Should we worry about private credit?

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Ethan Wu (0:28)

You Pushkin.

When you have piles of borrowed money, we like it where we can see it. In the light, visible, where regulators can look and say, hey, what's going on here? But a big change in financial markets that we've talked about in the show is the rise of shadow banking, and especially private credit. This is lending that goes on not in the light, but in the darkness. Today on the show, more on private credit.

This is Unhedged, the Markets and Finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio. A little bit sick, a little bit of a cold. Joined from London by Katie Martin, who also is a little bit sick and has a little bit of a cold. Don't you, Katie?

Katie Martin (1:12)

Yeah, we should apologize in advance to our listeners if we start coughing and spluttering.

Ethan Wu (1:18)

Nonetheless, we will power through.

Katie Martin (1:19)

We will power through, yeah.

Ethan Wu (1:20)

It's the FT way.

We've talked about private credit on the show before. With Alex Gags, but it's always good to revisit. This is a big topic in financial markets, but it is a little bit inevitably dense, and there's a lot of terminology, and there's a lot of moving parts. So, I mean, maybe it behooves us, Katie, to just take a step back, let's establish what we're talking about, and then we can kind of get into some of the stuff that's happening more recently. So just high level, Katie, what is private credit?

Katie Martin (1:48)

So it's one of those phrases, actually, that people use a little bit loosely and can mean a number of different things to different people. But broadly speaking, we're talking about lending to companies that doesn't come from banks, right? These aren't just bank loans, like we've had in the global banking system for like 500 years or something.

And they're also not like bonds. So they're not going to public markets and issuing bonds with prospectuses that like anybody can read. It's the stuff in the middle, it's bilateral loans from organizations that are not banks, or that come from little sort of small clubs of pockets of pockets of lenders. And this isn't new, but it's grown incredibly quickly over the past, particularly over the past sort of 30 years, but particularly over the past 10 years or so, this thing has just exploded. And suddenly everyone's talking about private credit, just like everyone's talking about private equity, just like there's a lot more private money in markets than there used to be.

Ethan Wu (2:47)

And just to give people kind of a lay of the land before we go any further, this is a $2 trillion market globally, including invested and uninvested capital.

The biggest player probably is Blackstone in the US, which is primarily a private equity and real estate company, but they do have a big private credit arm. And then there are some other private credit native players that are pretty big in the space. Aries, Blue Owl, HPS, a couple of others.

It's very much a market dominated by a single digit or maybe low double digit number of big players. Private credit was, I think, the hot asset class du jour in 2023 It was absolutely inescapable. All these pieces, all this press coverage about private credits moment in the sun, et cetera, et cetera. You know, we on the Unhedged newsletter contributed to that media coverage frenzy for sure.

It is, it is. And part of the backstory, right, is that these are loans made by non-banks. But what changed a lot in 2022 and 2023 is that private credit kind of took some turf from the banks, right? So, you know, you're a mid-sized company, you're a little bit indebted, you maybe don't have the strongest balance sheet. Traditionally, you go to JP Morgan, you go to Citi, you go to Goldman Sachs, and you go to their bank loan department and you say, hey, can you round up a club of lenders to give me some money? Like, we'll pay up, right? So that's the traditional way. You go to a bank and you do it.

What happened though is after interest rates went up a lot, because the Fed is fighting inflation, the banks had a lot of problems, right? They had a lot of debt that was stuck on their balance sheet. It clogged up the system at the banks and they didn't want to lend anymore, right? So these private credit guys who, like you said, Katie, have been around for decades, but you know, were smaller and occupied a smaller role in the financial system. They looked at the bank struggling with all of this bad debt on their balance sheets they couldn't do stuff with. And they said, we're gonna take some market share here. And that's exactly what they did. That's exactly what they did.