Uncomfortable moments in private credit

Katie Martin (0:06)

Pushkin. Here at Unhedged, your friendly markets podcast for normal people, we excel at one important thing, giving you extra stuff to worry about. Today, drum roll, private credit. Seriously, if we weren't all focused on the Strait of Hormuz, we would be laser focused on the constant trickle of grim headlines about this pocket of finance. It was the next big thing once, a revolution linking up companies with the money that they need to succeed. Now, finance people are worried that it's obscuring a multitude of sins. Lots of funny lending going belly up. Today on the show, is this the next financial crisis in the making, or a storm in a teacup? How bad could it get? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets columnist in the bunker of FT Towers in London. And I'm joined by a dynamic duo in New York City, Robert Armstrong from the ever excellent Unhedged newsletter. I'm biased because I write for it, but whatever. Rob, say hello.

Robert Armstrong (1:15)

Now Katie, first of all, hello. Second of all, you said this was a podcast for normal people. Do you have any actual evidence that normal people listen to this podcast? In any sense of the word normal?

Katie Martin (1:28)

Actually, you do. I do.

Robert Armstrong (1:29)

Okay, good.

Katie Martin (1:31)

Normal people say hello, Unhedged at ft.com. Tell Rob you are normal. Anyway, we are also welcoming back to the podcast, the FT's Antoine Gara, who covers private markets for us in the big Apple. Antoine, thank you so much for coming on. We know you're busy.

Antoine Gara (1:46)

Yeah, thanks for having me.

Robert Armstrong (1:47)

Second greatest Antoine of all time after Antoine Walker, the great Celtics power forward.

Antoine Gara (1:53)

Can't confirm or deny.

Katie Martin (1:56)

So listen, guys, we do not want to shout fire in a crowded cinema here. We're not trying to stir up panic. We are saying that in among the Iran news, there's lots of alarming headlines coming through about private credit. They're all over our website, ft.com. As a Goldman Sachs executive said this week, the bank's private capital clients are glad of the distraction from the Iran war. He may have put it slightly clumsily, but he is not wrong.

Robert Armstrong (2:24)

It was a major PR failure.

Antoine Gara (2:26)

The saying the quiet part out loud is the problem.

Katie Martin (2:29)

So, Antoine, listen, I know for a fact that normal people listen to this podcast. And some of them might not know what private credit is, but they are embarrassed to ask. So, tell us, explain it to us like we are five. What is private credit? How big is it?

Antoine Gara (2:43)

Private credit, the industry will tell you it's lending money to mid-sized companies. So, you think, you know, Germany's middle stand or, you know, the industrial base of America. But what it really is, is lending money to private equity firms to buy mid-sized companies. And it's boomed into a true trillion-dollar industry, you know, especially since the 2008 financial crisis, when banks really stopped making those loans.

Katie Martin (3:11)

So, the ecosystem is, you're a company, you want to get hold of some money. You can go to a bank to get that money, just get like a standard loan. Or if you're really big, you can issue a bond that lots and lots of different types of investors can buy. But the bit that's grown up in between, particularly in the States, but also to a growing extent in Europe, is this private credit thing, where companies borrow money effectively from companies that are not your kind of standard banks or whatever. They are in this private credit, private equity ecosystem.

Robert Armstrong (3:41)

Antoine is making his, Katie is making a hash of it face.

Antoine Gara (3:46)

A little bit more realistic is I'm a private equity firm, and I want to buy a company, and I can go to JP Morgan and see how much leverage they want to give me and what it costs. And then after the crisis, I could go to dozens of so-called private credit firms, Blue Owl, Aries, Blackstone, Apollo, and I could see what kind of loan they want to give me, whether I could get more leverage, whether there would be less covenants or more covenants, and whether I could sort of have the structure I want. And so it's really about the alternatives of what banks were offering versus what these new lenders in a sort of unregulated manner were offering because they were outside of the banking system.