Private Credit’s Major Split: Looming Disaster or Simply Business as Usual

Private Credit Market Faces Intense Debate Amid Rising Concerns

The private credit sector is currently at the center of heated discussions, with opinions among industry leaders and analysts more divided than ever. Recent events have amplified the debate, as some draw comparisons to the period leading up to the 2008 financial crisis.

Industry Leaders Sound the Alarm

Prominent figures such as Jamie Dimon, Mohamed El-Erian, and Danny Moses have voiced their concerns. Dimon, CEO of JPMorgan Chase, criticized the prevalence of risky lending practices, while El-Erian described Blue Owl Capital’s suspension of quarterly withdrawals as an early warning sign for the $1.8 trillion private credit market. Moses, known from Michael Lewis’ “The Big Short,” noted that the current push for retail investment echoes patterns he observed before the last major crisis.

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Warnings and Reassurances

Bruce Richards, Chairman of Marathon Asset Management, likened the mounting issues in software lending to an oncoming train—inevitable and visible from afar. He argued that high valuations driven by recurring revenue models have set the stage for refinancing challenges among highly leveraged companies.

In contrast, Brookfield CEO Bruce Flatt downplayed the situation, insisting that current conditions are not comparable to the 2008 crisis.

Insurers and Analysts Respond

Executives from major European insurers, including Axa and Allianz, acknowledged the market’s anxiety but emphasized their limited exposure to private credit and their confidence in risk management. Meanwhile, analysts at Bank of America defended Blue Owl, dismissing negative rumors, while UBS warned that rapid advances in artificial intelligence could push default rates in private credit as high as 15%.

Market Impact

Despite the ongoing debate, the toll on asset managers is clear. This year alone, shares of Ares Management have dropped 26%, Blue Owl is down 24%, Blackstone has fallen 23%, and Apollo Global Management has lost 19%, reflecting investor unease over the sector’s exposure to private credit.

Boaz Weinstein’s Contradictory Role

Activist investor Boaz Weinstein, head of Saba Capital Management, has warned that the private credit industry is at a breaking point. Yet, he is also seeking to acquire stakes in Blue Owl funds at significant discounts, potentially benefiting from the turmoil he predicts.

Growth and New Challenges

Private credit expanded rapidly after the 2008 crisis, stepping in where traditional banks pulled back. Many buyout firms have since evolved into large asset managers, now courting individual investors after gaining institutional support. The sector now faces its first major test: whether it can withstand persistent fears that artificial intelligence will disrupt its favored software investments.

Industry Perspectives

Hamza Lemssouguer, founder of Arini Capital Management, believes the sector’s rapid growth warrants the current scrutiny, describing it as a natural part of the industry cycle. Ares CEO Michael Arougheti expressed frustration with negative narratives, insisting that underwriting remains sound among leading players.

Blackstone’s global CIO, Mike Zawadzki, highlighted the strength and growth of software companies in their portfolio, while Blue Owl’s Erik Bissonnette argued that some software firms could actually benefit from AI advancements.

Mixed Results in Earnings Reports

Recent earnings calls have revealed a range of outcomes. FS KKR Capital Corp. reduced its dividend and reported a rise in non-performing assets, while New Mountain Finance Corp. sold assets at a discount, leading to a share price drop. SLR Investment Corp. positioned itself as a “safe haven” due to minimal software exposure.

Kort Schnabel of Ares Capital Corp. acknowledged the disruptive potential of AI but expressed confidence in the resilience of their portfolio.

Recent Deals

• A group led by JPMorgan Chase is arranging $5.3 billion in debt to finance Qualtrics International’s acquisition of Press Ganey Forsta.
• Affinity Education Group secured a A$650 million refinancing loan from existing lenders.
• HPS Investment Partners led a $700 million private credit deal for Elara Caring, a home healthcare provider.

Fundraising Highlights

• Third Point, led by Dan Loeb, will launch a pooled private credit fund in April.
• Ares Management priced its second European direct lending CLO, doubling the region’s total as investor interest grows.
• Qatar’s sovereign wealth fund is investing in a private credit firm founded by former Goldman Sachs executives.

Notable Job Moves

• Joshua Easterly, co-founder of Sixth Street Partners, is retiring from the firm.
• Andry Setiawan, Co-Chief Investment Officer of Indonesia Investment Authority, has resigned, raising questions about the fund’s future direction.

In Case You Missed It

• BDC With 2% Software Exposure Pitches Itself as a ‘Safe Haven’
• Blackstone Private Debt Fund Sees More Stress in Software Asset
• Mid-Sized Private Debt Downgrades to Outpace Upgrades, S&P Says
• Private Credit Fears Deepen With UBS Warning of 15% Defaults
• US Private Credit Default Rate at Record 5.8% in January: Fitch
• BDCs Shifting Loans to CLOs Masks True Leverage Risks, Citi Says
• Blue Owl Sold Loans to Pensions, Own Insurance Asset Manager
• BofA Commits $25 Billion of Its Own Cash to Private Credit Deals
• Blue Owl May Dent Sentiment, Not ‘Canary in Coal Mine’: Endowus
• Blue Owl Criticized by Warren Over Restricting Some Withdrawals

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Reporting contributed by Rene Ismail and Olivia Fishlow.

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