Now, on to the main event…

The current anxiety in the private-credit markets, as I’ve written before, began around last November. That’s about the time when Wall Street executives began to note the recent bankruptcies of First Brands and Tricolor, and eminences such as Jamie Dimon, Howard Marks, and Jeffrey Gundlach began crowing about cockroaches in the system and garbage lending akin to the subprime shenanigans that precipitated the 2008 crisis. Coincidentally, this was also around the time when investors in a $1.6 billion private-credit fund with the obscure name OBDC II started making noises about wanting to redeem some of their money.

The request was curious on a number of levels. First, the fund was affiliated with the blue-chip alternative asset management firm Blue Owl Capital, which has some $300 billion in assets under management. Second, around 97 percent of the loans, which were issued to about 180 middle-market companies, were senior and secured. Nevertheless, investors were ostensibly worried that some of the loans—especially the ones made to software companies—were susceptible to disintermediation by the coming A.I. revolution.

In response, Blue Owl tried to arrange for a merger with another of its funds, but that would have required the investors in OBDC II to take a 20 percent haircut—a nonstarter, for obvious reasons. Then Blue Owl sparked even more concern, in February, when it decided to sell some $1.4 billion of private-credit loans across its portfolio in order to have the cash ready to meet the redemptions in OBDC II. The loans were sold at or near par—so that should be okay—but then Blue Owl also changed the way redemptions would be made going forward from OBDC II.

The firm announced that it was not “halting investor liquidity” in the fund but rather was “restructuring how liquidity is delivered.” Instead of allowing for quarterly redemptions, as had been the case, Blue Owl was going to give investors in OBDC II some 30 percent of their money back, at book value, over a 45-day period, using the proceeds from loan sales. Moving forward, that was going to be how redemptions would work for investors in the fund. This was not technically a “gating” of the fund, which would have prevented all future redemptions, but it wasn’t exactly business as usual either.

Earlier this month, even the mighty Blackstone, through its Blackstone Private Credit Fund, found itself in a similar situation. BCRED, with some $82 billion in assets, faced an investor redemption request of some $3.7 billion, or 8 percent of the fund’s assets—significantly more than the 5 percent permitted quarterly redemption. Blackstone took a different approach than Blue Owl. It decided to increase redemptions to 7 percent. Then, the company and some of its employees injected a fresh $400 million into BCRED to facilitate the redemptions.

Blackstone leadership defended its generous decision, but also recognized that a narrative was building. “We’ve had a ton of noise,” Jon Gray, the president and C.O.O. of Blackstone, told CNBC. “As you guys know better than anybody in the press, this has become a story. It started with Tricolor and First Brands, which were bank-originated credits. There’s a constant spin cycle. And so when that’s happening, it’s not a surprise that investors can get nervous.” He said Blackstone made the decision to increase the redemption limits and put more of its own money in to allow it to deliver 100 percent liquidity to its investors.

And then it was BlackRock’s turn in the barrel, via HPS, a private-credit provider that BlackRock acquired last year for $12 billion. The $26 billion HPS Corporate Lending Fund, known as HLEND, faced redemption requests of some 9.3 percent of the fund’s assets—well above the quarterly 5 percent threshold. But BlackRock decided to stick to its guns, and allowed only 5 percent to be redeemed. The company noted on its website that the fund had returned nearly 11 percent annually to investors since inception, and that the redemption threshold “is foundational to enabling these return outcomes.”

Anyway, that display of logic hardly calmed everyone’s nerves. More investor panic, in the form of redemption requests, set in at a variety of other private-credit funds, including one affiliated with Morgan Stanley and one affiliated with Cliffwater, a relatively unknown alternative asset manager. Morgan Stanley took the BlackRock route and capped redemptions at 5 percent; Cliffwater raised the redemption cap to 7 percent—but that was about half of the redemptions requested.

Perhaps it was inevitable that we’d end up with at least a couple of cockroaches in the multitrillion-dollar private-credit market, which exploded following Dodd-Frank’s attempt to put the kibosh on excessive risk-taking by the big Wall Street banks. It was a well-intentioned idea, of course, but capitalism abhors a vacuum—and, naturally, a new generation of nimble financial institutions moved in to fill the void in the lending market.

Apollo, Blackstone, and KKR may have effectively created the private equity industry, but they’ve largely refashioned themselves since the financial crisis as lenders, too, and thereby created what we’ve been calling the modern private-credit business. TPG, itself a private equity O.G. and an investor in Puck, also moved aggressively into the credit market via its clever acquisition of Angelo Gordon in 2023.

Those are just some of the biggest players in this market. There are also a whole slew of relative up-and-comers, including Ares, Golub Capital, Sixth Street, Antares Capital, and both of the aforementioned Blue Owl Capital and HPS Investment Partners. And, of course, there are innumerable other firms now trying to imitate their success. The private-credit market is now far larger than the P.E. business that helped birth it. As Apollo C.E.O. Marc Rowan likes to say, cup of coffee in hand, the private-credit market’s true size is not just the $2 trillion of riskier levered loans. Rather, when you include the huge collection of senior secured first-lien loans, it’s more like $40 trillion. In other words, a lot of investor money has flowed into the private-credit market in the past 15 or so years.

Of course, the funds currently experiencing trouble make up just a minuscule fraction of the larger market, which was effectively the point that Gray and his counterparts at BlackRock were trying to articulate. But after the financial crisis, Wall Street veterans are especially attuned to early signals of market distress. Last week, amid the troubles at Blue Owl, Blackstone, Cliffwater, and BlackRock, former Goldman Sachs C.E.O. Lloyd Blankfein suggested he was getting a whiff of 2008 P.T.S.D., too. “It sort of smells like that kind of movement again,” Blankfein, who is in the midst of a monster book tour, said in an interview with his former Goldman partner Pablo Salame, now the co-chief investment officer at Citadel. “I don’t feel the storm, but the horses are starting to whinny in the corral.”

On Bloomberg TV, Lloyd warned even more firmly that we’re overdue for a correction. “The markets have been very good for a very long time,” he said. “The one thing that imposes a lot of discipline on people are problems and losses and disasters—and something like that happens, and then everybody goes into shock. And then all of a sudden, everyone gets very careful about how they allocate capital, at least for a while.” Boaz Weinstein, the outspoken hedge fund manager at Saba Capital, also joined the fray. He called Cliffwater a “turducken” on CNBC and tweeted that each quarter the fund “falls further behind.” He added, “That’s not market sentiment. That’s a queue.”

Dimon offered a similar comment at JPMorgan Chase’s annual investor day in New York. “I see a couple of people doing some dumb things,” he said, drawing an analogy to the way people behaved in the years leading up to the subprime mortgage fiasco. “Unfortunately, we did see this in ’05, ’06, ’07—almost the same thing,” he added. “The rising tide lifting all boats, everyone was making a lot of money, people leveraging to the hilt. The sky was the limit.”

JPMorgan Chase itself subsequently marked down the value of some loans in certain portfolios of private-credit lenders—loans that had been used as collateral for loans from the bank to the private-credit firms. “My own view,” Dimon said, “is people are getting a little comfortable that this is real—these high asset prices and high volumes—and that we won’t have any kind of problem whatsoever. So we’re quite cautious about that.”

Of course, as Gray’s appearance on CNBC evidenced, the champions of private credit have been similarly everywhere all at once in the past few weeks—acknowledging that we’re at the end of a long positive cycle for the financial markets and that, yes, there have been some bad actors out there who allowed their underwriting criteria to slip. But there was no reason to panic. “We can’t legislate out of existence stupidity,” Marc told Bloomberg TV recently. “Credit is just credit. There are good underwriters of credit and there are bad underwriters of credit.”

For what it’s worth, this doesn’t feel like 2007 or 2008 to me. Back then, the meltdown in the mortgage market seemed to have taken nearly everybody by surprise—save for hedge fund manager John Paulson and some traders at Goldman Sachs—and was occurring on the balance sheets of the big Wall Street banks, such as Bear Stearns, Lehman Brothers, Merril Lynch, and Morgan Stanley, in the beating heart of capitalism. If they went down the tubes, what hope was there for the financial system?

This is different. The problems aren’t inside the big Wall Street banks at the center of finance. The problems, such as they are, are on the edges—in a bunch of credit funds that aren’t publicly traded and limit quarterly redemptions. Maybe people shouldn’t have invested in them in the first place. But as we all know, when you limit what people can do when they get worried, they panic and want what they can’t have.

Marc was right, I think, when he told Bloomberg that the vast majority of these funds are invested in the senior secured, first-lien debt of hundreds and hundreds of companies. A lot would have to go wrong across the global economy for the senior secured debt of so many companies to come a cropper. You’d have to eat through the equity—and I mean all the equity—then eat through all of the high-yield and unsecured debt before you’d even have to begin worrying about the senior secured, first-lien debt. I’m not saying it can’t happen—it happened at Tricolor, and at First Brands. That seems to be what happened at Saks too, where even the most senior secured debt was trading below par. (Disclosure: Saks Global sued Puck over our coverage of its debt management.)

Breathless stories in the financial press aside, most investors don’t seem to be panicking. Average high-yield spreads above Treasuries have risen to 317 basis points, but they’re still at historically low levels. (The 20-year average is nearly 500 basis points.) I think we can stipulate that if the senior secured debt of thousands and thousands of companies is severely impaired, we’ll have a lot bigger problems than what’s going on in these few private-credit funds.

Need help? Review our FAQ page or contact us for assistance. For brand partnerships, email ads@puck.news.

You received this email because you signed up to receive emails from Puck, or as part of your Puck account associated with {{customer.email}}. To stop receiving this newsletter and/or manage all your email preferences, click here.

Puck is published by Heat Media LLC. 107 Greenwich St., New York, NY 10006