Key Takeaways
- • Private credit, a roughly $3 trillion industry according to Morgan Stanley, is facing mounting strain after two private-credit-backed companies declared bankruptcy in September, raising questions about underwriting standards.
- • Blue Owl, one of the largest private-credit lenders, said in February it would sell $1.4 billion in assets to return money to some investors, an announcement that instead sparked broader panic about private-credit valuations.
- • Shares of Blue Owl have fallen about 40% year to date, while KKR, Apollo, and Blackstone are down 20% or more, according to NPR.
- • U.S. banks have lent about $300 billion to private credit companies per Moody's, so stress in the sector carries direct exposure for the banking system; the KBW Nasdaq Bank Index is down more than 11% year to date versus about 3% for the S&P 500.
- • Harvard law professor Jared Ellias says he does not currently see a 2008-style crisis, but warns that a loss of confidence could spread contagion.
Summary
Private credit refers to lending by private-equity firms and other non-bank companies to businesses, including software companies and auto lenders. Banks are typically reluctant to lend to these borrowers directly but remain exposed because they lend to private credit firms. According to Morgan Stanley, the sector is now estimated at $3 trillion.
The sector's problems have become more visible since two private-credit-backed companies filed for bankruptcy in September. Those filings raised concerns about how carefully lenders were vetting borrowers and whether lenders and the banks financing them would recover their money. JPMorgan Chase CEO Jamie Dimon, whose bank also financed one of the failed companies, warned during an October conference call, "When you see one cockroach, there's probably more."
In February, Blue Owl said it would sell $1.4 billion in assets to return money to some investors. NPR reports the move was meant to reassure investors but instead fueled widespread panic about a collapse in private-credit assets. Blue Owl declined to comment. Investors have since sought to withdraw money from several private credit firms, and the selloff has reached public equities. Blue Owl shares have fallen about 40% since the start of the year, while KKR, Apollo, and Blackstone are down 20% or more. Citigroup wealth-management portfolio construction head Olaolu Aganga described the dynamic as an inherent panic when investors rush for the exits at once.
Part of the anxiety ties to artificial intelligence. Investors are uncertain about returns on Big Tech AI spending and worry AI could render many software companies obsolete, and private credit firms are significant lenders to those companies. Harvard law professor Jared Ellias, co-author of an academic paper on private credit, said, "The great fear is that private credit is going to turn out to have financed a lot of the losers."
For ordinary investors, the near-term impact includes losses in retirement accounts, including holdings in private credit exposure through mutual funds and 401(k)s. Longer term, critics including Brad Lipton of the Roosevelt Institute note that private credit firms are not regulated like banks and face less mandated disclosure about their loans. Moody's estimates U.S. banks have lent roughly $300 billion to private credit companies, and bank stocks have declined as problems have surfaced. Ellias said he does not currently see a 2008-style event, but warned that a prolonged downturn could hurt borrowers that rely on private credit and that loss of confidence could spread contagion.
The sector's problems have become more visible since two private-credit-backed companies filed for bankruptcy in September. Those filings raised concerns about how carefully lenders were vetting borrowers and whether lenders and the banks financing them would recover their money. JPMorgan Chase CEO Jamie Dimon, whose bank also financed one of the failed companies, warned during an October conference call, "When you see one cockroach, there's probably more."
In February, Blue Owl said it would sell $1.4 billion in assets to return money to some investors. NPR reports the move was meant to reassure investors but instead fueled widespread panic about a collapse in private-credit assets. Blue Owl declined to comment. Investors have since sought to withdraw money from several private credit firms, and the selloff has reached public equities. Blue Owl shares have fallen about 40% since the start of the year, while KKR, Apollo, and Blackstone are down 20% or more. Citigroup wealth-management portfolio construction head Olaolu Aganga described the dynamic as an inherent panic when investors rush for the exits at once.
Part of the anxiety ties to artificial intelligence. Investors are uncertain about returns on Big Tech AI spending and worry AI could render many software companies obsolete, and private credit firms are significant lenders to those companies. Harvard law professor Jared Ellias, co-author of an academic paper on private credit, said, "The great fear is that private credit is going to turn out to have financed a lot of the losers."
For ordinary investors, the near-term impact includes losses in retirement accounts, including holdings in private credit exposure through mutual funds and 401(k)s. Longer term, critics including Brad Lipton of the Roosevelt Institute note that private credit firms are not regulated like banks and face less mandated disclosure about their loans. Moody's estimates U.S. banks have lent roughly $300 billion to private credit companies, and bank stocks have declined as problems have surfaced. Ellias said he does not currently see a 2008-style event, but warned that a prolonged downturn could hurt borrowers that rely on private credit and that loss of confidence could spread contagion.
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