Private Credit Investments - thoughts?

[Duskerdawn]

Have been reading alot of articles on it and the feel like it's the next biggest investment bomb/ponzi (i.e. similar to subprime mortgage meltdown in 08/09)...

https://www.bloomberg.com/news/features/...epage-asia

"Rowan, who’s widely seen as the pioneer of private equity’s push into insurance, argues the premium comes from private credit’s illiquidity, or the difficulty of selling it quickly, not its risk of default."

I think the main issue of Private Credit although it has "low risk of default" is that there is no price discovery which causes more severe defaults when they happen.

Additionally the reason for growing demand is due to messaging and also incentive structure of private credit sales.

What he doesn't tell you is that for every dollar of investment brought into Private Credit often pays out a higher amount of commission/kickbacks. The incentive to sell them is what brings about the premium. As munger indicated "show me the incentives and I'll show you the outcomes".

In addition to the above, if you search the keywords "private credit + payment-in-kinds (PIK)" and understand that PIKs is just a form of accounting magic to book profits for debt that is not paid. You will be able to see the ponzi structure where Private Credit books accounting profits from interest that is not paid and the fund pays out from the new investors into the funds.

While I note that not all Private Credit funds are Ponzi schemes, a large number of them have the above elements and have the same symptoms of swashbuckling salesmanship similar to the pre-08/09 marketing of MBS.

Hence, it's once place I wish to call out and hope to bring attention to and if you have any additional points to add, please do.

Edits to above 10 sep - corrected some minor misinterpretion.

[weijian]

Read a recent Jason Zweig's article that commented that almost everything that can be ETF-ed has been ETF-ed, including an ETF that aggregates companies kicked out of S&P500 ETF.

So, it is probably no surprise that salesmen/middlemen continue to find new ways to milk the ultra-liquidity that Fed's money printing has bought about.

Not sure about private credit been the next big "boom/ponzi". On the local front, we witnessed the Sunshine Empire ponzi more than a decade ago. Then a few years ago, the Nickel trading ponzi happened. The business model is the same, ie. preying on the greedy (not naive, but greedy). So, the next ponzi will happen but the vehicle of choice will probably be the asset class of the day.

Fund giants aim to bring private markets to retail investors – but mind the risks

Even more interesting is news that Apollo Global Management is partnering State Street Global Advisors to bundle private credit into an exchange-traded fund (ETF). The fund is expected to be invested mostly in investment-grade debt. To be sure, the liquidity mismatch between an ETF with daily liquidity and private credit is not lost on observers. The private debt exposure may well be indirect via derivatives.

Wealth advisers will surely welcome these developments, which open up yet more options for clients and a lucrative source of fees.

https://www.businesstimes.com.sg/wealth/...mind-risks

[weijian]

Howard Marks made his fortune primarily through credit. He specializes in distressed assets/high yield bonds, and so private credit as an asset class, is his competition. I would assume he has thoroughly sized up his competitors.

Gimme Credit

For me, the most important observation about private credit is that it mostly emerged since 2011 in response to banks’ reduced lending activity after the Global Financial Crisis. Since then, the economy has witnessed an unusually long string of years without a recession (if you don’t count the two-month Covid 19-related recession that flared up and was reversed in mid-2020). To paraphrase Warren Buffett, the tide has never gone out on private credit, meaning we haven’t had an opportunity to see its flaws. As far as I’m concerned, the main one is the possibility that some managers have been in such a hurry to scoop up capital and put it to work – so they could come back for more – that they relaxed their credit standards and failed to demand a sufficient margin of safety. If there’s ever another difficult period in the economy and the market, we’ll see the result. Note: this isn’t a sweeping concern about the loans themselves, just a question about the behavior of individual managers.

Connected to the above (and to the absence of marking to market), we don’t know what’ll happen if and when a difficult environment does arrive. Is there a limit on the ability of managers to keep marks too high? Is it right for fund returns to ignore deteriorated fundamentals? Can managers avoid recognizing credit difficulties by granting forbearances and “kicking the can down the road”? For how long? Are there ill effects on fund investors in the meantime? Since private credit managers are mostly unregulated, will the truth come out? Which truth? Questions like these also are answered only when the tide goes out.

Lastly, I don’t believe private credit represents a systemic risk. People have been on the lookout for systemic risk ever since the GFC, in which troubled banks brought trouble to other banks and took them down. My belief is that the risk in private credit isn’t systemic, since (a) private loan portfolios and their owners aren’t levered nearly as much as banks were in 2007-08 and (b) there isn’t the same level of interconnectedness, or “counterparty risk,” since the holders haven’t sold each other default protection and other forms of hedging, like banks did before the GFC. There are those who believe some holders of private credit have multiple layers of leverage, which could increase the risk in a downside scenario, but I have no way of knowing.

https://www.oaktreecapital.com/insights/...mme-credit

[weijian]

Sg Budget 60 headlines were taken over by CDC Vouchers Galore and MAS's 5 billion commitment as a LP into the local equity market.

What was less noticeable is the 2H25 launch of a private credit fund of 1 billion into the local enterprise space, which I assume MTI will be the LP. Besides the MAS's equity fund, this will be the next interesting space to see how this PCGF develops in future.

Speech by DPM and Minister for Trade and Industry Gan Kim Yong at MTI's Committee of Supply Debate 2025

29. Second, we will launch a $1 billion Private Credit Growth Fund, or PCGF.
a. Unlike traditional debt, private credit has the flexibility to meet the specific needs of companies looking to scale up quickly. And unlike equity, private credit allows companies and founders to retain business ownership and control.
b. The PCGF is targeted at local enterprises with strong growth potential, to become leaders in their respective industry domains.
c. Some of them will require tailored financing solutions to support their unique growth strategy, such as international M&As or large overseas capital investments. These solutions may not be readily available in Asia through traditional financing today.
d. Beyond the $1 billion seeded by the Government, we hope to catalyse more commercial funding as more fund managers and investors gain familiarity and confidence in this space.

https://www.mti.gov.sg/Newsroom/Speeches...mmittee-of

[postage paid]

Howard Marks made his fortune primarily through credit. He specializes in distressed assets/high yield bonds, and so private credit as an asset class, is his competition. I would assume he has thoroughly sized up his competitors.

Gimme Credit

For me, the most important observation about private credit is that it mostly emerged since 2011 in response to banks’ reduced lending activity after the Global Financial Crisis. Since then, the economy has witnessed an unusually long string of years without a recession (if you don’t count the two-month Covid 19-related recession that flared up and was reversed in mid-2020). To paraphrase Warren Buffett, the tide has never gone out on private credit, meaning we haven’t had an opportunity to see its flaws. As far as I’m concerned, the main one is the possibility that some managers have been in such a hurry to scoop up capital and put it to work – so they could come back for more – that they relaxed their credit standards and failed to demand a sufficient margin of safety. If there’s ever another difficult period in the economy and the market, we’ll see the result. Note: this isn’t a sweeping concern about the loans themselves, just a question about the behavior of individual managers.

Connected to the above (and to the absence of marking to market), we don’t know what’ll happen if and when a difficult environment does arrive. Is there a limit on the ability of managers to keep marks too high? Is it right for fund returns to ignore deteriorated fundamentals? Can managers avoid recognizing credit difficulties by granting forbearances and “kicking the can down the road”? For how long? Are there ill effects on fund investors in the meantime? Since private credit managers are mostly unregulated, will the truth come out? Which truth? Questions like these also are answered only when the tide goes out.

Lastly, I don’t believe private credit represents a systemic risk. People have been on the lookout for systemic risk ever since the GFC, in which troubled banks brought trouble to other banks and took them down. My belief is that the risk in private credit isn’t systemic, since (a) private loan portfolios and their owners aren’t levered nearly as much as banks were in 2007-08 and (b) there isn’t the same level of interconnectedness, or “counterparty risk,” since the holders haven’t sold each other default protection and other forms of hedging, like banks did before the GFC. There are those who believe some holders of private credit have multiple layers of leverage, which could increase the risk in a downside scenario, but I have no way of knowing.

https://www.oaktreecapital.com/insights/...mme-credit

Usually, large private credit players like blackstone, apollo, carlyle are experienced private equity players.

The funds from private credit allows them to extend their horizons of their private equity investments for longer as their private credit fund is unlikely to stop funding their private equity fund, while a bank or other credit investor might decide to pull the plug earlier, in order to recoup their capital.

I think the answer is to invest in the listed private equity companies themselves, rather than the private equity or private credit fund. Past performance is no guarantee of future results, but those have performed really well.

[weijian]

I am little less foolish about private credit after listening to Animal Podcast's "How Private Credit Works". This "new" asset class looks pretty diverse and exciting, and is just how financial markets continue to evolve.

3 Reflections on Private Credit

Imagine an asset class that’s designed to boost returns, reduce risk and open doors to opportunities beyond traditional markets. This is the influence of private credit – a strategy once exclusive to institutional investors is now accessible to everyone including retail investors. With its growing popularity and accessibility, the asset class reached nearly $2 trillion at the end of 2023, roughly ten times larger than it was in 2009.

As we look toward the future, we are eager to share three pivotal takeaways on the opportunities in private credit and the potential for investors willing to explore the asset class.

https://www.calamos.com/globalassets/med...credit.pdf

How Private Credit Works (podcast): https://awealthofcommonsense.com/2025/03...r-book-33/


@postage paid, the specific situation you mentioned below is ~5.9% of the AUM of the portfolio manager been interviewed in this article.

In general, I do agree with you that it is better to be investing in the asset manager over the asset class. But I also appreciate that different people have different strokes. For example, VB ghchua invests in companies who hold investment properties on their BS. I actively avoid that but I understand why he did so. There is this young man who made a fortune in the early days of covid-19 making thousand-dollar gaming chairs, and he took astute advice to preserve his "sudden found" wealth in GCBs. So while some of us like to invest in stuff with high ROICs/ROEs but there are definitely people who have other preferences due to their unique situation.

Usually, large private credit players like blackstone, apollo, carlyle are experienced private equity players.

The funds from private credit allows them to extend their horizons of their private equity investments for longer as their private credit fund is unlikely to stop funding their private equity fund, while a bank or other credit investor might decide to pull the plug earlier, in order to recoup their capital.

I think the answer is to invest in the listed private equity companies themselves, rather than the private equity or private credit fund. Past performance is no guarantee of future results, but those have performed really well.