Howard Marks, CEO of Oaktree Capital Management, has voiced concerns regarding the recent practices within the direct lending sector, suggesting that an overly permissive approach to credit standards has paved the way for an impending market correction. His observations, articulated in a recent memo titled "What's Going on in Private Credit?", highlight a period of rapid growth in direct lending, which expanded from approximately $150 billion two decades ago to a substantial $2 trillion today. Marks suggests that this surge created a "goldrush mentality," leading some managers to compromise underwriting rigor in their haste to deploy capital.

Marks elaborated on the emerging vulnerabilities in the private credit landscape, noting that a massive influx of capital into direct lending has created a "goldrush mentality." This aggressive pursuit of deployment, he argued, led to a relaxation of underwriting standards, effectively creating fertile ground for future instability. He specifically cited the bankruptcies of First Brands and Tricolor as recent events that blindsided investors, sparking critical questions about the structural integrity and valuation methodologies of publicly traded vehicles involved in direct lending. These events underscored a growing apprehension about the hidden risks within the rapidly expanding market.

The Oaktree CEO also delved into the expansion of direct lending into the software industry, explaining that lenders were attracted by the perceived stability of companies with dominant market positions. This led to private equity firms acquiring software companies, with credit investors eagerly funding these ventures. Marks cautioned that the limiting factor in credit markets is never the demand from borrowers but rather the willingness of lenders to supply capital. He further explored the disruptive potential of artificial intelligence (AI), particularly new coding models that can automate tasks across various fields. While the market initially seemed to overlook this trend in 2024, investor attention intensified following the November 2025 release of Anthropic's advanced coding model, which subsequently amplified scrutiny and volatility in the private credit market.

Marks also touched upon the broader implications of elevated interest rates on private equity. He explained that these rates have diminished the profitability of portfolio companies, leading to a slowdown in company sales. This, in turn, has reduced distributions to private equity limited partners (LPs), making them less inclined to commit to new funds. He referenced MSCI estimates, noting a significant drop in annualized returns for U.S. private equity funds compared to the S&P 500 between 2022 and Q3 2025. Marks concluded that future performance will hinge on private equity firms' skill in selecting, financing, and managing portfolio companies, as well as the eventual salability of these businesses. These factors will be crucial in determining the returns on debt used to finance buyouts, including private loans, indicating a shift towards a more discerning investment environment.

Oaktree's cautious approach to this volatile environment was also highlighted, with Marks stating that the firm's exposure to software companies across its credit platform is minimal compared to its peers. He emphasized that Oaktree's private credit investments are characterized by defensive underwriting and conservative structuring, with a strong preference for first-lien positions and very limited payment-in-kind arrangements. This strategy reflects a deliberate effort to mitigate risks in a market increasingly prone to correction.