Should private credit be public?

Katie Martin (0:06)

Cushkin.

Private markets get a bad rap, and you know what, they kind of deserve it. These are markets where the investments are not on the stock markets, they're not normal company bonds that any big investor or canny individual investor can buy. They're things like loans packaged together by big alternative asset managers, often private equity firms. It's the stuff that's behind the velvet rope, it's kind of exclusive. And look, this whole thing is fine and it's been great for years. But the past year or so has actually been pretty rough. Investors have been trying to get their money out with patchy results. But today on the show, is there a case that retail investors should be getting involved in this stuff after all?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London. I am joined down the line from his Brooklyn Lair by Mr. Robert Armstrong, sweating profusely, I understand. Which is a mental issue, a mental image for us all to work with today.

Robert Armstrong (1:18)

I just got back from walking my dog in the sticky humidity. So if I'm shining, that's why, it's because I'm good to my dog.

Katie Martin (1:29)

Got to be good to your dog, boys and girls. So, Rob, you've been writing about private markets recently. Let me just tell you some headlines on private markets recently that we've had on ft.com.

So just a few weeks ago, BlackRock Private Credit Fund honours less than 40% of redemption requests. So people can't get their money out necessarily from BlackRock Private Credit Funds. In May, the FSB, that's the Financial Stability Board, not the Russian Secret Service, raises alarm over private credit vulnerabilities. Also in May, ECB, European Central Bank, said private credit-fuelled AI boom poses a risk to the financial system. So there's a bunch of reasons to not like private credit and not like private markets. And this drumbeat, I remember we first talked about this, I think it was in September last year.

There was all of a sudden stuff started going wrong in this fancy new market where nothing ever goes wrong. And it's just been pretty relentless ever since, hasn't it?

Robert Armstrong (2:34)

September was the credit cockroaches. Do you remember the cockroaches? Where there were a couple of funds, September 25 Where there were a couple of private credit funds where something in the fund turned out to be either a fraud or something close to a fraud and nobody had done their proper due diligence on this loan. And when something like that happens in a very public way, everybody starts wondering what else might be a fraud behind the velvet rope, as you put it well there. And that put a kind of scare into the market, a scare I should say, which hasn't totally materialized in the credit results of the industry at large.

It was sort of the dog or the cockroach that didn't bark. I don't know what sound cockroaches make. I don't think they bark.

Katie Martin (3:25)

They hiss. They don't bark.

Robert Armstrong (3:27)

And it was the cockroach that didn't hiss so far, exactly.

Katie Martin (3:31)

So some people that you talk to are like proper kind of disaster merchants about private credit. They're like, there is like billions and billions and billions of dollars tied up in private credit and we don't really know what's in the box, but we suspect that there's lots of lending to unsustainable software companies that's in the box and this is all terrible because you can't necessarily get your money back quickly if you put money in a private credit fund, you can't necessarily get it out again.

Look, these people, they could be right, but the evidence for this being a systemic risk to the entire global financial ecosystem is at best weak. Like, where's the problem? So where do you fall down on this?

Robert Armstrong (4:13)

I think with private assets, there is a bunch of kind of overlapping worries, and it's important to kind of pull them apart. So let's start with one that you mentioned when you were reeling off those headlines, which is this thing about liquidity.

So the point about private assets, private credit, private equity, whatever, is that part of the secret sauce is the manager of the private fund owns this stuff for a long time. It stays in there and it's not exposed to the vicissitudes of markets, and it doesn't have to deal with all the complexity, whether it's loans or it's equities or it's a company or whatever. It doesn't have to deal with the vicissitudes of the public market. But that means that unlike a fund that has marketable stuff in it, if you want your money back, you might not be able to get it.