Ali Hamed - An Update on Private Credit

Principles & Lessons:

1. Private credit markets are defined by domain-specific opacity, which creates both fragility and resilience depending on who holds informational control. Ali emphasizes that in private credit, “each asset is serviced or originated by a company with a bit more unique domain expertise than normal,” unlike public credit markets, which are more standardized. This has two implications: first, when originators break down (e.g., due to venture backing or operational stress), credit investors may unknowingly inherit corporate credit risk; second, those who underwrite based on non-obvious or deeply vertical knowledge — such as perishable produce or streaming revenues — may outperform during systemic stress. But because these systems aren’t interchangeable, defaults are idiosyncratic and solutions are slow: “everything that happens in private credit happens in slow motion.”
2. In a regime of radical uncertainty, investors retreat not because of risk, but because of the collapse of knowability. The most common seller behavior Ali observed was people offloading “bags of uncertainty” — portfolios that “seem okay,” but whose future performance couldn’t be modeled. This was not classic distress: “In distress, you kind of have a thing... it didn’t go as well as it was supposed to. But in this case... I don't really know what's in the bag.” Investors didn't stop because of price; they stopped because traditional underwriting frameworks broke down. This reflects a critical epistemological distinction: risk is calculable; uncertainty resists quantification. The immediate response was thus to freeze, triage, and prioritize known exposures over new trades.
3. Advance rates, not yields, became the key instrument for navigating pandemic-era lending — reflecting a shift from pricing risk to removing it. In theory, lenders could compensate for uncertainty by demanding higher returns. But that’s not what happened: “Instead… they’re just adjusting their advance rates.” A lender who previously financed $100 in loans at 90% might now only offer 60%, keeping yield constant but de-risking through structure. This points to a preference for principal protection over income — a sign that investors lacked conviction about default probabilities and prioritized downside control over return maximization. Ali explicitly states: “even if they get it wildly wrong, it's hard to lose money” under these conservative structures.
4. Digitally native assets gained strategic reclassification: from novel and risky to resilient and high-quality. A major shift Ali identifies is the re-rating of tech-enabled assets. “It used to be... you were borrowing at a higher rate than a physical retail store. That'll never happen again.” He notes that these businesses, once seen as risky because of their newness, are now viewed as more adaptable due to their variable cost structures and non-reliance on physical infrastructure. E-commerce and content platforms like Amazon, YouTube, and Spotify didn’t just survive — they exposed the fragility of supposedly stable offline assets. Investors now associate “tech-enabled” not with speculation, but with control and continuity in chaotic conditions.
5. Crises invert perceived safety, leading to overcrowding in “resilient” assets and missed upside in temporarily impaired ones. Ali warns against backward-looking selection: “we're trying to discourage our companies from chasing assets that are going to see low defaults in the next three to six months.” These assets will appear safe and attract capital, but may underperform due to price compression and crowding. Meanwhile, assets that experienced actual stress may be mispriced in the recovery. The principle is that signals of recent resilience may correlate negatively with future returns once capital floods in. As he puts it, “you’re going to have a bubble there of perceived higher quality assets.”
6. The COVID shock accelerated the redefinition of small business — with implications for capital allocation and platform dominance. Ali notes that “a small business is not a dry-cleaner or a drug store” anymore. Instead, the term now meaningfully includes Amazon third-party sellers, YouTubers, Shopify merchants — and these digital-first enterprises are now central to credit and economic infrastructure. What was once creative investing is now mainstream: “it used to be a novel idea that an Instagram account could be a commercial activity... now it's just the norm.” This redefinition is not merely sociological — it influences how lenders price risk, how capital is deployed, and how financial institutions define underwriting categories.
7. Private credit investors face second-order risk from their own capital stack partners, especially in junior positions.

Being a junior lender is not just about absorbing more loss; it means ceding control to senior lenders who may act based on unrelated portfolio needs: “you might be screwed, not because of anything you did, but because [the senior] is just trying to solve an issue.” Ali underscores that senior lenders are “your boss,” especially in crisis scenarios. This points to a structural vulnerability: investors in junior tranches are exposed not just to asset-level risk, but to higher-order behavior under stress. This is particularly acute when senior lenders themselves are part of unstable capital systems.

8. Digitally native advertising ecosystems are becoming real-time economic sensors and cashflow infrastructure — not just media channels. Ali explains that YouTube, Instagram, and Snapchat aren't just attention platforms — they are monetizable asset classes with trackable revenue mechanics: “CPMs might be down 50%, but views are up 100%, so revenue is flat.” He notes that exchanges like Google’s act like stock markets — “you actually get real-time sentiment on how these retailers… are willing to spend.” This makes them function as both credit signals and income streams. Moreover, because content monetization splits are fixed (e.g., “YouTube gives 55% to the creator”), lenders can underwrite based on known revenue flows. These ecosystems are increasingly financial, not just cultural.

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