The problem with private credit is not that it might blow up the financial system. It’s that it might just not be a very good investment. That is the central claim of new research by a group of academics led by Jeffrey Hooke, senior lecturer in finance at Johns Hopkins Carey Business School and author of The Myth of Private Equity.
Using Preqin data, Hooke looked at what private-credit managers of 262 North American funds launched between 2015 and 2020 actually delivered to LPs, as investors in private markets are known. Many funds report internal rates of return, or IRR, in the high single or low double digits. But Hooke, a former investment banker and private-equity executive himself, says those numbers can easily be manipulated.
The metric he prefers is total value to paid-in capital, or TVPI. It measures how much money investors have actually received back, plus what’s left, relative to what they put in. It strips out the financial engineering that can make IRR look better than reality. It ain’t looking great, he told Investment Officer.
Unrealised gains
Across senior or direct-lending funds, median TVPI ranged from about 1.25 to 1.33. This means investors who committed one dollar have so far received roughly 1.25 to 1.33 dollar back. That included unrealised assets still sitting in portfolios. In mezzanine funds, the multiples were slightly higher, around 1.23 to 1.44, but much of that reflected residual, not distributed, value.
That unrealised portion, known as residual value, or RVPI, has ballooned. For funds launched in 2015, unrealised assets represented roughly a third of total value; by the 2020 vintage, that figure exceeded 90 percent. In some mezzanine funds, residual value alone now claims to be worth more than the capital investors put in.
In other words, a large share of private-credit returns exists only as accounting marks, not cash. “That tells me loans are being extended, covenants are being waived, or interest is being paid in kind rather than cash,” Hooke said. “Claims of higher returns and better liquidity start to look illusory.”
When the researchers compared private-credit performance with publicly traded vehicles that hold similar assets, the supposed premium vanished. Funds were benchmarked against ETFs such as Invesco’s Senior Loan ETF (BKLN) and VanEck’s Investment Grade Floating Rate ETF (FLTR) both of which invest in leveraged or floating-rate loans.
According to Hooke, these are among the few benchmarks that make a fair comparison.
“We didn’t see terrific or consistent outperformance,” Hooke said. “Across six vintages, you had a couple of years where private credit was ahead, a couple where the ETF was ahead, and a couple that were roughly the same. Nothing special.”
Nonetheless, MSCI benchmark data show double-digit returns in some private-credit segments between 2021 and 2024, comfortably ahead of public high-yield bonds. The difference, however, largely reflects unrealised valuations within private funds rather than cash returned to investors, a key issue raised by Hooke’s study. In the first half of 2025, both MSCI indices stood at returns of about 3.4 percent.
Annual returns (%)
Cockroaches
Hooke’s timing is apt, as he published his paper Residual Risk: Benchmarking the Boom in Private Credit one week before the collapse of auto-parts supplier First Brands and subprime auto-lender Tricolor brought a new round of scrutiny to private credit’s risks and valuations.
Both companies were heavily financed by private-credit funds rather than banks, meaning their defaults hit portfolios that had been marketed as insulated from broader market shocks. Earlier this month, JPMorgan Chase’s Jamie Dimon put it bluntly during the bank’s earnings-call: “When you see one cockroach, there are probably more.”
Unlike journalists, market participants have already moved on. After a short dip on fears of contagion from U.S. credit blow-ups, spreads have retraced and the S&P500 is again within reach of record territory.
Hooke is not concerned about contagion either. “If you’ve got ten or fifteen of those, then you’ve got something to worry about,” he said. “But a few isolated bankruptcies don’t make a crisis.” What does worry him is what investors can’t yet see. Much of private credit’s apparent performance, he argues, still comes from unsold or unliquidated loans.
A trillion-dollar feedback loop
Private credit has ballooned from roughly 375 billion dollars in 2015 to more than 3,000 billion dollars in 2025, according to Morgan Stanley, citing PitchBook data. Wall Street and private-equity firms are pitching it as a stable, high-yield alternative to traditional fixed income.
So why, if the data look underwhelming, are institutions still pouring money in? Hooke says the incentives are hiding in plain sight.
“Institutional portfolio executives like to cloak their activities in a fog of mumbo jumbo that is indiscernible to the educated layperson. Everything’s so complex, that institutions need a whole big staff to understand it, close the deals, and study it, and all that crap. It’s basically a career concern. It has nothing to do with fiduciary obligations.”
As long as assets are marked internally rather than priced in the open market, investors can avoid unpleasant volatility. But that comfort comes at a cost: a lack of price discovery. “It’s a great business,” Hooke said. “You mark your own grades. Nobody really knows what’s going on for 10 or 12 years.”
For European investors, who have been just as eager as their American peers to join the private-credit boom, the takeaway is straightforward. Hooke’s advice: stick with liquid, transparent exposures.
“If you hold a large bag of listed syndicated loans and get nervous, you can sell,” he said. “In private credit, you can’t. Fees are higher, leverage is higher, and half the value is often still on paper.”
‘Flawed methodology’
Credit fund fans are sceptical of Hooke’s methodology. They argue that his research gets the numbers wrong because it leans on a metric that was never meant to measure performance. “TVPI was never intended as a performance measure because it does not factor in time,” said Stephen Nesbitt, chief executive of Cliffwater, a research firm specialising in alternative assets. “Unfortunately, the study is remarkably flawed in methodology, and its conclusions are erroneous.”
Cliffwater’s own figures tell a different story. Its data show private-credit funds beat comparable public-credit vehicles by 4.82 percent a year, or 2.83 percent after adjusting for leverage, over the same 2015–2020 vintages. The divergence between the two studies underlines how dependent performance assessments in private markets remain on methodology and assumptions, rather than on transparent, market-based pricing.