Private Credit's Negative Month

CNBC, the finance world's ultimate cheerleader, recently put out an article declaring private credit's 'zero-loss fantasy' was coming to an end. When even your biggest fan sounds concerned something is up. Now, there have been a lot of negative headlines around private credit for the past six months--mainly tied to business development companies ("BDCs"). What started out as a botched attempt by one lender, Blue Owl (albeit one of the industry's biggest players), to give its investors liquidity has morphed into fundamental concerns about the asset class itself following a few high-profile defaults. And liquidity.

Many of private credit's biggest investment vehicles are private, semi-liquid BDCs marketed to retail clients, who want (and need) liquidity. Private credit managers make 5-year loans to levered private equity-backed companies that don't trade. These loans often offer a 3-4% premium to public market fixed income (the 'liquidity premium'). Historically, they were sold to institutions, such as pension funds and endowments that have long investment horizons. But private credited needed to grow, so they targeted wealthy individuals. 

The innovation was evergreen funds that offered quarterly liquidity. Yay! Illiquid assets in a liquid-y investment vehicle. Retail investors could have their cake and eat it too! There was a catch of course (which most people didn't seem to pay much attention to). Liquidity? Sure; but...up to only 5% of fund's net asset value ("NAV") in any given quarter. In normal circumstances, any individual investor could get all their money out at the end of the quarter; but what if many investors wanted to get out at the same time? Well, then the gates would come down to avoid a run on the bank scenario. In that case, it could, in theory, take you 20 quarters or 5 years to get all your money out. But gating often that just creates more panic and brings about a self-fulling prophecy as redemption pressure increases. 

In Q4 2025 Blue Owl Technology Income Corp. ("OTIC") and Blue Owl Credit Income Corp. ("OCIC) saw redemption requests of 15.4% and 5.2% of NAV. In Q1 2026, Blackstone Private Credit Fund ("BCRED"), the industry's $83 billion behemoth, received redemption requests totaling 7.9% of NAV; likewise, Oaktree Strategic Credit Fund ("OCREDIT") received 8.5% in redemption requests in Q1. To their credit, these funds have managed to, or plan to, honor 100% of repurchase requests for the quarter by utilizing credit facilities, new capital, maturing loans, and, in the case of Blackstone, employee commitments. But others have not, as these measures naturally impact future operations. Apollo Debt Solutions ("ADS"), Ares Strategic Income Fund ("ASIF"), and HPS/ BlackRock Corporate Lending Fund ("HLEND") have all received redemptions well in excess of 5% of NAV and plan to gate investors. Collectively, these seven funds manage more than $200 billion of gross assets. And there are many more cases as withdrawals have spiked across the asset class in recent months, as shown below (click to enlarge).

Until recently, all these challenges hadn't really translated into negative returns for investors in the above funds. They are private, non-traded BDCs that report monthly. They don't really have to mark-to-market. Instead, they mostly carry loans at par till there's a default, which can be a subjective measure (extend-and-pretend anyone?). But in February, many of the biggest non-traded BDCs recorded their first monthly loss in almost four years, suggesting they are beginning to mark down questionable loans. 

ASIF, ADS, BCRED, OCIC, OTIC, HLEND, and OCREDIT were all negative in February, ranging in losses from -7bps to -219 bps, as shown below (click to enlarge). Funds with more software exposure tended to have worse performances. The urgent worry among investors, as noted by Goldman Sachs, is that "money managers have loaned too much to software and technology companies vulnerable to disruption from AI." 

Source: Public websites of funds, SEC, and Mantabye.

This may just be the beginning for managers. Sell-side analysts, including UBS' Matthew Mish, forecasts defaults could reach up to 15% in an extreme scenario. What does that mean for fund investors? To do the math, we need two additional pieces of information: (i) the recovery rate on defaults and (ii) leverage. Defaults (failure to make timely payments on loans) doesn't mean a total loss for the lender. When a borrower defaults, lenders typically can recover a portion of the principal through bankruptcy restructuring or asset sales. Historically, for senior secured loans (which are the relatively 'safe' type of loans these funds predominantly provide), the recovery rate has been 70-80%. Let's assume 70% for our example. Second, most of these funds are levered at least 1:1; i.e., for every $100 of their investors' money they lend out, they borrow another $100 from banks to increase the total loan amount. Leverage can increase returns but also amplify losses.

If credit defaults do rise to 15%, with a 70% recovery rate, you'd expect losses around 5% for an unlevered fund. However, since these funds are all 1-1.25x levered (paying 8% or more in interest for borrowed funds) the losses could be 13-17%, based on the amount of leverage and the cost of debt. Even assuming that defaults don't happen all at once but over 2-3 years, it is still shocking for an asset class that is expected to have low single-digit defaults even under challenging market conditions. Which explains why retail investors are so eager to get out. And fund managers only incentivized them to do so. Managers didn't want to write down the value of their portfolios (not a good look) and were willing to cash out investors at par even though there is a very good chance these many of these loans could be worth less. The rationale decision of course is to take the managers up on their offer and get out as quickly as you can. And investors have. Too many have! Now you have gates and the start of valuation adjustments! Let's how see far write downs go and how painful it becomes for investors. 

The Jewel in the Crown: UK Get its Own Obama Moment

Congratulations to Rishi Sunak who is set to succeed Liz Truss at Britain's next Prime Minister. He becomes the 81st person to attain the position, going back to 1721. Significantly, he will be the first person of color to lead the country in the long history of Brittania. While Sunak was born and raised in Britain, his parents are of Indian origin. He is also the UK's first Hindu Prime Minister. That he becomes PM by leading the Conservative Party is even more remarkable and a truly historic moment for multiculturalism and racial equality.

Rishi Sunak was born in the port city of Southhampton in 1980. His parents are of Indian descent by way of East Africa. His father, Yashvir, a doctor, was born in Kenya and his mother, Usha, in Tanzania. They migrated to the UK in the 1960s. While Sunak maybe a second-generation Briton, his rise to first, among equals followed "one of the most traditional paths to power: prestigious Winchester College, one of the U.K.’s elite private boarding schools, before going on to study philosophy, politics, and economics—the quintessential degree for anyone aspiring to go into British politics—at Oxford University." After graduating in 2001, he pursued a career in finance; working first as an analyst with Goldman Sachs and then, after getting his MBA from Stanford University, joining Chris Hohn's hedge fund, the Children's Investment Fund ("TCI"). Sunak started his own fund, Theleme Partners, in 2010 before leaving to join politics in 2015. 

Rishi Rich 

Sunak's background isn't the only thing atypical about him. He is also the richest lawmaker in the House of Commons, ranking in at #222 on the Sunday Times Rich List of the wealthiest people in Britain in 2022. Sunak is worth an estimated £730m, thanks to his finance past and marriage to Akshata Murty, his Stanford classmate and daughter of Indian billionaire and Infosys founder, N. R. Narayana Murthy. I guess it takes a billionaire to relate to kitchen table issues. Err, how much is a pint of milk Rishi?

Well, in any case, the new PM has his work cut out for him, having inherited an economy that is experiencing significant turmoil, not least due to the ill-conceived policies of his predecessor. But it is worth taking in the symbolism of the UK's "Barack Obama" moment. The British conquered India in 1742 and for the 200 years it was the jewel in the crown of an empire that stretched across a quarter of the earth. India was so valuable that General Charles Cornwallis, who lost the Colonies in the Revolutionary War, was feted at home as a hero because of his successes in the Subcontinent. America, what? Now, the new King of England will appoint a new Prime Minister that looks very different from everyone else before him. Interesting times!

BRIC By BRIC

In 2001, Goldman Sachs economist Jim O'Neill coined the acronym BRICs to represent the four major emerging market nations, Brazil, Russia, India and China, that he predicted would drive global growth and transform the international economic order. (The full report is here.) The idea soon took off, leading to an investment and business charge into the BRICs that catapulted O'Neill from head economist to chairman of GSAM. Two decades on, how have O'Neill's predictions fared?

From an economics perspective, it's been a mixed bag. China has soared to become the second biggest economy in the world. India has climbed, while Brazil and Russia have stagnated after a decade of strong growth, as shown below (GDPs in current USD; click to enlarge). In 2001, Brazil, Russia, India and China were 2.2%, 1.2%, 1.9% and 5.3% of global GDP, respectively. By 2020, Brazil and Russia were still around 2.4% and 2.5% of world GDP, respectively; India had risen to 4.3% of global GDP; but China...had shot up to a remarkable 24.3% of global GDP from $1.3 trillion to $14.7 trillion. Over the past two decades, the world's economy grew from $20.5 trillion to $60.5 trillion and China was responsible for nearly 40% of that increase!  

                                 Source: Bloomberg, World Bank

                                         Source: World Bank, Mantabye

                                            Source: Mantabye 

But what has been the result from investors' perspective? Were all the billions flowing into the BRICs, as a result of O'Neill's report, a good investment? Based on returns of the individual countries' MSCI indices...the answer is (a qualified) yes, as shown below. (MSCI ACWI represents MSCI's benchmark All Country World Index and MSCI EAFE represents Europe, Australia and Far East) 

                                            Source: MSCI family of indices, Mantabye. Returns range: Nov 2001-Oct 2021

Since the GS report was published in November 2001, the BRICs have all outperformed the U.S. and global equities. But all of the outperformance came in the first 10 years. Over the past decade, following the Global Finance Crisis, each of the BRICs substantially underperformed the U.S. and global equities. Brazil has especially struggled in the past 10 years, losing investors 4% per year. Even Chinese equities have generated only half the gains as U.S. equities. Perhaps that's an opportunity...now that U.S. equities are at elevated valuations, some of the BRICs may once again be attractive.

Last Week Tonite: Wall Street Edition

Some of the most interesting financial stories of the week:

1. Goldman Sachs analysts want better working conditions: A small of group 1st year IBD analysts who felt overworked and had no time to shower or sleep but, on the other hand, did manage to find the time to put together a professional looking deck (congratulations, you are GS material!) under the guise of a 'survey', bemoaning their lot in life and how GS needs to change or risk losing them. And, of course, posting it on social media to have the desired effect. Hmmm, not sure they will get all that much sympathy from current senior management.

2. Greensill and financial innovation: Greensill Capital was supposedly at the forefront of fintech before it collapsed last week, offering supply chain finance reserved only for blue-chip companies to small (i.e., risky) businesses through great analytics. But Softbank was an investor so, you know, it could always go either way. Turned out it had decidely low tech, but no shortage of risks. 

Greensill's business was financing supply chains. Say, company ABC buys $100 worth of widgets from company XYZ. XYZ allows ABC 90 days to make payment, but would rather get paid today and is willing to offer a discount as incentive (you know..."a bird in hand is better than two in the bush" argument). So Greensill would pay XYZ $95 today and collect $100 from ABC 90 days later. And that's supposedly the whole game. Of course, that alone doesn't get you a check from Softbank. Greensill would do many of these transactions and remove the risk by securitizing the cash flows...specifically, sell them to two Credit Suisse funds. Ok, sounds more interesting.

But Greensill also financed "prospective receiveables" from "prospective buyers." Huh? Basically, XYZ says to Greensill that they think company BBB will buy $100 of widgets from them shortly. So asks Greensill to advance them $95 and collect $100 from BBB in 90 days. Of course, BBB isn't a XYZ client yet and has not purchased anything and may never do so...there's just the dream of doing so. But Greensill was undettered, because what is high-finance but dreams? At the end of 90 days, of course, no sale. But XYZ promises very soon...almost there. So they roll over the loan. Greensill lends XYZ $95 so it can pay Greensill back the original advance plus interest. XYZ wires, I dunno, $99 to Greensill. And they keep doing that...but wiring money back-an- forth incurs fees and that's not high finance. So the parties move to a cashless roll, where XYZ just pays the interest--voila, a high-finance solution! Greensill apparently did a lot of this with its biggest client, Bluestone. So, it was probably risky stuff like this with risky counter parties that got Greensill into trouble, but also stuff like this that probably made them attractive to VCs in the first place.

3. Dow gains 1,000 points in record time to reach 33K: The Dow Jones notched its fastest consecutive, 1,000-point milestones on a closing basis, taking just 5 days after passing 32,000 to close at a record 33,015 on March 17th. Lately, the Dow's been on a tear gaining ~4% MTD and benefiting from the rotation out of growth (i.e., Tech) into cyclicals. The tech-heavy NASDAQ is down 4% MTD.

4. Bitcoin hits $60,000: The crypto juggernought continues. Bitcoin passed the $60K milestone last weekend, about 4 weeks after crossing $50K for the first time. YTD the crypto "currency" is up almost 100%. Here's a revealing chart from BAML that puts Bitcoin's popularity in perspective. Seriously, not a bubble? Bitcoin's meteoric rise makes the prior decade's Tech and U.S. Housing gains look almost rational.

5. Inflation, inflation, inflation: See here.

Inflation Head Fake?

The financial markets freaked out last week as yields rose on fears, yet again (sigh), of growing inflationary pressure. The benchmark 10-yr Treasury yield briefly crossed 1.6% Thursday, the highest level in a year, sparking a sell-off in Growth and Momentum stocks. But so what? The 10-yr was back at only pre-Covid levels, and everyone knew those stocks were grossly overvalued...Yes, the 12-month CPI came in at 1.4% in Jan vs the average of 1.2% for 2020. And true, there is another $1.9T of stimulus on the way even as the economy is poised to take-off (Goldman Sachs is forecasting ~7% GDP growth for 2021). From that angle, you might expect some handwringing in the media about inflation... though sell-side research loves to cheerlead remind clients rising yields is good for stocks as it reflects strong fundamentals (there's never a bad reason not to own stocks).

But, what seemed to really have panicked the markets was the disorderly nature of the bond sell-off. The magnitude of the move last week was more than 2 standard deviations, which is typically associated falling equity prices. So last week both bonds and stocks lost value together. The nightmare scenario from a portfolio construction perspective! Anyways...continuing with what happened...Goldman Sachs' Portfolio Strategy team notes that long-duration growth stocks fared especially poorly, including a 15% sell-off in a basket of non-profitable tech stocks that had risen by 230% since the start of 2020. In contrast, cyclicals with falling sales in 2020 have returned +25% YTD. There was also the chart below, which got a lot of attention showing the 10-yr was now yielding as much as stocks and signaling potentially more outflows out of stocks as investors re-think their income source:   

But we've been here before...as the above chart shows, including famously in 2013 with the "Taper Tantrum." Each time growth has been slower than expected and inflation way lower than anticipated. I'm with PIMCO's Dan Ivascyn, who continues to see "powerful disinflationary trends. [And] after an initial recovery there is likely a world of excess capacity." In Ivascyn's opinion, inflation will remain contained due to secular trends in demographics, technology and weakness of organized labor. The upshot is a material risk of an "inflation head fake." 

Goldman Sachs Planned to 'Storm the Hill' First!

Not literally, of course. (After all, Government Goldman Sachs  is always doing 'God's work' and loves government.) 

The WSJ reports that the venerable bank was sponsoring an event next week for small business owners to meet with lawmakers. As part of the program they had come up with an enthusiastic and unfortunately timed "Storm the Hill" slogan that was prominently displaced on T-shirts and other parenphelia given to partcipants. But after last Wednesday's actual storming of the Hill, GS quickly rebranded the Jan 13 event, now called The Virtual Capitol Hill Day. It also asked participants to hide their swag...and presumably to never speak of its contents again. 

The Daily Top 5 List (Oct 8, 2020)

The biggest, most interesting things of the day:

5. Animal Planet: Python hunters catch biggest Burmese python on record in the Florida Everglades

4. Finance: Bloomberg columnist Matt Levine gets well-deserved profile in the Times.  The ex-lawyer and ex-Goldman banker produces the world's best finance newsletter, Money Stuff.  It's incisive, funny and always educational.

3. Awards: The 2020 Nobel Prize for literature goes to American poet Louise Gluck. Yale, where she's an adjunct professor, has a good profile of her work.

2. Business: Flurry off Financial M&A as rivals Goldman Sachs and Morgan Stanley continue to diversify their revenue streams away from volatile trading and advisory businesses. Goldman will acquire GM's credit card business for $2.5B, while MS will acquire asset manager Eaton Vance for $7b...also...years of easy money policies from the Fed have made the current economic crisis worse...but it's been great for billionaires

1. Politics: Remember "LIBERATE MICHIGAN"?...The FBI busts domestic terror plot to kidnap Gov. Whitmer...Whitmer, Biden say Trump culpable...Trump blames everyone

Goldman Predicts 6% Equity Returns Over Next Decade

Pandemic, recessions, Fed-driven bubbles, inflation, deflation? Goldman Sachs is not really worried...expects S&P 500 to return 6%--the historical average. Video