Money Is Flying Out of Private Credit. That’s Bad News for Wall Street.

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John Jorgensen (0:19)

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Matt Grossman (0:20)

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Matt Wirz (0:27)

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Alex Ossola (0:33)

Money is pouring out of private credit, and some investors are finding it's complicated to pull their cash.

Matt Wirz (0:39)

Redemption started to go up, and then all of a sudden, investors, at least some of them, woke up to the fact that, oh, wait, I might not be able to get all my money out when I want it. I better put in for it now. And then it just kind of built and built.

Alex Ossola (0:52)

Plus, a federal judge throws out subpoenas issued to the Federal Reserve in a heavy blow to the Justice Department's criminal investigation into Jerome Powell. And the Pentagon is moving more troops and ships to the Middle East. It's Friday, March 13th. I'm Alex Ossola for The Wall Street Journal. This is the PM Edition of What's News, the top headlines and business stories that moved the world today. Two data points are out today from the Commerce Department on the US economy. GDP for the end of last year was revised down to 0.7% growth, well short of the 1.4% pace initially reported. And the personal consumption expenditures price index, the Fed's preferred measure for inflation, was 2.8% in January. That's a slight decline from December, but still above the central bank's target. And those numbers are, of course, before the Iran War, which has raised energy prices. WSJ economics reporter Matt Grossman says that because of the war, this inflation data isn't as helpful to economists and policymakers.

Matt Grossman (1:54)

As everyone who's driven in the last couple of weeks knows, gas prices are already a lot higher. So I think this report best serves as a baseline for where things stood before the war. Things were already a bit hotter than the Fed wanted in January, and economists are on the edge of their seat to see how much of an increase we get once we get the March data.

Alex Ossola (2:16)

Matt says the war may affect the Fed's thinking.

Matt Grossman (2:19)

The Fed in January felt their policy was in a decent place to watch inflation gradually fall back to that 2% level over the course of the year. Maybe they could find opportunities for a cut or two. Of course, that was before we knew this war in Iran was coming. The fear would be that not only does that translate into higher gas prices, but higher prices for everything else too, because so much of what we buy has to get shipped. At the margin, traders have seen the war news as being more on the pessimistic side for actually getting those rate cuts this year.

Alex Ossola (3:03)

The continuing war in the Middle East and worries about its economic repercussions weighed on stocks today and pushed up oil prices. Brent crude, the global oil benchmark, rose 2.7% to more than $103 a barrel. Since the attacks between the US and Iran started nearly two weeks ago, Brent prices have surged more than 40%. The NASDAQ led the day's losses in the US stock indexes, falling 0.9%. All three indexes finished lower for the week, with the Dow posting the steepest losses. It ended down 0.2%.

Private credit has in recent years powered massive growth on Wall Street. Now though, that engine has been sputtering. Investors are trying to pull money out of big funds, endangering firms' future profits. For more on what's driving the run on private credit, I'm joined now by Matt Wirz, who covers credit for the journal. Matt, to remind people, private credit is loans made by private fund managers to corporations, financial institutions, and sometimes even consumers that were traditionally made by banks. So why this rush of redemptions? Why is this happening and why now?

Matt Wirz (4:09)

Well, on Wall Street, they love to say like, what inning are we in? And I think this is a reflection of broader investor angst. There's a sense that valuations are quite high, that maybe we're in like the seventh or the eighth inning of this like boom in both credit markets and also in equity markets. But what makes private credit different is that it's mostly sold to individual investors through these funds that, unlike mutual funds, limit the speed at which you can withdraw your investment. And that's because the assets in the funds are these private loans that are actually kind of hard to sell. So it's a structure that makes sense. However, when these products were sold, from what I've heard talking to numerous financial advisors, brokers, some investors were very aware that these funds that they were buying would limit the speed at which they could take out their money. And then some people, they weren't. They were just told, hey, you can get 11% yield on this and it's holding really safe, senior secured loans. And it's the top notch asset manager. And that's why we're seeing, I think, the pandemonium that we're seeing right now.