Over the last decade, private debt has gained significant ground in the portfolios of institutional and high-net-worth investors, and has become increasingly popular with retail banking customers. This growth can be explained, to a large extent, by its ability to offer attractive risk-adjusted returns, lower correlation with public markets, and contractual structures that, in theory, offer greater protection against adverse scenarios. However, recent events in the international market—particularly the cases of Tricolor and First Brands—have once again highlighted that this asset class is not risk-free, especially in a context of more restrictive financial conditions. 

Both cases unfolded in an environment marked by high interest rates, reduced credit availability, and greater demands on cash flow generation. Tricolor, a lender specializing in subprime auto loans in the United States, faced a rapid deterioration in its financial performance due to rising delinquencies and the increased cost of financing. First Brands, a global auto parts manufacturer, was pressured by high levels of leverage, rising operating costs, and a slowdown in demand, which culminated in a restructuring process under Chapter 11. Chapter 11. 

The impact of these events was not limited to the companies involved, but extended to various private debt and structured credit funds with direct or indirect exposure to these issuers. In the case of Tricolor, the bankruptcy led to significant adjustments in the valuation of asset-backed securities (asset-backed securities, ABS) associated with its loan portfolio, affecting the value of certain positions within private debt funds, structured credit, and hybrid strategies. Although in many cases the exposures were limited and diversified, the event prompted revisions of risk assumptions, greater discounts in valuations, and a general increase in risk aversion toward the subprime credit segment. Similarly, the First Brands situation impacted private debt funds with exposure to corporate financing. The need to renegotiate terms, extend maturities, or accept partial write-offs demonstrated that even instruments considered senior can face losses when the underlying operating deterioration is significant. For some funds, these processes involved temporary adjustments to expected returns, higher management costs, and an increase in the effective duration of investments. 

From a broader perspective, these events have contributed to a change in the perception of risk associated with private debt as an asset class. Lower liquidity, which in normal circumstances helps to smooth volatility, can become a source of uncertainty when credit events force discrete adjustments to be made to valuations. 

These episodes should not be interpreted as a sign of structural weakness in private debt, but rather as a reminder that this is an asset class that requires in-depth analysis and selectivity. In this context, recent experience reinforces a key idea: in private debt, return alone is an incomplete metric if it is not accompanied by a deep understanding of the underlying assets, the structure of the instruments, and the operating assumptions that support them. The true differentiation between strategies and managers emerges in their ability to anticipate adverse scenarios, structure effective protections, and actively monitor credit risk throughout the cycle. 

As Warren Buffet said: "Only when the tide goes out do you discover who's been swimming naked." 

Esteban Fuentes
Portfolio Manager, Private Debt, Fynsa AGF