Why You Should Care About the Private-Credit Crisis
It holds potentially profound implications for the tech industry
Regular readers of this forum will know that I am not bullish about the rickety rollercoaster known as private credit. The entire edifice could fall apart at any moment, and, as anybody who’s ridden on a rollercoaster will appreciate, nobody sane wants to plummet from the top to the unforgiving ground below.
Not all private credit is bad, but a lot of it is emitting a fetid odor. The blast radius of an impending private-credit implosion could be greater than many pundits estimate, especially if we experience a simultaneous macroeconomic downturn. Given what passes for leadership in these strange times — unprecedented technological advances and unlimited information at our disposal, paradoxically juxtaposed with an inability of growing numbers of otherwise educated people to think rationally — we could be in big trouble.
In the interests of comity, I will refrain from polemics and focus on the relevant evidence of a looming private-credit crackup. It’s here that I am spoiled for choice. Data and information increasingly suggest that profligate private credit has reached a crisis point.
To wit, I adduce this Bloomberg article on Pimco’s grim assessment of the situation. Pimco makes the point that the crisis not simply one of confidence — of the market’s subjective assessment of private credit — but “a crisis of really bad underwriting.” That’s worse than a crisis of confidence, which can arguably be repaired by a heavy onslaught of deft public relations. A crisis of bad underwriting is not subject to the assuagement and ministrations of publicists.
At this point, you might reasonably interject by making the point that Pimco has a long history of hurling brickbats at private credit. True enough, but that doesn’t mean Pimco was wrong then or now, nor does it refute the concerns raised by others. Make no mistake, there are others.
George Noble, former director of Fidelity Overseas Fund, has raised the alarm, bluntly stating that the strains in the sector portend a potential financial disaster. In an article published by Business Insider, Noble says the following:
"We're watching a financial crisis unfold in real time," he said in a post on X. "The last time funds started blocking investors from getting their money back, Bear Stearns collapsed six months later."
The collapse of the investment bank is often seen as one of the first dominoes of the 2008 financial crisis. Noble pointed to recent news of redemptions at major firms, including BlackRock, Blackstone, and Blue Owl.
Later in the article, Noble refers to BlackRock’s recent decision, after contending with $1.2 billion in redemption requests, to limit withdrawals from its $26 billion HPS Corporate Lending Fund. Says Noble: “When the WORLD'S LARGEST ASSET MANAGER starts blocking investors from getting their money back, that's not "noise." That's an alarm.”
I don’t know how predisposed Noble is to shouting in all-caps avidity, but he seems committed to the point he’s making.
When Destruction Gets Too Far Ahead of Creation
As they used to say on informercials, that’s not all. There’s a technological dimension to the private-credit crisis, and, as you might have guessed, it involves AI. An article published by Barron’s puts the situation thusly:
A massive surge in the amount of money the world’s biggest tech companies are committing to their artificial intelligence strategies has yet to produce profits, which is holding down gains for the Magnificent Seven cohort.
An index of the market’s seven largest stocks, in fact, has edged only 0.8% higher over the past six months, and has fallen more than 8% since late October.
Those AI technologies might not be profitable yet, but they will be disruptive. That’s hammering the shares of software, financials-services, and media design companies as investors see AI technologies upending a broad swath of industries over the coming years.
To summarize briefly, what’s being said in that excerpt is that AI will destroy value in preexisting industries before it can compensate for those losses by generating countervailing or commensurate wealth of its own. The gap between obliteration of legacy companies and market segments on one hand and the flowering and prosperity of AI as next big thing could be more akin to an economic dislocation than to an orderly economic transition. The implosion of private credit, and the unwinding of everything in the path of devastation, is an increasingly possible consequence.
Truth be told, these transitions are rarely smooth. I don’t think I’ve lived all that long on this planet — time is a strange force, its effects more disorienting as it has its way with you — but I’ve lived long enough to experience several tech-economic transitions. They are never seamless.
A private-credit crackup appears increasingly inevitable to me. What I don’t know is how deep or broad the repercussions will be. One potential scenario is that many existing tech sectors will be decimated before AI can compensate for the business losses and jobs attached to them.
Keep an eye on the private-credit drama. It’s a narrative that is vastly underappreciated.