The private credit market, with assets of 1.8 trillion dollars (1.5 trillion euros), trembles. The growing risks linked to the healthcare sector have been aligned software with the arrival of credit funds for small investors, as the case of Blue Owl has revealed. Jamie Dimon, president of JP Morgan, detects parallels with the 2008 crisis. UBS, for its part, warns that default rates will reach 15% in private credit in the worst scenario, that caused by a “rapid and severe disruption” of artificial intelligence. In Spain, for the moment, the CNMV closely monitors the marketing of products to individuals who invest in private markets and makes it difficult to launch those that have liquidity windows.
Firms that grant private loans, which compete with those of traditional banks and carry more risk but also more profitability, have seen their business increase sixfold since 2010, according to data from Bloomberg and the specialized consulting firm Preqin. The alarm bells already went off with several bankruptcies of the automobile parts manufacturer First Brands last September and of the financial companies for the purchase of Tricolor and Primalend cars. They were the so-called credit cockroaches. In the first case, the ferocious growth of several layers of debt not recorded on the balance sheet were the cause of the debacle. The experts consulted warn that what happened with Blue Owl may be the consequence of the arrival of these cockroaches: Small investors have become nervous when they learn of these cases, they have requested refunds in an avalanche and this has led to the preventive closure of the vehicle.
The risks of the industries software and companies linked to AI are key. The volume of credits traded below 80% of their face value has more than doubled since the end of the year, to $25 billion. Of this amount, almost a third are loans to the sector in which the market detects the most danger, and it is foreseeable that the trend will continue upwards.
The key is in the arrival of small investors to the credit market and how they do it. Nizar Tarhuni, from the consulting firm specializing in private capital PitchBook, advocates formulas that guarantee the commitment of individuals through significant reimbursement penalties, since these types of investments are illiquid by definition. This occurs both in credit vehicles and in seed capital vehicles (venture capital) or in venture capital (private equity). “I note the current push to attract retail capital into private markets through semi-liquid structures like evergreen (of indefinite duration),” says the expert in an article published this Wednesday.
Luis Felipe Castellanos, Private Debt partner at Alantra, explains that the problem is in the format of the product that has had to be blocked. “Private credit is illiquid and retailers must be aware that they cannot withdraw the money; if they do not understand the product properly, problems like that of Blue Owl can occur. In Spain, for example, products have not been sold to individuals who are attributed liquidity that in reality is non-existent,” adds the manager.
The CNMV is aware of the risks and is increasing its supervision of products that invest in private markets. Its mission is to prevent scenarios like those that happened with Spanish real estate funds that blocked liquidity repayments just after the outbreak of the great financial crisis in 2008. Although the ending was happy for those trapped, it is better to learn from the past.
The supervisor chaired by Carlos San Basilio has issued a warning to sailors through a document on closed collective investment vehicles: “There is no (…) possibility that, on a structural basis, maximum limits may be established on the amounts of reimbursements,” in reference to those who invest in private assets. That is, if the managers set liquidity windows, they will not be able to establish maximum limits on the reimbursements that unitholders can request.
In the United States, most BDCs (business development companies), such as Blue Owl, allow investing from very small amounts and limit quarterly withdrawals to 5% of assets. This figure does not exist in Europe.
The sources consulted point out that the fact that the CNMV does not facilitate the creation of windows in the so-called funds evergreen This is one of the reasons why no retail product offering liquidity has yet been registered. “It is better for it to be this way than to sell a vehicle in which reimbursements are going to be blocked at the first opportunity,” they point out from a management company that offers private equity products to retailers. The minimum investment, in any case, is 10,000 euros and for clients with a financial asset of at least 100,000 euros.
Ignacio Marqués del Pecho, partner at Arcano Debt Advisory & Capital Solutions, agrees that the problem is one of form and not content: “Blue Owl’s product had liquidity windows that were possibly not well explained to the retailers who invested in it. The good news is that the appropriate decisions have been made, blocking reimbursements so that an orderly sale of the assets can be made, without causing losses to investors.” The punishment for Blue Owl’s shares, which have plummeted 30% since it announced the temporary closure last Friday, has not been massively transferred to the private credit market, according to the experts consulted. Arcano’s investment banker adds that potential doubts about credits linked to artificial intelligence are foreign to Europe, because the amount lent to this sector is “tiny.”
‘Zombie backgrounds’
Meanwhile, in the United States the market doubts the possibility of maintaining the devilish growth of private credit, on which companies controlled by the government are especially dependent. private equityat the same time that classical financial supervisors tighten their surveillance over possible contagions to the banking sector. Giants like Apollo or Blackstone have their own alternative financing capabilities, thanks to the capital they obtain from investors and other key assets, such as the insurer Athene in the first case and the BXCI division, which consolidates the credit and insurance businesses into one, in the second.
In other cases, the money injected into companies comes directly from traditional banking. “Banking entities can be exposed both directly – through loans to companies in which investment funds participate private equity— as indirect, through lines of credit granted to the funds themselves or loans granted to those who invest in these funds,” says the Bank of Spain in a recent analysis of private credit. UBS warns in a report that “banks and insurers have quietly accumulated a substantial exposure to private credit and alternative assets.” “American and European banks hold $1.3 trillion in loans,” it adds.
Boaz Weinstein, founder of the management company hedge funds Saba Capital Management, well known for its bets against credit risk, has stressed that the private credit industry may be in the initial stages of “the wheels coming off the car.” Meanwhile, the PitchBook analyst warns that what the market may actually need is not more capital, but less. Their data reveal that the amount invested in private equity compared to the exits carried out (sales of assets to return liquidity to the investor) stood at 2.8 times last year, record levels in a decade.
PitchBook reveals that the assets under management of the so-called zombie backgrounds [que han superado su periodo de vida previsto] They will exceed one trillion dollars in 2025, 7% more than in the previous year. “The market needs to contract and heal before growing again in a sustainable way,” says Nizar Tarhuni. In his view, the secondary market, follow-on vehicles and retail entries are useful tools, but they are being deployed as a solution that does not address the central problem: the speed of the divestments necessary to restore the gears of private markets.