Cracks in Private Credit

After a decade of rapid growth, the private credit market has come under pressure. Several high profile defaults, concerns about valuations, and especially substantial exposure to a software industry vulnerable to AI disruption have fueled a surge in redemption requests, which has raised alarm bells for the asset class. So are these concerns merited or overblown? And how will the current stresses shape the outlook for private credit in the years ahead? I'm Allison Nathan, and this is Goldman Sachs Exchanges. Each month, I speak with investors, policymakers, and academics about the most pressin

Private credit has probably always existed, which is to say the making of loans. That's what banks do. And there's been nonbank lending forever. Direct lending is just one subset under the broad heading of private credit. Direct lending is the label that has been given to private loans made by nonbank lenders to midsize private equity deals. And the private equity business has existed and run on the use of other people's money to lever up returns on equity on the purchase of companies. And in the global financial crisis, banks lost a lot of capital and were chastened and became more harshly re

Howard, you actually described that growth as a gold rush. So what are the similarities, and should we be concerned about that? We we all know how the gold rush ended.

Every upsurge in financial activity brings heated competition, more participants, perhaps some risky behavior to get in on it. So let's say that today, direct lending is 2,000,000,000,000. If you can lend 2,000,000,000,000 and if you can judge, let's say, 1% fee, that's 20,000,000,000 in annual fees. So people wanna get in on that. So everybody hangs up a shingle as a direct lender. That's a gold rush.

This growth means that private credit now plays an important role in financing businesses, as Amanda Lineham explains.

When we just think about the core of private credit and the traditional lending model in its earliest years of the asset class, it was really reserved for companies that were really small and really couldn't access public debt markets. But the addressable market of borrowers has expanded specifically since the financial crisis and absolutely since the pandemic to include borrowers that could access the public credit markets if they wanted to, or in many cases have done so and are refinancing their debt into the private credit market. So it's now grown to be able to write larger checks, fund la

The current worries about private credit are focused on non traded business development companies, otherwise known as BDCs. Lineham explains what these are and how concerned we should be about the recent surge in redemption requests.

So the BDC universe, specifically the area that has been of most focus, the non traded or evergreen BDCs, have really grown in recent years, and they've provided a way for retail investors to access private credit in ways that are different from the institutional community. And specifically, there have been some features of those vehicles that investors really liked, namely lower minimum denominations, so they could participate at a lower entry point, more simplified tax reporting, which historically had been a gating issue. And I would say probably first and foremost, the ability to become in

Michael Aragetti of Ares is also not concerned about the surge in redemption requests or the bigger risk that they could trigger crisis inducing fire sales.