The most important distinction in private credit right now is not between senior and subordinated debt. It is between a loan secured by a building and a loan secured by a promise.
John Atwater, co-founder and managing partner at Prime Finance, makes this case directly. In an interview with Institutional Real Estate, he argues that market participants are conflating the risks of corporate direct lending with asset-backed commercial real estate lending. The two sectors, he says, are driven by different fundamentals, collateral structures, and market dynamics.
Atwater is not splitting hairs. He is identifying a structural gap in how institutional capital is pricing risk across private credit markets.
Corporate direct lending is a bet on enterprise value, cash flow, and management execution. The collateral is often intangible: intellectual property, contracts, goodwill. When the business model breaks, the recovery depends on a liquidation process that can take years and yield cents on the dollar.
Commercial real estate debt is a bet on a physical asset with a rent roll, a location, and a replacement cost. The collateral is tangible. The cash flow is contractual. The recovery, while not guaranteed, is grounded in something a court can appraise and a buyer can bid on.
That distinction matters more now than it did two years ago because the cycle has reset the basis for CRE debt. Atwater points out that commercial real estate valuations have repriced, leverage has been compressed, and lenders are underwriting with more conservative assumptions. The risk that was priced into CRE loans in 2021 and 2022 has largely been recognized and, in many cases, written down.
Corporate direct lending, by contrast, has not gone through the same valuation reset. Many loans were originated at tight spreads and high leverage during a period of low rates and strong economic growth. The question is whether those loans have been adequately repriced for a world where rates stay higher and growth slows.
The market is beginning to ask that question. Private credit has come under increasing scrutiny from institutional LPs who are wondering where the next shoe drops. Atwater's argument is that the shoe is more likely to drop in corporate lending than in CRE lending, because CRE has already taken its hit.
Who benefits from this distinction? Lenders and investors who can differentiate between the two risk profiles. Capital that treats all private credit as a single asset class is likely to misallocate risk. Capital that understands the collateral difference can find relative value where others see only correlation.
Who is exposed? LPs who have allocated to private credit without distinguishing between corporate and CRE sleeves. Fund managers who have marketed themselves as diversified private credit platforms but whose risk is concentrated in unsecured corporate loans. And borrowers in both markets who will face tighter underwriting as the market reprices risk more granularly.
The banks pulling back from CRE lending have created an opening for private credit, but that opening comes with scrutiny. Lenders like Prime Finance are positioning themselves as specialists who understand the asset class, not generalists who treat every loan as a spread trade.
What should the market watch next? The performance of corporate direct lending portfolios as the economy slows. If defaults rise and recoveries disappoint, the distinction Atwater is drawing will become a pricing wedge. CRE debt that has already been repriced may look cheap relative to corporate debt that has not.
The next phase of private credit will not be defined by who has the most capital. It will be defined by who understands what their collateral actually protects.