Once the hottest bet on Wall Street, private credit has started to crack

Private credit, an industry focused on lending to risky companies, has been one of the fastest-growing sectors on Wall Street, raking in trillions of dollars of investments and minting a slew of bil- lionaires.

 

But the tide has started to turn. Blue Owl Capital, the largest private credit firm, has seen its stock fall more than 50 percent over the past year — including a 10 percent drop on Tuesday — and investors have been pulling money from funds that the firm man- ages. 

 

Apollo Global Management and BlackRock, two other large players, have also rattled investors with write-downs on large loans to several troubled e-com- merce companies. 

 

 

Concerns about risks in the industry have been rising for months after a smat- tering of loan losses have raised ques- tions about the financial stability of private credit borrowers. But a trigger for Tuesday’s turmoil was a sudden fear that software com- panies, which borrow heavily from pri- vate credit firms, could be upended by artificial intelligence. Software firms have received roughly 20 percent of loans made by private credit funds, and analysts at Barclays and UBS warned this week about the risks of increased losses on the loans. 

 

Publicly traded software firms have lost roughly one-fifth of their value this year, and the prices of loans that trade have also dropped, the analysts noted. “This industry has never gone through a down cycle, so it makes a lot of sense that investors are especially jittery,” said Jared Ellias, a professor at Harvard Law School who recently co-wrote a paper on the growth of pri- vate credit titled “The Credit Markets Go Dark.” 

 

The prospect of further write-downs on these private loans has raised fears of large losses rippling through Wall Street and constricting a source of roughly $3 trillion worth of capital in the economy. 

 

In recent years, private credit stepped into a lending void left by traditional investment banks that had to deal with greater regulatory restrictions on their lending. It became an especially attract- ive investment when interest rates were extremely low because private credit firms were lending at higher rates, meaning higher returns for investors. 

 

But the trade-off is that since both the borrowers and the lenders in most cases are private, investors are given relatively little visibility into the financial health of the companies borrowing from private credit firms. Private credit firms have sought to reassure investors that their credit quality is sound. 

 

Craig Packer, co-president of Blue Owl, said in an interview Tuesday that he was baffled by the sell-off. “It seems really overblown relative to what we’re experiencing,” he said. One issue for these firms is how they have funded their growth. Blue Owl has raked in nearly $300 billion from inves- tors since its founding in 2016 — a pace of growth nearly unmatched on Wall Street. 

 

Some of that money came from long-term investors, including pension and endowments that are used to lock- ing up their money with private invest- ments for five to 10 years and waiting out any short-term setbacks. 

 

But a large por- tion of Blue Owl’s funding comes from investors in the publicly traded invest- ment funds that Blue Owl manages, called business development com- panies, or BDCs. As some companies have shown signs of strain, many inves- tors have been selling. 

 

BlackRock recently told investors that it had cut the value of one of its pri- vate credit loan books, which had expo- sure to struggling Amazon resellers and a home improvement company that filed for bankruptcy, by 20 percent. Just a month earlier, BlackRock had valued that group of companies at roughly $1.8 billion. 

 

Last month, Bloomberg reported that Apollo had been forced to write off a portion of a $170 million loan it extended to Perch, a company that bought and aggregated sales for Amazon resellers. In a statement, Apollo said the loan “was immaterial to our performance — on an annualised basis.” Apollo’s share price is down about 24 percent over the past year. The stock sell-off could also hurt the industry’s ability to keep growing rapidly.