After years of growth, private credit lenders are having to deal with a wave of withdrawals by their customers. Blue Owl Capital Inc., Morgan Stanley, Blackrock Inc., Ares Management Corp., and Apollo Global Management Inc. have all had to cap withdrawals by customers to help prevent a severe liquidity squeeze.
The Rise and Potential Fall of Private Credit
In the wake of the financial crisis the US government and others enacted rules requiring banks to maintain larger reserves and to follow strict rules for calculating loan risks. Those seeking credit found it easier under new regulations to secure loans via private credit where rules governing banks do not exist. Thus the private credit market grew over the last decade or more to more than $2 trillion in value with projections of a total value of $5 trillion by 2029! At the rate that money is leaving private credit today it is not certain that the $5 trillion projection will be anywhere near accurate.
Private Credit and the US Economy
As we noted in our article about whether 2026 could be a repeat of 2008 with a repeat of the Financial Crisis, the $2 trillion share of the credit market held by private credit is large enough to pose a risk if things go bad. We might assume the worst if there were to be a prolonged conflict with Iran, continued closure of the Strait of Hormuz, global inflation and depression caused by cutting off a third of the world’s oil supply and add in the cutting off of sources of credit for US businesses, home owners, and consumers. Such a scenario could drive the US into another Great Recession as bad or worse than the Financial Crisis. If that should occur folks will not be able to pay on their credit cards and will stop making purchases, renters will not be able to pay rent, home owners will not be able to keep up on their mortgages and unemployment will surge upward.
Best Case Private Credit Scenario
If the major private credit companies listed above are successful in limiting withdrawals, are able to maintain a flow of credit sufficient to keep the economy stable and not go out of business themselves the US economy may well dodge a bullet. In the meantime investors will be well advised to rotate part of their assets into cash or cash equivalents like treasuries, dividend paying stocks with long histories of stability and try to avoid knee jerk investment and trading decisions in the difficult to predict investing world of today.
Who Is At Fault for the Private Credit Situation?
CNBC published an article about private credit’s cracks. They make the point that private credit creditors are not the only ones at fault for the potentially dangerous financial situation. Private credit companies have taken on increasingly risky loans over the years similar to how banks took on riskier and riskier mortgages running up to the Financial Crisis. As private credit lenders have had to back off of many loans, banks are seeing an opportunity to pick up lost ground. One can only hope that they do not repeat the mistakes of the past by taking on increasingly risky loans! Stable and solvent banks may be a good investment bet going forward in the light of a likely retreat of private credit lenders.