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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. It's been a rough

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Speaker 1: few weeks for private credit. Investors are just pulling out

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Speaker 1: to the tune of billions.

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Speaker 2: Private credit is kind of a different beast.

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Speaker 1: The one point eight trillion dollar industry makes loans directly

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Speaker 1: to private companies using money from institutional investors and more

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Speaker 1: recently retail investors, and as the private credit market has boomed,

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Speaker 1: it's positioned itself as a go to lender for the

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Speaker 1: tech industry and for its data center construction spree, which

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Speaker 1: means private credit has a lot of exposure to AI risks.

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Speaker 3: Financial firms grappling with signs that private credit issues are

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Speaker 3: starting to emerge following a series of blows from the

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Speaker 3: threat of AI.

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Speaker 1: Private credit money isn't just backing the AI infrastructure buildout,

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Speaker 1: It's also invested in the very software companies that the

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Speaker 1: technology threatens to displace. Jitters over AI hit the market,

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Speaker 1: these lenders are under a magnifying glass too. In February,

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Speaker 1: squeamish investors started trying to pull some of their money

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Speaker 1: out of private credit funds managed by companies like Blue Owl, Blackstone,

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Speaker 1: and Blackrock.

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Speaker 3: Concerns over the industry have mounted after Blue Oul halted

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Speaker 3: redemptions in one of its funds and decided to sell

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Speaker 3: some assets t helpay investors.

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Speaker 1: The problem is, the private credit industry isn't designed to

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Speaker 1: offer on demand liquidity the way that say banks can.

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Speaker 1: Investors in these funds are supposed to be comfortable with

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Speaker 1: having their money locked up for a while. So when

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Speaker 1: investors came knocking, major private credit firms handled their requests

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Speaker 1: in different ways, and that scramble is exposing cracks across

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Speaker 1: the entire private credit industry at a particularly sensitive time.

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Speaker 4: There was an executive order signed by President Donald Trump

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Speaker 4: last year that basically makes it easier for these retail

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Speaker 4: investors to get into alternative assets such as private credit,

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Speaker 4: and it's what they were counting on. And now that

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Speaker 4: all of a sudden, you're seeing exodus from these funds,

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Speaker 4: and it's raising all these kind of questions about the

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Speaker 4: asset class in general and whether it can withstand the

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Speaker 4: kind of pressure that it was never really intended to face.

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Speaker 1: I'm Sarah Holder, and this is the big take from

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Speaker 1: Bloomberg News Today. On the show, Bloomberg's Brian Chapata and

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Speaker 1: Olivia Fischlow take us inside the recent tumults in the

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Speaker 1: world of private credit, how cracks formed in this one

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Speaker 1: point eight trillion dollar market, how companies are trying to

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Speaker 1: tamp down investor anxiety, and what it could all mean

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Speaker 1: for your four to roh one k. Today, the nearly

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Speaker 1: two trillion dollar private credit market is central to the

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Speaker 1: global financial system. It powers hundreds of billions of dollars

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Speaker 1: worth of loans to companies of virtually every size. But

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Speaker 1: when private credit first emerged it was pretty niche.

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Speaker 2: The market actually started after the financial crisis and after

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Speaker 2: banks were sort of limited in the lending that they

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Speaker 2: could do.

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Speaker 1: That's Olivia Fischlow, who covers private credit for Bloomberg.

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Speaker 2: The basic idea was to move risk away from the banks,

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Speaker 2: which obviously caused a huge crisis, and sort of move

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Speaker 2: it into more individuals. Some investors from the banks left

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Speaker 2: and started their own firms called private credit firms, where

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Speaker 2: they had third party capital and started to give loans

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Speaker 2: the businesses that weren't really able to access financing. So

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Speaker 2: they were mainly focused on, you know, small businesses in

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Speaker 2: the Midwest, maybe like hvac businesses, things of that nature.

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Speaker 2: And of course, because these businesses were a bit riskier, right,

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Speaker 2: they were able to get more money for these loans,

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Speaker 2: they were able to be paid a higher rate. So then,

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Speaker 2: of course it became a very successful strategy. They started

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Speaker 2: to raise a lot of money and started to very

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Speaker 2: aggressively market these funds to retail investors. And then as

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Speaker 2: they got more and more money, now we can see

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Speaker 2: they're financing some of the largest companies in the world,

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Speaker 2: and you know, focusing on financing data centers.

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Speaker 1: Over time, private equity firms like Blackstone and Apollo set

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Speaker 1: up their own private credit shops, becoming some of the

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Speaker 1: largest firms in the space.

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Speaker 2: You know, they thought it was a good opportunity. But

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Speaker 2: what really started happening is private equity became less lucrative.

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Speaker 2: The returns came down, and you know, businesses aren't really

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Speaker 2: selling anymore, they're not really transacting. So credit became sort

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Speaker 2: of the backbone of these businesses, which, like for a

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Speaker 2: long time, were only known as private equity businesses.

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Speaker 1: For businesses, private credit can be attractive for two reasons.

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Speaker 1: Maybe the company is considered too risky to qualify for

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Speaker 1: a loan from a bank, or would face a high

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Speaker 1: borrowing cost if they do qualify a loan from a

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Speaker 1: private credit firm can be expensive too, but it typically

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Speaker 1: establishes a longer term relationship for everyone involved, the borrowing business,

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Speaker 1: the private credit firm, and their investors. This can give

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Speaker 1: businesses time to grow and hopefully eventually turn the kind

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Speaker 1: of profit that it's attractive to private credit firms and investors.

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Speaker 1: Bloomberg's Brian Chapata, who edits coverage of leveraged finance and

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Speaker 1: distressed debt, says that for investors, putting money in a

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Speaker 1: private credit fund can be a pretty good deal.

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Speaker 4: I mean, the thing you have to understand about credit

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Speaker 4: is that as long as defaults are low, it is

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Speaker 4: effectively a guaranteed return in a lot of ways. Just

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Speaker 4: as bonds that are very safe, such as treasuries, will

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Speaker 4: yield whatever it is on a daily basis, three percent,

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Speaker 4: four percent. You have some of these direct loans that

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Speaker 4: as long as the barrowers pay you back, you get

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Speaker 4: ten percent, eleven percent, and so that's what you can

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Speaker 4: sell these wealthy investors on or institutions. You can get

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Speaker 4: this kind of return as long as we are making

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Speaker 4: credit worthy loans.

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Speaker 1: But there are also some real risks with a lending

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Speaker 1: model like this.

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Speaker 2: What some people say is that because the market is

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Speaker 2: very private and it's very opaque, it's hard to know

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Speaker 2: how much leverage is actually inherent in the system.

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Speaker 1: And it's not just that there isn't the same transparent

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Speaker 1: around leverage. Private credit tends to let businesses take on

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Speaker 1: more leverage to borrow more against their debt.

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Speaker 2: Some critics say that you basically just shifted the risk

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Speaker 2: away from banks, which are regulated and you know, which

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Speaker 2: have more rules, into a more opaque area, which used

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Speaker 2: to be referred to as sort of shadow banking. That

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Speaker 2: phrase has sort of gone away, but I think the

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Speaker 2: idea of that risk still stands.

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Speaker 1: The private credit industry flourished as specific industries that it

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Speaker 1: invested in took off, like software companies.

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Speaker 2: When software businesses really started to take off, the banks

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Speaker 2: were relatively restricted in lending and they were dealing with

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Speaker 2: a lot of other crisses, so they couldn't really put

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Speaker 2: money out the door. And private credit was coming into

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Speaker 2: its own and so they really very heavily invested in

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Speaker 2: these software businesses, and at the time like this was

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Speaker 2: a great area of recurring revenue. It seemed like the

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Speaker 2: best place ever to lend, and there was basically no competition.

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Speaker 1: But in recent years, another industry, the private credit, heavily

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Speaker 1: in tested and has complicated this picture.

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Speaker 2: And I think what they really did not expect was

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Speaker 2: the level that artificial intelligence could now make that software

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Speaker 2: absolute like honestly, no one did. And I think it's

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Speaker 2: just sort of a combination of factors that they now

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Speaker 2: find themselves with that.

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Speaker 4: And the thing that we've reported here at Bloomberg is

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Speaker 4: that the software exposure that some of these private credit

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Speaker 4: funds self report is actually probably lower than reality because

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Speaker 4: so much is software. As we are quickly learning that

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Speaker 4: a lot of these businesses that maybe are classified as

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Speaker 4: healthcare actually are very much a healthcare software business. If

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Speaker 4: these companies go bust, private credit is on the hook

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Speaker 4: for a large portion of their portfolio, and they may

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Speaker 4: not be as diversified as they seem.

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Speaker 1: Concerns about AI have been a big deal for private credit,

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Speaker 1: but the industry had already been under scrutiny even before

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Speaker 1: the latest AI related market swings.

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Speaker 2: Concerns really started to towards the middle of last year

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Speaker 2: and where we saw some pretty high profile collapses with

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Speaker 2: businesses like Tricolor and First Brands.

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Speaker 1: Tree Color is a subprime auto lender and First Brands Is,

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Speaker 1: an auto parts company. Both had borrowed from firms that

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Speaker 1: fall under the private credit umbrella, and both went bankrupt

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Speaker 1: in the fall. By that point, JP Morgan had invested

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Speaker 1: in Tree Color, and an earnings call last year, the

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Speaker 1: bank's CEO, Jamie Diamond commented on the collapse.

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Speaker 4: Why Antenna goes up with leeleg I happened in I

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Speaker 4: should price shouldn't say this, but when you see one cockroach,

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Speaker 4: they're probably more, he said, You know, this is not

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Speaker 4: going to be the last time that you see some

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Speaker 4: sort of credit flare up, because there's probably more of

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Speaker 4: these out there. Private credit bristles at this because Tree

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Speaker 4: Color wasn't purely a private credit play, as JP Morgan

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Speaker 4: can attest to, but it did kind of raise awareness

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Speaker 4: of the cracks that were forming out there in the markets.

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Speaker 2: I think that started investor fears, which also sort of

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Speaker 2: added to the idea that as the FED cut rates,

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Speaker 2: where turns would also be coming down.

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Speaker 4: And then you started to see this kind of cascade

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Speaker 4: of missteps, bad news, just general weakness in the market

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Speaker 4: that was able to kind of tip the scales for

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Speaker 4: various credit firms out there into a major share price decline.

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Speaker 1: After the break. How these factors came together to create

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Speaker 1: a perfect storm for the private credit firm Blue Owl Capital,

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Speaker 1: How Blue Owl's challenges ricocheted throughout the industry, and where

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Speaker 1: the push to bring more investors into the private credit

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Speaker 1: market stands. Now. There's a lot that's making private credit

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Speaker 1: investors nervous right now. There's the fear that cockroaches are

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Speaker 1: scuttling around, that there are systemic risks hiding within the industry.

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Speaker 1: And then there's the AI of it all, the fear

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Speaker 1: that private credit CDIT funds are too exposed to legacy

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Speaker 1: software companies that could soon be put out of business

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Speaker 1: by new AI tech, and to expose to AI companies

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Speaker 1: that are spending a ton of capital right now. And

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Speaker 1: even though private credit funds don't typically offer opportunities for

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Speaker 1: more than five percent of their investors to withdraw money

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Speaker 1: at any given time, that's exactly what some investors are

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Speaker 1: starting to request. That's put what's known as redemption pressure

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Speaker 1: on private credit companies companies like Blue Owl Capital. I

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Speaker 1: asked Bloomberg's Olivia Fischlow and Brian Chapata to explain why

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Speaker 1: that company was the first domino to fall. So I'm

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Speaker 1: wondering if you could just tell us a little bit

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Speaker 1: more about what blue Al does and what its reputation

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Speaker 1: in the private credit market has been up to this point.

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Speaker 2: So I think before this point, bluel was known for

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Speaker 2: its just massive growth. They were able to grow their

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Speaker 2: business extremely rapidly in part by marketing their funds to

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Speaker 2: retail investors. And they also specialized on software, and they

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Speaker 2: would be on their earnings calls telling investors that this

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Speaker 2: was their edge and this was how they were able

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Speaker 2: to be such successful lenders. That's kind of why they

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Speaker 2: find themselves in the.

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Speaker 1: Moment they are today, because that same software could be

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Speaker 1: disrupted by the same AI companies that the rest of

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Speaker 1: the market is invested in.

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Speaker 2: Exactly, and that plus their retail focus, they're kind of

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Speaker 2: at these two points that people are now very very

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Speaker 2: worried about.

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Speaker 4: All of a sudden, you're seeing a large amount of

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Speaker 4: redemption pressure that they were never designed to be able

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Speaker 4: to withstand. They basically say, we have the right if

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Speaker 4: there's more than five percent of people five percent of

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Speaker 4: people want out, we can cap the amount that we're

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Speaker 4: willing to let you go. And so all of a sudden,

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Speaker 4: you're seeing these redemptions that are in excess of that.

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Speaker 4: One of Blue Owl's funds saw over fifteen percent redemption

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Speaker 4: requests in the fourth quarter. It was a number that

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Speaker 4: I think shocked the market, to be quite frank How.

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Speaker 1: Did the company handle all those requests?

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Speaker 4: They met them, And that is what's causing a little

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Speaker 4: bit of consternation in the market now, because these funds

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Speaker 4: are not designed to be able to meet these requests

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Speaker 4: quarter after quarter, because the private loans that they make

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Speaker 4: are not liquid at all. So the fact that there

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Speaker 4: are these redemption pressures now has Blue Oul selling one

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Speaker 4: point four billion dollars of assets in order to meet

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Speaker 4: some of these redemptions, and it's raising all these kind

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Speaker 4: of questions about the asset class in general and whether

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Speaker 4: it can withstand the kind of pressure that it was

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Speaker 4: never really intended to face.

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Speaker 2: I think some people thought that bluell agreed to give everyone,

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Speaker 2: like more than fifteen percent of investors their money back,

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Speaker 2: because they thought that was sort of quell concerns like, Okay,

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Speaker 2: we make a stand this one quarter, we pay investors back,

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Speaker 2: and then redemptions will go down and it'll all be okay.

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Speaker 2: But the problem is it sort of set this precedent. Well,

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Speaker 2: we're just pay investors out every quarter and if redemption

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Speaker 2: requests remain elevated as they have been for the industry broadly,

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Speaker 2: that action sort of began a problem for the industry,

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Speaker 2: which which I think people weren't really prepared for.

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Speaker 1: How have these fears about private credit that perhaps you

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Speaker 1: know started with Blue Owl at least in the past

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Speaker 1: few weeks, how have they spread to or affected other

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Speaker 1: companies like black Rock and Blackstone.

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Speaker 4: They say, liquidity never matters until it matters, and that's

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Speaker 4: what we're learning right now. And Blackrock, through its HPS

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Speaker 4: Corporate Lending Fund, was the first one to say, you

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Speaker 4: know what, we are going to cap at five percent,

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Speaker 4: and we're sorry, but not really sorry, because that is

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Speaker 4: what we've said all along that we would do, and

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Speaker 4: it protects the integrity or the fund. It prevents us

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Speaker 4: from having to sell assets at distress prices and hurt

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Speaker 4: the investors who are left in the fund.

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Speaker 1: So it's quite different from Blue Owl's approach.

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Speaker 4: It is, and so we're going to see in the

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Speaker 4: coming weeks what Blue Owl does whether they are going

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Speaker 4: to also enforce these five percent caps.

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Speaker 1: And meanwhile Blackstone did something different, right, tell me about

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Speaker 1: the unusual move that Blackstone made to give money back

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Speaker 1: to investors who wanted out. How did they handle all

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Speaker 1: these requests?

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Speaker 2: Yes, so what Blackstone was able to do was have

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Speaker 2: another fund in which their own employees put money into,

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Speaker 2: and then they use that money from their own senior

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Speaker 2: executives and other leaders across a firm to pay back investors.

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Speaker 1: Their own their own executives put up their own money

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Speaker 1: in order to pay back investors.

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Speaker 2: Yes, and it is very interesting that they did that.

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Speaker 2: But what some people have noted is that they were

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Speaker 2: restricted by the documents of their fund themselves. So they

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Speaker 2: say they were able to pay back that and much

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Speaker 2: more with their own money, but because requests reach beyond

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Speaker 2: seven percent, they had to find a way to not

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Speaker 2: use that funds money in order to give people their

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Speaker 2: money back.

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Speaker 4: To put up one hundred and fifty million dollars of

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Speaker 4: cash to show a sign of strength and to kind

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Speaker 4: of make sure that I guess the priorities are aligned

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Speaker 4: that they have skinning the game. It was a pretty

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Speaker 4: remarkable STANDI say by Blackstone.

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Speaker 1: Yeah, I feel like we throw around the word unprecedented

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Speaker 1: a lot, But that sounds unprecedented.

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Speaker 4: I mean it's huge, and I mean it probably speaks

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Speaker 4: to some extents to you know, the wealth of the

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Speaker 4: senior managements at Blackstone as well. But I mean, to

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Speaker 4: put up that amount of money is quite some conviction

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Speaker 4: in what is right now the largest private credit fund

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Speaker 4: out there, which is its be credit products.

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Speaker 1: In August of last year, just before the Tree Color bankruptcy,

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Speaker 1: President Trump signed this executive order to expand the type

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Speaker 1: of investments allowed in for one case, to clear the

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Speaker 1: way for more investments in private equity and others so

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Speaker 1: called alternative assets like private credit. There's been a lot

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Speaker 1: of debate over whether or not this is a good idea.

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Speaker 1: I'm wondering, how do you think the last few months

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Speaker 1: have impacted this question.

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Speaker 2: I think it's brought more attention to advisors and you know,

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Speaker 2: people just looking at the asset class from AFAR that

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Speaker 2: there are risks inherent in the asset class that maybe

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Speaker 2: you know six months ago, these weren't really being talked about,

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Speaker 2: and now it's definitely a folk I think the pros

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Speaker 2: that lenders will say is these are types of investments

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Speaker 2: that you can't get elsewhere and How is it fair

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Speaker 2: that institutions are able to reap this benefit but the

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Speaker 2: average everyday American can't reap the benefit of private credit

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Speaker 2: and get access to these high returns, low risk, differentiated

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Speaker 2: type of investment.

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Speaker 4: This whole episode has definitely raised people's awareness of private

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Speaker 4: credit for better or worse, and I think for the

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Speaker 4: ordinary person who doesn't fully understand the risks, I think

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Speaker 4: they will probably think twice before necessarily diving into something

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Speaker 4: that says private credit on it.

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Speaker 1: Obviously, these private credit companies don't want anything to blow

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Speaker 1: up their chances of getting into four O one k's

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Speaker 1: as planned as promised. Why does this feel so existential

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Speaker 1: to them?

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Speaker 2: I think it's because the market has never been this

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Speaker 2: big before, right, and they've never gone through a credit

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Speaker 2: cycle or any form of downturn in the size of

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Speaker 2: the are today.

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Speaker 4: Yeah, it's very different when you're a middle market lender

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Speaker 4: that is extending some credit to a lawnmowing company in

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Speaker 4: the Midwest versus being a major data center financier or

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Speaker 4: lending to software companies that are now directly in the

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Speaker 4: crosshairs of AI. It's just a completely fundamentally different market

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Speaker 4: than it was when it started, and so these firms

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Speaker 4: really want access to four oh one k's because it

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Speaker 4: is by design harder for individual investors to take their

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Speaker 4: cash out. You pay a penalty if you touch your

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Speaker 4: four oh one k and I would say probably a

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Speaker 4: lot of people do not ever touch their forum on

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Speaker 4: ks or withdraw money because of those penalties. So if

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Speaker 4: you're able to access that market as a private credit firm,

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Speaker 4: then all of a sudden, you probably face less pressure

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Speaker 4: than you do today from investors who are able to

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Speaker 4: on a quarterly basis say I want out. You said

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Speaker 4: I could get out. I would like to get out

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Speaker 4: in full. So that's why they want access to some

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Speaker 4: of this investor money that is more stable.

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Speaker 1: I'm wondering about the two ways that people are reading

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Speaker 1: this moment for private credit. We've talked a lot about

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Speaker 1: folks who are really concerned with what they're seeing in

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Speaker 1: the market. But are there also people who feel like

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Speaker 1: these fears are overblown?

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Speaker 4: I think definitely. I think there are some people who

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Speaker 4: say this is the precipice of the two thousand and

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Speaker 4: eight financial crisis all over again, and there are others

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Speaker 4: who have literally been quoted saying it's no big deal.

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Speaker 1: How are they looking at the same information and coming

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Speaker 1: to such different conclusions.

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Speaker 4: Well, I think what's happening right now is this AI

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Speaker 4: software nexus that we talked about earlier is creating fear

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Speaker 4: and anxiety in the market. We have not seen that

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Speaker 4: actually play out in terms of software companies just completely

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Speaker 4: collapsing and imploding. But I think people are really taking

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Speaker 4: comfort in the fact that this is a slow moving thing.

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Speaker 4: There will be some adaptation among software firms. Generally, some

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Speaker 4: might not all make it, but by and large they will.

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Speaker 4: That's kind of what private credit leaders are counting on,

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Speaker 4: that this too shall pass and there will be a

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Speaker 4: shakeout among the weekends that can't really withstand this kind

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Speaker 4: of volatility, and those who remain in the asset class

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Speaker 4: will be there for the long haul.

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Speaker 1: This is The Big Take from Bloomberg News. I'm Sarah Holder.

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