‘When you see one cockroach, there are probably more,” warned JP Morgan boss Jamie Dimon last October, after the shock bankruptcy of car-parts supplier First Brands. Time is already proving him right.
There is mounting evidence of problems in the private credit markets that backed First Brands. These are hitting hard for big private equity (PE) firms, such as Apollo Global Management and Blackstone, that expanded into private credit-seeking higher returns when profiting from their main business of owning companies got harder. There is a growing risk of knock-on effects to the broader financial system.
The ongoing troubles of Blue Owl Capital, a fund that specialises in offering software companies an alternative source of credit to bank loans, have highlighted that many PE firms bet big on that sector being a low-risk borrower with predictable revenues. Now, software is seen as potentially one of the first industries where artificial intelligence will wipe out traditional providers.
Last Tuesday, Blackstone said it had lifted withdrawal limits on its non-traded private credit vehicle, BCRED, allowing worried investors to redeem a record 7.9% of the fund. (Blackstone insiders used their own money to fill the gap, apparently thanks to considerable peer pressure.) But rival BlackRock has so far refused to lift the redemption cap on its HPS Corporate Lending Fund above the existing 5%, despite investors demanding at least 9.3% of their money back.
Last week, Marc Rowan, Apollo’s CEO, predicted a private credit “shake-out” that will sort the best investors from the rest. And Dawn Fitzpatrick, chief investment officer of Soros Fund Management, warned that private credit and private equity are in for a “painful 18-24 months”.
Not everyone is so nervous. Connor Teskey, CEO of Brookfield Asset Management, dismissed the current problems as mere “hiccups” for private credit markets, and said that overall credit markets are “in good shape”. Giant Silicon Valley venture capital firm Andreessen Horowitz tried to calm fears with a blog post arguing “we’ll see that AI is the best thing that ever happened to the software industry”.
Yet shares of PE giants, such as Apollo, Blackstone, KKR and Ares, have all lost over a quarter of their value this year, while the broader S&P 500 index is down by just 0.3%. Look out for more cockroaches.
Photograph by Victor J Blue/Bloomberg via Getty Images
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