AI Disruption Isn’t Just a Software Story, Churchill’s Alona Gornick Warns Private Credit Investors

THE CONVERSATION

JANE KING: Alona Gornick is a managing director and senior investment strategist at Churchill Asset Management. In her role, she partners with wealth advisors and their clients in coordination with Nuveen’s Global Distribution Team, providing insights on market trends and investment discipline as well as competitive positioning across the private markets landscape. Alona also serves as co-head of Churchill’s Chicago office and co-head of the Culture and Empowerment Council, where she collaborates on initiatives that prioritize inclusion and authenticity.

So Alona, great to have you.

ALONA GORNICK: Thank you, Jane, for having me.

JANE KING: You’re from Chicago, one of my favorite cities. So let’s start with just a broad look at the economy, there’s a lot of worries, we’ve got wars and inflation and AI, we don’t know what that’s going to do. But there’s optimism too, so how do you see things?

ALONA GORNICK: Sure. I’d say the economy has generally shown some great resilience, but I’d say it’s not uncomplicated. From the standpoint of the economy basically having handled a lot of things, we’ve got higher rates, we don’t know what two o’clock will bring us, but that’s been in the picture for a while. We’ve got that geopolitical uncertainty and certainly the technological impact and disruption that’s happening across the board, that’s been a lot. But I’d say that’s all been happening while we’ve seen data trends generally above or expanding, so that 2.1% print for Q1, the expectations for the year to be at above 2% for GDP growth is great, and all that’s while the consumer confidence is quite low.

When we think about it, in the aggregate resilience is great, but underneath it there’s a lot of uneven strength there, where you see some companies and consumers thriving and doing well, and some continuing to be under pressure. If I think about it as a credit investor though, we less so focus on macro predictions because that’s not where we bring our value to the table. I’d say we’re really focused on company-specific matters, really trying to find durable businesses that have longevity to their revenue streams, a visibility on that, great free cash flow, really great management support.

So to the extent we’re not necessarily seeing it within a company-specific lens, and particularly for Churchill, when I think about our portfolio of core middle market private business, they’re in fact doing quite well. In terms of revenue and EBITDA growth, they’ve grown above 20% quarter over quarter and year on year. And that’s generally in line with the S&P 500, which has shown incredible growth so far for who’s reported for Q2, above 25% if you exclude Alphabet, which is insane if you did, it’d be up over 37%.

But I’d say in private credit portfolios, you’re seeing that growth with much more diversification. It’s a lot more broad-based, a lot less of that concentrated Mag Seven approach, if you will, and a lot more consistency. It’s not a great Q1-Q2, it’s a consistent growth that we’re seeing across that middle market.

JANE KING: Okay, so those are good signs, that’s really what you want to see. There was a lot of worry about private credit earlier this year, you saw the market react to that negatively. Do you think it was overdone? Was there just too much worry, because it seems to have faded?

ALONA GORNICK: Absolutely. I’d say generally at the onset I felt like there was much more of a disconnect between the headlines and reality as far as what was happening underneath. By in large, I would say some of the concerns that were elevated are definitely valid, but not necessarily the same as systemic risk, which I think was called out a little bit there.
A few things I would say off the bat, number one, private credit is not as a whole one market, we can’t think about it as one trade. There are many aspects underneath private credit that look and feel very different; senior lending, infrastructure debt, real estate, distressed, that is all very, very different. The headlines and the warnings generally felt like they were very broad-based and kind of overgeneralized to one big issue. And if we took it down to how much even relationship to the banks that we see with private credit, you’ve got that today contained at about maybe 4%. Whereas before 2008, when you think about the mortgages and the Financial Crisis, we saw that closer to 40%, so really a much less, smaller linkage there.

But two, I’d say bigger point to your “it’s kind of dying down”, fundamentals have remained steady to even improving throughout this whole time. The stress indicators haven’t really jumped off the cliff, or at least climbed meaningfully. So by in large we’re seeing the ability for borrowers to cover their interest generally staying steady to improving, although we’ll see what it does with a higher rate environment, but that will be a watch for investors here.

And then third, the sentiment, if we looked at redemptions alone, Q1 was massive. But I think what’s interesting that we found is the amount of new redemptions that were posted in Q1, call it about 30-40% of new redemptions. In Q2, that faded to about just 7%, so really meaningful sentiment shifts is what we’re seeing across the space.

JANE KING: Now BDCs, so they allow investors access to private credit, everyday investors, but what should somebody know before investing in a BDC?

ALONA GORNICK: So while access is incredibly valuable, I don’t want to mistake that for simplicity. There are a few things you should absolutely think about if you’re evaluating or considering a BDC, particularly for why you’re doing it.

One, I would say private credit, if that’s what you’re ultimately trying to get access to, has shown significant and sustainable growth. It is a very massive opportunity set, people may be worried about, has this grown too quickly too fast, and could this fade? The opportunity set ahead is really huge, it’s a massive white space that’s barely been penetrated. So, I’d say one, very big opportunity set.

Two, I’d say if you’re going to try to access BDCs ultimately to get private credit exposure, you’re really seeing that from the lens of what’s really compelling about private credit? People who are investors ask me all the time, “What am I really going to get out of this versus the fixed income that I already have in my portfolio?” So we talk about, yes, this will deliver current income for you, but it’ll also deliver diversification in your portfolio, these uncorrelated, lower volatility assets that will be in a portfolio for you for private credit. And ultimately, a really unique natural inflation hedge, because private credit tends to be floating rate in nature. So to the extent rates are going to go up, you won’t feel that impact on value, so I’d say that’s a really big thing.

And third, I would say, is liquidity. These liquidity windows that are a feature, not a flaw, of BDCs, are there for the protection of you as an investor. You are taking a risk to get exposure to a private asset, but know that ultimately the underneath assets are not liquid, they’re not intended to be traded. The vehicle is giving you access to it, and liquidity windows periodically, but that’s for your benefit. So to the extent, a maximum or threshold is reached and the manager decides to cap or stop there, that is not a negative indication of stress on the portfolio, and I think that’s been a big miss for folks looking at BDCs.

JANE KING:Don’t BDCs have pretty good yields too, or at least some of them?

ALONA GORNICK: Absolutely.

JANE KING: So that would be a benefit too.

ALONA GORNICK: From the extent that if you think about current income here as a premium, because they are private assets, to your public alternative, generally that’s landed about 150-200 basis points wider, an advantage that has been consistent over the past 15-20 years. So wherever rates go up or go down, your win is essentially getting over your fixed income or public loan alternative. That yield today, if SOFR, our base rate, is around 380 and maybe the forward curve suggests getting to 400 or 415, is generally a spread on top of that, 450-500, you’re seeing 8-9% all-in yields, 8-10% all-in yields. Which is great if you compare that to loans at SOFR 250-300.

JANE KING: Right. You have written that private credit is a $30-40 trillion long-term addressable market. Let that sink in. How do we get there?

ALONA GORNICK: So I will say it’s been interesting to even think about it being even a $2 trillion market as far as the numbers go, but the way that we think about the broadening of private credit is it’s not just going to be on the biggest subsector, which we know about and liken most of private credit to, which is direct lending; that’s probably the majority of the $2 trillion today, but the way that we’re going to get to that $30-40 trillion is expansion. We’re really seeing private credit, really anything that’s a financial obligation between two parties, negotiated privately without a traded secondary market readily available.

So the biggest component to get to that $30-40 trillion would likely be in the investment-grade arena, where there’s a lot of privately negotiated, direct without a bank intermediary, in there to take that spread or that fee, so that the source of capital and the borrower can meet together. There is a term sheet that’s extended and the financing execution risk is sort of eliminated because you know who is going to lend you that capital. Insurance companies do this quite a bit, so expanding that will be a huge opportunity to see private credit go.

And then of course, infrastructure debt, consumer finance, consumer credit, fund finance, NAV financings, there are many different cousins to direct lending that can help push $2 trillion upwards towards that $30-40, but I think that private investment-grade credit will really be a big needle mover.

JANE KING: I’m hearing just the word “trillion” more lately, it’s the new billion, I guess. How vulnerable is private credit or even benefit from AI?

ALONA GORNICK: I’d say AI, we’ve got to think about this as both a risk and also a really great productivity tailwind as well. Two things, when I think about private credit and AI disruption, one, I would say that the idea of likening AI disruption to just software as kind of a proxy for risk was a big leap. Because not all software will be disrupted in the same way and it won’t all happen on the same day, it may take some time. So the concern about software, I think, was a big leap, but the big discovery was that there was a lot more software in these private credit portfolios than investors actually thought. So the concentration risk, separate from AI risk, I think should have been more of a focus, that on average, BDCs, not all of them, were showing about 20-25% software exposure.

So the question about software being a potential proxy for AI disruption was raised, then a big focus on private credit came out very strong. So I’d say that isn’t uniform across the space, Churchill’s software exposure is somewhere around 5-6%, a stark cry from 25%, so I’d say that’s one thing.

And then two, I would say AI disruption can happen to any industry, it’s not just isolated to software alone. So we really need to think about evaluating AI disruption and make that broader obsolescence risk or technology risk to every deal you look at. This is always going to be a question, Churchill’s been doing this for about 20 years, so to the extent we know that things can’t last forever, whatever got you here, is that a sustainable driver for growth in the future, really should be a part of your underwriting.

So we do have a more refined framework around AI. AI’s constantly developing and changing, and how it will affect us going forward, but I think now the question is more, how can you identify those businesses that are going to leverage AI as a tool and really turn that risk into an opportunity? And you can find that across the space, software is one that already has inherent technology risk, so to the extent you lean in or lean out, I think that’s assessed manager by manager.

JANE KING: So private credit is maturing, when you have meetings at work or with clients, what are the things on your radar screen to make sure that it stays relevant in the financial ecosystem?

ALONA GORNICK: Absolutely. So I’d say with private credit today, the market is very healthy. I think from a radar screen perspective, there’s definitely more selectivity going on. I think the questions I’m getting from investors now are actually getting better. I’m feeling a lot more discernment from advisors on behalf of their clients, which is excellent. I think that we cannot perceive private credit to be a one and done solution or that all private credit funds are created equal, the discernment, the evaluation is extremely helpful, I think we’re going to see more widening of dispersion across performance of funds. Do from the standpoint of supply side, capital formation seems to be good even though we’ve seen wealth take a step back.

But we have to remember, the institutional market here has been very, very focused on private credit, to the extent that they are continuing to remain allocated and increase their allocation to private credit, they are not steering off course. About 75-80% of the private credit market comes from the institutional market, so while it’s early innings, they may have had a bit of a pause in the first quarter and year to date here, but I do think we are seeing signs of that sentiment shift, so supply is great.

The demand side though, we have to remember, is still strong, it’s healthy. The reason why private credit exists is to provide unique solutions, financing solutions, in a private way that is a better alternative to a public debt deal. If a borrower needs speed, certainty of execution, they want to remain confidential, that’s what private equity firms want, and they want it in a big way. A lot of private companies are staying private for longer, so the solution in the private space for private financing is huge, and I think the demand side will continue to be strong too.

So if your supply and your demand continue to grow, I think that that is a very healthy place to be for private credit. But what we saw this year, year to date 2026, what that means for deal flow and spreads, as we have a lot of capital still in the system, we have seen some deal flow kind of in a recovering phase, which means our spreads, while we had a minor widening out, a little bit, a few months out of this year, they’ve actually were turned back and have tightened up a bit. So there is strength in the market, the bid is strong for A+ assets, they’ve got to be macro-proof, tariff-proof, AI-proof, but they are getting done.

JANE KING: Okay. It’s amazing there are still investments out there like that.

ALONA GORNICK: Absolutely.

JANE KING: Alona, thank you so much for coming and sharing your insights.

ALONA GORNICK: Absolutely, it’s great to be here. Thanks, Jane.