The private credit boom

SPEAKER_1 (0:01)

The systemic risk in the economy is affected both by levels of consumer debt and federal debt. They don't necessarily interact directly, but high levels of debt across the economy can create risks for stress in the financial system, perhaps ultimately instability in the financial system.

SPEAKER_2 (0:20)

To hear more about potential impacts of our increasing federal debt level, subscribe to P-Gym's The Outthinking Investor in your favorite podcast app.

Ethan Wu (0:29)

Thank you.

Pushkin.

Since the 2008 financial crisis, there have been a lot of bank regulations. So finance activities moved from the banks to things that are not banks. One particularly fast growing part of the non-bank sector is private credit, which you may have heard a lot about. And indeed, one of the biggest players in private credit, Blackstone, just today hit a big milestone, one trillion dollars in assets under management. It's got a lot of people asking, what's private credit again? Today on the show, we'll tell you. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu, here in New York, joined by master of the shadows, Alexander Skaggs.

Alexander Skaggs (1:22)

That is going on my business card.

Ethan Wu (1:24)

Master of the shadows and AlphaVille reporter.

Alexander Skaggs (1:26)

Yes.

Ethan Wu (1:27)

So Alex, private credit, I think this is a thing that's a little hard to talk about just because people may not have an intuition for it, but I think it's worth underlining the growth, right? Like when something grows a lot in finance, people get excited, people get worried.

And I mean, in 10 years, private credit has gone from something like $600 billion, which you know, maybe mid-sized part of the financial system to 1.5 trillion. So it's more than doubled in 10 years. It's just astonishing.

Alexander Skaggs (1:55)

Yeah, it's been really wild to see how much it's grown. And I think a big part of that is bank regulations, like you mentioned. One of the most interesting things to me about private credit is really who uses it. So like if you're a super small business, if you have like a startup coffee shop, you're like going to your uncle or like family, you know, somebody with a lot of money. If you are Apple, you go to JP Morgan. But there's a lot of space in between those two markets. And the companies that are sort of in this kind of mix tend to be a little bit smaller, maybe like a few hundred employees. One example of that kind of company is Melissa and Doug.

Which make kids' toys, which I didn't know what it was until like a couple years ago. And I saw they were taking out loans.

And another one is a Kentucky company called Big Ass Fans.

Ethan Wu (2:45)

What do they sell?

Alexander Skaggs (2:46)

It's a mystery. Nobody knows.

No, they're wonderful. It's a really funny name for a company. And it's like those kinds of companies either get bought out by private equity or they want to grow because every parent in the country needs a puzzle or a push toy for their kid from Melissa and Doug. Not that I would know.

Ethan Wu (3:07)

Or a Big Ass Fan.

Alexander Skaggs (3:08)

Yeah, or a Big Ass Fan. That's also very valid.

Ethan Wu (3:11)

So as private credit has doubled in the past 10 years, it's gone from we're serving this less served middle chunk of the market to we're competing with the JP Morgans of the world for this bigger business, right?

Alexander Skaggs (3:24)

Yeah, so I think there was just a big private credit loan to Bombardier, which I mean, they make giant subway cars and I think airplanes. So having private credit be financing that kind of business I think is really wild and really shows sort of how much it's grown.

Ethan Wu (3:41)

Yeah, and I think we should explain maybe the connection between private equity and private credit here. And so I mentioned in the top, Blackstone, right?

They're primarily a private equity player, but they've also become one of the biggest players in private credit. If I'm not mistaken, their private equity business does dwarf their private credit business in terms of assets under management. But these markets have become, I think, very symbiotic. Private credit is tending to lend to companies that are owned by private equity.

Alexander Skaggs (4:10)

Yeah, it's a really fascinating tension, I think. So Blackstone's private credit fund has about $50 billion under management, which is a lot of money, but compared to the total size of Blackstone, as we say, one trillion, it's not giants, but it's funny because private equity's business model is basically, okay, let's take on a ton of debt, take this company private and see how it goes.