The Private Credit Reckoning is Coming: Executives Are Mistaking Luck For Genius | The Weekly Wrap

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Steve Eisman (0:28)

President Trump asserted, there has been a regime change suggesting the war is ending. I still find it hard to believe that President Trump will end the war with the straight closed, because that would be viewed as defeat. We now know that private credit understates its software exposure, that the industry wants to massage the data to make it seem smaller. The lesson here is that an entire generation of private credit executives have mistaken a lack of a credit cycle for genius. When private credit eventually blows up, it's going to be a shock to the industry's executives. Just like the GFC was a shock to Wall Street executives. It's not going to be pretty.

Hi, this is Steve Eisman, and welcome to another edition of The Weekly Wrap. Because of Good Friday, this is a shortened week. So this wrap is for the week ending Thursday, April 2nd, but recorded Wednesday, April 1 The first quarter is over, and it was a tough one. The market started the year with a nice January. The market was up a bit over 1% by the end of January. However, largely because of the war, but also because of fears about the impact of AI and private credit, the quarter ended with the S&P down 4.6% for the year and NASDAQ down 7.1%. I will have more to say about the quarter and the performance of all the sectors and important subsectors on next week's Wrap. But on this Wrap, we will discuss the following. One, while the war in Iran continues to grab headlines, we need to keep focusing on the underlying economic issues at play. Two, more bad news about private credit. Three, the psychology and herd mentality of hedge funds. Four, the psychology of the executives of private credit funds and how similar that is to the psychology of Wall Street executives pre the great financial crisis. And finally, five, I answer two questions from viewers. So let's get started. We have now entered the fifth week of the war. Over the weekend, President Trump threatened to destroy Iran's energy infrastructure and Cargillan, unless the Iranians negotiate and reopen the Strait of Hormuz. Like I have said before, we are now in an environment where there is only one variable that matters, the war. On Monday, the market attempted to rally, but ended down on day after the publication of certain negative headlines. But on Tuesday, the market was up strong on a Wall Street Journal article, which stated that President Trump told aides that he is willing to end the war without reopening the Strait of Hormuz. After our interview with Stephen Cook of the Council of Foreign Relations, which we posted on Monday of this week, I must say that that headline does not sound right. On the other hand, on the same Tuesday morning, President Trump put out a scathing statement on Truth Social. He said, quote, all of those countries that can't get jet fuel because of the Strait of Hormuz like the United Kingdom, which refused to get involved in the decapitation of Iran, I have a suggestion for you. Number one, buy from the US. We have plenty. And number two, build up some delayed courage. Go to the strait and just take it. You'll have to start learning how to fight for yourself. The USA won't be there to help you anymore, just like you weren't there for us. Iran has been essentially decimated. The hard part is done. Go get your own oil, unquote. By Tuesday morning, after the market soared almost 3 percent, President Trump asserted there has been a regime change suggesting the war is ending. Even given this and the truth social statement, I still find it hard to believe that President Trump will end the war with the strait closed because that would be viewed as defeat. But that's just my opinion. Clearly, making any investment decisions right now is very difficult, given that the markets are literally trading headlines. Moving on. More bad news on private credit. Shocking, I know. Monday morning, the Wall Street Journal published a very interesting article about private credit's exposure to the software sector, pointing out that the actual level of exposure is considerably higher than the 25% that has been estimated. By looking through the filings of scores of private credit funds, some commentators have reached that 25% estimate number. They say 25% of all direct lending loans are to software companies, specifically to software companies bought out by private equity from 2018 to 2022 The journal article suggests that there is leeway and how private credit classifies a company as being or not being in the software sector. I call this data massaging. Private credit funds classify software companies that service other sectors, such as health care, as being in those sectors as opposed to software. Tomato, tomato. If that isn't data massaging, I don't know what is. The journal looked at four private credit funds, four major private credit funds and found the following. One, the Blue Owl Credit Income Fund, a $34.8 billion fund, reported 11.6% of its portfolio in software, but the journal found its software exposure at around 21%.