The Importance of Discipline in Private Credit: Lessons from 2026
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Alex Jones
Junior Investment Manager
September 15, 2026
In a year when some of the world’s largest private credit funds gated redemptions and restricted distributions, other private credit funds, including our own USD Income Fund, have been carrying on with business as usual. The reason for this is one thing:
Fund structure.
This article explains how deliberate structural decisions by fund managers can protect investor capital.
Private credit provides liquidity where banks have retreated. Executing this properly means doing two things well:
The combination of banks retreating and fast-growing sectors with tangible assets available for recovery has made private credit one of the fastest-growing corners of finance. The market has grown roughly fivefold since 2009, to close to $2 trillion globally (Federal Reserve Board, 2025).
For most of the last decade, private credit’s pitch to investors was simple: steady, contractual income, largely uncorrelated to public markets. That pitch relied on the loans behind it holding up.
Software companies became a prime target for lenders over that period, drawn in by recurring revenue, high margins and low customer churn. Loans to SaaS and technology businesses grew from a rounding error a decade ago to nearly a fifth of all direct lending by the end of 2025 (Bank for International Settlements, 2026).
The problem sits in what that lending was secured against. A software company’s value lives in code, contracts and customer relationships, all real to the business itself but difficult for a lender to seize, value or sell if things go wrong.
That weakness became visible once AI began disrupting software business models through late 2025 and into 2026: software valuations fell by roughly 30% between October 2025 and February 2026 (Bank for International Settlements, 2026), and several large private credit vehicles restricted investor withdrawals as redemption requests outpaced what they could pay out (CNBC, 2026).
This doesn’t mean private credit as an asset class is broken.
What it does suggest is a lack of discipline in two specific places:
No credit investor needs to be told that collateral should be worth something, or that a portfolio of loans should mature as fast as it promises to pay. The hard part is maintaining those standards when a sector is running hot and capital is flowing into it at unprecedented speed.
The discipline investors should insist on is asking, every time: what exactly will we get hold of if this goes wrong, and will it return our capital?
Collateral
Collateral is the answer to one question: what does a lender get hold of if the borrower cannot pay, and will selling it return the capital?
Private credit funds aim to advance less than the underlying security is worth, a cushion known as overcollateralisation. It means the financing can still be repaid in full even if the assets must be sold quickly and at a discount. A lender advancing $700,000 against $1,000,000 of inventory or receivables, for example, can absorb a 30% fall in the value of that collateral before investor principal is touched. That cushion, rather than the headline yield, is what decides the outcome in a bad year.
Liquidity and duration matching
A fund can only pay investors as fast as its own book repays, so the tenor of the financing is itself a promise to investors. When a book is built from short, self-liquidating facilities, rather than open-ended loans rolled indefinitely, it turns over at a steady pace, so a fund isn’t promising investors money back faster than it’s coming in.
Neither overcollateralisation nor duration matching is a secret, but what determines a fund’s resilience during times of stress is how easily they are relaxed once capital starts chasing a single sector. This means being prepared to pass on sectors that are paying well, and accepting slower deployment, while everyone else is still being paid.
Overcollateralisation and duration matching provide a solid foundation, but a fund can get both right and still lose investor money if the rest of the structure is weak. Three further features do most of the remaining work:
Covenants, monitoring and early warnings
Collateral only helps if a lender finds out in time to use it. Covenants, such as leverage and repayment-cover tests, borrowing-base limits, and reporting deadlines, are the mechanism for that.
Covenants give the manager the right to act while the position is still intact, rather than after it has been impaired. However, much of the market has recently been moving the other way. Covenant-lite documentation has spread through direct lending, and has been identified as a driver of lower recoveries when loans default (Financial Stability Board, 2026).
Diversification, by sector and by geography
Diversification is another form of credit enhancement, reducing how much a single bad outcome can hurt the whole book. Zhongzhi Enterprise Group shows what happens without it: once one of China’s largest shadow-banking conglomerates, overseeing more than $140 billion at its peak, it had built its book almost entirely around Chinese property and local-government lending. When that market turned, it had nothing else to fall back on, and filed for bankruptcy in 2024 owing a shortfall of some $36 billion (Bloomberg Law and CNN Business, 2024).
Alignment: who takes the first loss
The last question is who is exposed when a financing goes wrong. When a manager or an originating partner holds the first-loss piece, its own money is impaired before investor principal is touched, which ties underwriting incentives to how the financing performs rather than to how much of it gets written.
None of this says that businesses without realisable assets should not be financed. Plenty of good companies have their value in code, contracts and people, and they need capital too. However, a sharia-compliant mandate helps avoid deals secured on intangible collateral. This year that has kept investors well away from the lending that came under stress, but it does not put those businesses permanently out of reach.
These businesses present future opportunities. As contracted, recurring revenues, real inventory or equipment build up on their balance sheets, there is something a lender can value independently and recover against. That is the point at which they become financeable for a fund like ours, taken on with the lessons of what went wrong elsewhere this year.
Stress in private credit this year showed up where loans were backed by intangible assets, concentrated in one sector, or sold with liquidity terms the underlying loans could not support.
The USD Income Fund was built to avoid all three: financing secured against tangible assets, a book spread across several financing types and regions rather than concentrated in one sector, and a short-duration book matched to what it promises investors.
The portfolio is spread across consumer finance, real estate finance, trade and working capital, asset finance and leasing, alongside a money markets and cash sleeve, with origination partners across the US, the Gulf and emerging markets. The fund’s 5.5% is loss-absorbing capital in practice: a reserve fund and a management fee pledge that are impaired before investor principal is touched. That is what supports a target net yield of 8.5% to 9.5%.
However, none of this makes a portfolio shock-proof. Financing secured on real assets can still be hit by events no manager controls, and today’s sensible-looking book can look very different after a shock of a kind nobody priced for. That is why preparation is key.
If you have capital of $100,000 or more that you are looking to put to work, you are welcome to book a call with the Cur8 Capital investment team for an overview of available strategies and diversification plays.
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This article is for educational purposes only and does not constitute financial, tax, legal or investment advice. Capital is at risk. Private market investments can be illiquid and may not be suitable for all investors. Tax treatment depends on individual circumstances and may change. Investors should obtain appropriate professional advice before making investment decisions.