover like? Do senior professionals remain engaged in underwriting, or has origination been delegated to junior staff?
Portfolio construction. How is concentration managed? What limits exist? How is portfolio-level risk monitored?
Tip
A user-friendly technology interface won't compensate for poor investment selection. Glossy marketing materials won't generate recoveries when loans go bad. The substance of credit capabilities matters.
The Implications for Allocators
The shift from "access" to "selection" has practical implications for allocators.
Time horizons may need to extend. Manager differentiation becomes clearer over full cycles, not quarters. Allocators focused on near-term performance may churn into and out of managers at precisely the wrong times.
Due diligence intensity may need to increase. When any manager could generate acceptable returns, lightweight diligence was tolerable. When manager selection drives outcomes, deeper understanding of processes, capabilities, and culture is essential.
Concentration may deserve reconsideration. If manager skill varies substantially, concentration in high-conviction managers may be preferable to broad diversification across mediocre ones.
The Bottom Line
In a market where spreads are compressed, where regulatory tailwinds may be shifting, where fundraising has become more challenging, and where defaults are normalizing, the managers who built their platforms on genuine credit discipline will be distinguished from those who simply rode favorable conditions. The question allocators face is whether their manager selection processes are robust enough to identify the difference before it shows up in returns. The private credit environment has shifted from one that rewarded participation to one that will reward selection. That shift is the defining feature of the current moment.