Private Credit Explained: Why It’s Booming (And What Could Go Wrong)

This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Check responses set up require compatibility and availability varies 18 plus. Propel Fitness Water with Gatorade Electrolites, Zero Sugar, and Vitamins. Propel hydrates better than water to help you get the most out of your workout and get back to your best self. What propels you? Propel with Gatorade Electrolites. - Hello and welcome to this deep dive on private credit. And if you read any financial news or listen to any podcast, not that you'd listen to any other podcast, of course, apart from the market maker, you've probably heard about private credit. And in this episode, I've got Stephens to join me to break this down. What is it? How big is it? Why is it growing so quickly? And importantly, what are the risks? 'Cause you're probably reading a lot about it. We're also gonna focus on two big names in private credit. Of course, Blackstone and Blue Owl and get into what exactly a business development company is. So even, probably a place to start. What is it? - Yeah, absolutely, thank you. And you've given me 20 minutes to do private credit. So either I'm gonna speak faster or I'm gonna have to miss little bits out, but hopefully 20 minutes will be enough to give people a decent overview of what private credit is. Private credit is the name suggests. It is credit lending, but it's done outside of the traditional banking system. And it is not public, you cannot trade. It is not tradable debt, like a bond or like a leverage loan private credit. That's what it is. The way that I really liked, so the head of the CIO of credit for Blackstone, Michael Zawadski, he described the growth of private credit a little bit like a kind of farm to table. So previously, if you were a company and you wanted to take out a loan or if you wanted to do a syndicated loan, you had to go through a bank, right? And the bank might lend you some money, but they would probably, in the case of, in lots of cases, they would facilitate, broker, arrange a series of investors to come and lend money to you through a various product, right? Whereas private credit is farm to table. It is cutting out the arranger in the middle and going, all right, we are an investor and we want to directly invest in companies across the US and across the world. He actually says it's a little bit like Amazon instead of going through high street stores, you now go straight to source to Amazon and you get your lending products, you get your direct relationship. So I think really, really importantly, you know, it's not trading over the public markets, it's debt, but really importantly, the relationship is between the investor, the private credit fund, the likes of Blackstone and Aries, and the company. And that is incredibly important when it comes to controls, when it comes to risk, when it comes to returns and things like that. And so, as a next step then, why is it become so important and like how big of a market are we talking here? Who has access to it? How much like deploying in their activities and what they're doing? - Yeah, so a little bit of a, maybe a little bit of a history lesson goes a long way. So private credit's been around for a long time way before 2008, 2009, global financial crisis, but it was a very, very, very small, teeny tiny pocket with not many big investors. What happened after the GFC in 2008, 2009, banks went super, super risk off, right? And banks were one of the traditionally, one of the biggest lenders into non-investment grade, the biggest direct lenders into non-investment grade, highly levered, highly indebted, often private equity backed or private equity owned companies that needed debt in order for the private equity economics to work appropriately. But post global financial crisis, a lot of these banks were trenched, they had really, really strict risk limits, tier one assets, risk weighted assets, et cetera, and there was a bit of a void that needed to be filled. And at the same time, there was a generational law in interest rates, meaning that some of the more traditional, public debt instruments were not providing the yield to return on investment, the big institutional investors, the pension funds, the insurance funds, the endowment funds needed. So they went hunting for yield in a low interest rate environment when banks had pulled out of slightly risky leverage lending and who fills this void, private credit. And private credit has grown almost in lockstep and actually has started to grow a lot quicker than private equity. We've spoken on previous podcasts around the growth and dominance and significance of private equity, $15 trillion of assets under management, company staying private for longer. Well, private credit's catching up. It's $3 trillion, maybe even three and a half trillion dollars, of assets under management as of April, 2026. That's growing double digits every single year, still growing double digits despite maybe some wobbles that we'll talk about. And the reason why it's popular well, let's say from an investor's perspective, what do I care about as an investor? I care about return on investment and private credit has shown to have really, really enduring internal rate to return on investment through the cycle, through the cycle being recessionary but also through the interest rate cycle as well. It's spread is about 200 basis points, 2% higher than publicly traded debt instruments, high yield debt instruments. So if you're going for yield, if you're going for return, private credit's provided a really nice source of returns for these large institutional investors. And then on the flip side, from a company perspective, the asset manager sits in between the institutional investor and the company, on the flip side, companies really want customisable, flexible, direct, borrowing relationships with counter parties, with investors, with private credit funds that kind of get their particular business need. So there's a direct lending thing has been a real positive for all of these middle market, you know, profitable, stable companies that want to do something and have finally got a counter party, a pool of money that's not the banks that are really one size fits all, very slow, very stodgy. It's not the public bond market, which you have to get credit ratings, you have to go through all the whole process, then it gets traded on the secondary market, but actually, no, why don't I just go to Blackstone? You know, they've got $500 billion of assets on the management and credit. Let's go and forge a relationship with them and we can actually speak to the person that's taking our debt. - Quick question, does that change the composition of the Blackstone workforce then? Is there roles that exist that sounds like there's some, I don't know, some sort of origination activity or something that's going on where there's people now going direct to market, so to speak, to these companies, but, or is that, I guess those, as you said, this is pre-financial crisis activities were happening. Have they just like beefed up those teams essentially? - They have massively beefed up these teams. I think one of the big differences is scale. So Blackstone has now, it's a $1.3 trillion global asset manager. There was traditionally private equity focused, but the fastest growing division of Blackstone is private credit, growing at an 18% compound on your growth rate, and it is diversifying in terms of its strategies within private credit as well. So you're actually right in terms of new roles. There are originators, there's a big salespeople pounding the pavements, going to companies in Idaho and Arkansas and places like that and going, hey, would you like a piece of private credit? But then there's this big kind of investment team. There's about 120, 130 investment professionals that sit on top that invest across a wide range of private credit strategies. So the most traditional private credit strategies, is secured direct lending. You need money, you want to borrow some money, we're going to lend you some money, we're going to take some security or collateral, the most vanilla kind of thing that you can do. But then increasingly, there's been a focus on asset-backed lending, and this has been a massive trend in the world of data center financing, and even GPU financing, and that's where a couple of the ripples of risk have maybe started to surface. We are going to lend directly to you, but lend against an asset book, as opposed to just directly lending on a cash flow basis. And what's really interesting to kind of wrap up the Blackstone Mini-K study is that 123 billion of their 500 billion of private credit assets on the management, 123 billion of that, is on investment grade companies. So this is no longer the debate. If anyone thinks that private credit is just for private equity backed, highly levered, really risky junk bond-style companies, this is not true. 123 billion is going to investment grade companies, the blue chip companies, that have realised that actually, we can issue an investment grade bond, but we can also go direct to Blackstone and say, "Hey, we want some flexibility. We're doing this interesting thing. Can you give us some covenant benefits or whatever it might be?" So this thing's kind of spreading out, right? Sounds like you're trying to calm the market here, Stephen. You're kind of like the spokesman for Blackstone, but maybe we could talk quickly about Blue Owl, because that's a name that you see a lot. When people have been searching private credit, it kind of pops up. So what is BDC? So Blue Owl is a business development company. So Blue Owl is an asset manager, is an asset manager that manages circa $300 billion of assets across different strategies, and it is a listed asset manager in its own right, like a Carlisle or a KKR. But what it specialises in is starting funds that are called business development companies, and this is a key key part of this private credit puzzle. So business development company is a, and sorry to get technical for a second, but it's a closed-end investment company that was passed through Congress in 1980 in response to trying to get more lending into the kind of US mid-market post 1970s recession. And it acts a little bit like a real estate investment trust. There are tax advantages to a business development company, and the BDC has to pass on 90% of its taxable income to its shareholders. So it is like a real estate investment trust. It is a closed-ended vehicle. That, importantly, can be traded publicly. So you have two different types of business development companies. Just get into the weeds very quickly. You have a traded business development company. The flagship one of Blue Owl is Blue Owl capital, so you can type in Blue Owl capital share price, and you'll see the share price movement. It's gone down, just as a bit of a tip. And this is retail investors like me and you being able to pile in to exposure to private credit through this listed business development company with some tax advantage, and it's a dividend play, because they have to return 90% as dividend. There's also this concept of the non-traded business development company. So Blue Owl technology income credit, I think it's called, that's an example of a non-traded BDC. So if you want to avoid stock market volatility, you can invest in this non-traded business development company, and your returns will be based on a net asset value. Mark, you can still, a retail investor can still invest in it, but you have to go through professional investment check channels. Now, the reason why this is important is because Blue Owl, remember if you're investing, if you're a pension fund and you're investing in Blackstone, it's not going to be public if the Norwegian sovereign wealth fund wants to take a little redeem a little bit of their money, right? And it's often very illiquid. You've got a lock-in period, you can't take out your money, dot, dot, dot. So don't really know the signals of getting cold feet in traditional private credit, aren't really there. But in this business development company environment, if everyone's getting spooked about private credit as an asset class, worried about a few defaults, worried about a few bankruptcies, worried about AI exposure, they can just take their money out, right? So they can take their money out of the traded business development company, Blue Owl Capital, or at certain periods of time, they can take their money out of the non-trader BDC. And we've seen headlines. I think there were $5.4 billion of redemption requests in Blue Owl credit income and Blue Owl technology income. These are two non-trader BDCs. In April, representing about 30% of the total funds assets on the management, resulting in Blue Owl saying, no, maximum redemption every quarter are going to be 5%. The share price of the overall asset manager, Blue Owl is down 35% this year. And this is why people are starting to get a little bit freaked out. So in terms of then what you just said, freaked out, how big is this risk from a systemic point of view because that's the way often is the narrative that gets spun. This is like financial crisis 2.0. You'll read that a lot when it comes to private credit as a fundamental risk to the system. Where does that come from? Is that a realistic thing to say or is it just to the media doing what the media does? I think it's the media doing what the media does. But to an extent, spurred on by some inopportune comments from very senior figures in the banking world. You would remember, I think probably late last year, Jamie Diamond with his famous cockroaches. When you see a cockroach, there are probably more. And this is referencing the bankruptcies and solvencies of two companies, two auto parts companies in the US first brands and trickle-all. Now, I can say a lot about these two companies. We don't have time to talk about them now, but I don't necessarily think that they were canaries in the coal mine for private credit. And by the way, we have to realize that in the world of credit, and I used to work in lending, you will get companies that go bankrupt. You will get companies that default. This is the risk return paradigm. Not all companies are going to exist forever. So Jamie Diamond's cockroach comments got people a little bit worried that this could be something where a wave of default ripple through the private credit industry and it has associative downside effects on banks and on the financial system in general. But I think what's really important to note is the risk, if there is a little bit of froth in this market, if there are maybe slightly lax lending standards to a bunch of companies that might end up defaulting, the risk is so much more dispersed than it was during the financial crisis. In the financial crisis, there are six or seven systemically important institutions, whether it's Fannie Mae and Freddie Mac or whether it's insurance companies or whether it's the banks. These are important for every person in the country and every person in the world. These private credit firms, yes, there might be some losses. Yes, there might be some redemption, but these are super isolated, right? The flagship blue owl fund, tradable fund, tradable BDC is $16 billion, $1.6. That is not a large even if that goes pop. That's not going to be systemically important. So the risk has definitely been distributed. That's not to say that there's no risk there, but the nature of investing is risk and return, right? It's just we need to figure out whether the risk is commensurate with those spreads that we've spoken about earlier on. Awesome. All right. Well, look, if anyone has any follow up questions at all, feel free to drop us a comment. Obviously, it's on YouTube, on Spotify. I know you can do that, and I'm sure Stephen will have half an eye on those and be willing to take part in conversation. Any questions at all? First, no, but I hope you found that useful. This is going to be the first in a series of many deep dives. We'll do over certain topics to the very common that come up when talking about financial markets. I hope you enjoyed it. And thank you as always, Stephen. Thanks. Now at Kruger, your points add up to more ways to save every trip. Use them your way to take dollars off groceries at checkout or save at the pump. you can even save up to $35 on your next fill-up. Same points, more choices, and with low prices on fresh quality food, plus digital and personalized offers tailored to how you shop, your dollar goes further. Redeem your points online or in the app. Kroger, fresh for everyone. Restrictions apply, seaside or store for details.