AI in Practice: AI, Headlines, and Direct Lending

David Richman sits down with Chris Remington, Head of Portfolio & Client Strategy for Morgan Stanley's North America Private Credit business, to discuss how advisors can evaluate private credit amid evolving AI developments and media-driven feedback loops.

David:
Advisors are fielding a lot of questions about private credit right now. Headlines have focused on AI disruption, redemption activity, recent performance and whether the asset class is still doing what investors expect it to do. What is the first thing advisors should keep in mind?

Chris:
To start, private credit is not the first asset class to go through a difficult news cycle, and it will not be the last. Markets have always tended to overweight what is most recent, most visible and most emotionally charged.

What's notable today is the sheer speed at which narratives build and recirculate. AI is changing how information is gathered, processed and amplified, while financial media and social platforms can spread the same story almost instantly. As a result, advisors have an even more important role in helping clients distinguish between narratives and fundamentals.

So the advisor’s job becomes even more important. Clients may come in with more “information” than ever before, but that is not the same as knowledge – especially if less meaningful information is prioritized or certainly when misinformation is involved.

The most important question is still one of the simplest: Is the asset class doing the job it was hired to do?

David:
That “job it was hired to do” phrase is useful. Can you unpack it for advisors?

Chris:
Investors sometimes change the scorecard after they make the investment. Stay focused on objectives.

I bought my Jeep Wrangler because it is fun, great for the beach and easy to maneuver in the city. If I wake up tomorrow and criticize it for not accelerating like a sports car, getting great gas mileage or driving like a luxury sedan, I am judging it against the wrong benchmarks.

Investments are no different. The right question isn't whether private credit does everything; it's whether it does the job it was hired to do.

For most investors, direct lending is intended to provide three key attributes, all of which continue amid the noisy backdrop: high levels of interest income, lower volatility than liquid asset classes, and diversification relative to increasingly correlated stock and bond markets.

For clients allocated to direct lending, the question is whether their portfolio still benefits from investments with those objectives. And for clients not yet allocated, how might their risk/return balance evolve if direct lending were incorporated?

Too often, people reverse the process and allow news flow to redefine their objectives.

David:
A lot of the current discussion seems to be driven by headline risk. Why do these narratives gain so much traction?

Chris:
There are real issues worth discussing. Credit stress is normalizing from very low levels. Performance has been more muted than what investors became accustomed to during a favorable period in recent years. Some vehicle structures are being tested by redemption requests. And certain sectors, like software, require more careful underwriting considering AI-related disruption concerns.

While those are legitimate topics, the challenge is that the public narrative often compresses all of that into a much simpler story: private credit has a problem.

A manager-specific issue is positioned as an asset-class story. A liquidity discussion can be twisted into a  credit angle. An issuer-specific valuation adjustment can be interpreted as evidence of broad market deterioration ahead. Over time, repetition can make a narrative feel more certain than the underlying facts may warrant.

This isn't unique to direct lending. It's a common feature of investing, particularly in credit markets.

That's why advisors need to slow down the conversation and ask a more important question: Away from the “news”, what are the actual underlying fundamentals telling us? In direct lending, those fundamentals are tied to the economy, corporate operating performance and capital availability. Broadly speaking, those indicators are not flashing the kind of warnings that headline narratives often imply.

David:
One AI-related concern clients raise is disruption, particularly among software companies. How should advisors address that?

Chris:
The right posture is selective, not dismissive and not alarmist.

AI will create winners and losers – and it will take time. That is true in software, and it is true across many industries. It does not follow that every issuer is equally exposed, or that every private credit portfolio should be assessed with the same broad brush.

The more useful exercise is understanding how a specific business may be affected and whether those changes alter its long-term fundamentals, and how effectively the lender underwrote those risks in the first place.

Technology is inherently exciting. Some of the most “magnificent” tech companies now account for a massive share of the S&P 500, creating a concentration risk for equity investors. And in bonds, rapid growth in AI-related issuance may contribute to supply challenges which, along with rising rates, could be a headwind for fixed income.

The broader lesson is to zoom out. Telescopes are more helpful than microscopes in seeing the big picture. Advisors can help clients discern generalized narratives from real thoughtfulness around balancing the risks.

David:
This might sound counterintuitive. Could current caution actually improve the forward opportunity set?

Chris:
In lending, sentiment and forward opportunity often move in opposite directions.

When enthusiasm is high, capital tends to flood the market. Spreads compress. Documentation can weaken. Investors may feel better, yet the forward compensation for risk may be less attractive.

When capital becomes more selective, the reverse can happen. Lenders can demand better pricing, stronger structures and tighter documentation. That can create a healthier environment for new investments.

And therein lies one of the most important points advisors can make right now: the conditions that made retail investors uncomfortable in the first half of the year may also be improving the opportunity set looking forward. Periods like these often reward lenders with strong underwriting processes and the discipline to remain selective.

Institutional clients continue to invest in direct lending in the current environment. That’s after asking not only “what does the environment ahead look like for direct lending?”, but also “how does this compare to traditional markets’ risk and return?”

David:
How should advisors address liquidity and redemption headlines in non-traded vehicles?

Chris:
First, be clear with clients on time horizons. Clients need to understand what they own, and why they own it. They also need to understand for how long they should anticipate holding the investment, as well as what liquidity is available, and what the limitations are.

It is also important to explain why those structures exist. Non-traded BDCs and similar vehicles were designed to provide periodic liquidity while enabling investment in illiquid private loans. For this reason, they are not daily liquidity products, and they were never intended to behave like mutual funds.

Think of non-traded BDCs as a unique middle ground: a “listed” BDC can be bought/sold like a stock (and because of exchange listing can be volatile at times). At the other end of the spectrum are long-term drawdown funds, in which there may be no liquidity for 7-10 years. By contrast, non-traded funds strike a balance, providing partial liquidity throughout the year, and at net asset value.

So the message to clients around redemption limits should be that they exist for a reason, and in fact they are the very feature that enables this structure to be available in the first place.

David:
Where does direct lending fit in a client portfolio today?

Chris:
It’s a complement to fixed income.

July was a useful case study. Rising yields roiled markets, with negative performance across fixed income segments. By contrast direct lending produced positive, coupon-driven returns with characteristics counteracting the ongoing trio of fixed income headwinds: susceptibility to higher rates, heightened beta/volatility and positive correlations with stocks.

Many investors own a lot of different bond sectors and still end up with many of the same underlying risks: interest-rate risk, and public market volatility.

Direct lending can help diversify that income sleeve. Most direct lending loans are floating rate, senior secured and privately originated. That means the return profile is driven by different factors than many traditional fixed-rate bond allocations.

I describe this as “unfixing fixed income”, because direct lending is essentially an inside-out version of bonds. Think zig for the bond sleeve’s zag.

David:
Final takeaway for advisors?

Chris:
I would encourage advisors to avoid headline-driven conclusions or over-reliance on AI-powered information sourcing. Instead, return to a disciplined process around defining objectives.

Why was the allocation included in the portfolio? Has that objective changed? For my clients without exposure, could they benefit?

Then separate narrative from fundamentals. Are my clients’ concern centered on actual investment performance, cash flows and portfolio quality, or are they primarily reflections of sentiment and media attention?

Finally, evaluate the facts with the same rigor you would apply to any other investment decision.

The goal isn't to ignore headlines. It's to place them in context.