(Bloomberg) - Even in the world of private credit, which for months has pitted skeptics against true believers after some high-profile blowups, the difference of opinion has reached new heights in the past week.
To the likes of Jamie Dimon, Mohamed El-Erian and even a money manager from , the parallels with the run-up to the 2008 financial crisis are obvious. Financial firms are “doing dumb things” in risky lending, JPMorgan Chase & Co.’s chief executive officer said. El-Erian tagged Blue Owl Capital Inc.’s decision to halt quarterly withdrawals from one of its retail funds a “canary in the coal mine” for the $1.8 trillion private credit market. And Danny Moses, made famous in Michael Lewis’ book, acknowledged the push for retail money “rhymes” with what he saw some two decades ago.
In an interview with Bloomberg TV on Thursday, Marathon Asset Management LP Chairman Bruce Richards likened the problems in software to “a train coming down the tracks that you could see from some distance.”
“It wasn’t a matter of if, it was just a matter of when. The markets have just woken up,” he said. “Annual recurring revenue allowed companies to trade at way too high a multiple,” he said, predicting refinancing challenges for heavily indebted firms.
Then there’s Bruce Flatt, CEO of powerhouse alternative asset manager Brookfield Corp.: “This is not that big of a deal,” he said on Wednesday. “It is definitely not an ’08, it has got nothing to do with ’08.”
Executives at two of Europe’s biggest insurers nodded to the widespread worries but were quick to reassure investors about their own risks.
Axa SA Chief Executive Officer Thomas Buberl said Thursday on Bloomberg TV that his group’s exposure to private credit was “far below” that of rivals, while Allianz SE Chief Financial Officer Claire-Marie Coste-Lepoutre said her company was “very comfortable” with its position in a separate interview.
Bank analysts are also jumping into the fray. Bank of America Corp. called Blue Owl a buy, blasting “misinformation” around the money manager. Those at UBS Group AG, though, now see an even bleaker worst-case scenario for private credit: a default rate as high as 15% due to “rapid, severe AI disruption.”
As the war of words rages on, the market damage is undeniable. Just this year, shares of Ares Management Corp. have plunged 26%, Blue Owl is down 24%, Blackstone Inc. has dropped 23% and Apollo Global Management Inc. has slumped 19%, as shareholders take flight from asset managers that have plowed into private credit.
Perhaps no one embodies this moment in private credit more than Boaz Weinstein, the famous activist investor behind Saba Capital Management. He cautioned this week that he sees “the wheels coming off the car” in the industry. Yet he’s also offering to buy stakes in three funds managed by Blue Owl at steep discounts to their stated value, potentially standing to gain from any fears.
Private credit grew rapidly in the wake of the 2008 financial crisis, filling the lending gaps created by regulations that hamstrung Wall Street banks. Many of the buyout shops that waded into the market have become sprawling asset managers in their own right, and are pushing for more money from individual investors after winning over institutions.
Whether the naysayers or defenders prove to be right, it’s increasingly clear that private credit is facing its first major test of confidence over whether it can withstand sustained pressure from concerns that one of its favored sectors, software, will be upended by artificial intelligence.
“Given the scale of growth, I think private credit is now big enough that it deserves this attention, that it deserves this focus and it is healthy,” said Hamza Lemssouguer, founder of Arini Capital Management. “Every single industry goes through this cycle and I think now it’s the turn for private credit.”
Emotions Flare
As the shares of major private lenders continue to slump, industry leaders aren’t hiding their emotions.
“It’s frankly a frustrating narrative to folks like us that have been doing it a long time,” Ares CEO Michael Arougheti said. “We’re not seeing bad underwriting,” but rather “it’s stable, rational, and performance for the top 10 players continues to be quite good.”
Blackstone posted a video to its social media channels in which Mike Zawadzki, its global chief credit investment officer, discussed the firm’s view of software investing.
“When I look at our portfolio, what I see is that software companies are growing faster, are larger and better capitalized and have more equity cushion beneath them,” he said.
Blue Owl, too, took to social media with a white paper authored by its co-head of technology investing Erik Bissonnette touting its expertise in the sector, while claiming some software firms may benefit from AI rather than be replaced by it.
The mood in earnings calls of business development companies this week was largely mixed.
FS KKR Capital Corp. cut its dividend to 48 cents a share from 70 cents and said about 3.4% of its portfolio was on non-accrual at year-end, up from 2.9% in the preceding quarter, meaning it no longer expects to collect interest on those investments. It slashed the value on its loan to software company Medallia, as did the Blackstone Secured Lending Fund.
New Mountain Finance Corp. disclosed that it agreed to sell $477 million of assets at 94% of fair value as of Dec. 31. While the move was telegraphed late last year, shares nonetheless plunged to the lowest level since 2020.
SLR Investment Corp. went so far as to lay out the case for why it could be “viewed as a safe haven” among BDCs: Its loan portfolio has just 2% allocated to software.
Over at Ares, Kort Schnabel insists they are eyes wide open to the AI risk — yet confident they’ll withstand the turmoil.
“AI is probably the most disruptive technology risk that we could have imagined and it absolutely is going to disrupt a lot of software companies,” Schnabel, head of Ares Capital Corp., said during an earnings call. “I don’t want to sugarcoat it. But we still believe strongly that we’ve constructed a portfolio that will remain highly resistant to this risk.”
Deals
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A lender group led by JPMorgan Chase & Co. is preparing to raise $5.3 billion of debt to support Qualtrics International Inc.’s purchase of health-care survey firm Press Ganey Forsta
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Affinity Education Group Ltd., an Australian childcare provider owned by Quadrant Private Equity, has completed an A$650m loan with existing lenders for refinancing purposes
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HPS Investment Partners led a roughly $700 million private-credit deal for Elara Caring, a home health-care provider
Fundraising
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Dan Loeb’s Third Point plans to launch a pooled fund for private credit loans in April, as the firm expands its push into direct lending
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Ares Management Corp. priced its second European direct lending collateralized loan obligation, doubling the total number of private credit CLOs in the region as investors warm to the nascent asset class
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Qatar’s $580 billion sovereign wealth fund is investing in a private credit firm run by former Goldman Sachs Group Inc. partners Tom Connolly and Michael Koester
Job Moves
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Joshua Easterly, who co-founded and helped build Sixth Street Partners into a more than $125 billion private capital manager, is retiring from the San Francisco-based firm
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Indonesia Investment Authority’s Co-Chief Investment Officer Andry Setiawan has resigned, deepening a leadership vacuum at the country’s first sovereign wealth fund and raising questions about its future direction
By Ellen DiMauro and Brian Chappatta
With assistance from Rene Ismail and Olivia Fishlow
