Who's afraid of private credit?

0:01NPR.

0:11When Richard Cox retired back in 2024, his broker pitched him on this hot new place to invest some of his savings. He made it sound very, very attractive. That new place was something called private credit. It's basically what it sounds like. Richard would be investing in a big pool of tons of money that gets loaned out to businesses, kind of like alternatives to bank loans. The catch is that you often have no idea what you're invested in. Still, Richard went for it. He parked$30 ,000 of his retirement money into private credit. Later on, he mentioned this to another broker. There was this long silence on the phone and like an audible gasp.

0:51That investment was, in that broker's view, too risky for a guy like him to get into. and potentially too difficult to get out of. When Richard did eventually ask to pull his money out, he was not alone. So not alone that some private credit funds have limited saying yes to everyone who asks. This is the Indicator from Planet Money. I'm Waylon Wong, and I'm joined today by Indicator intern Vito Emanuel. Hello. Hi, Waylon. There is a$3 trillion black box in our economy. It's called private credit. On Monday, the Trump administration proposed a new rule in that world. That rule would make it easier for employers to offer private credit investments in their employee 401k funds.

1:34This proposal comes as some investors are scrambling to get out of the private credit black box. So today on the show, why is this exodus happening and could this industry spark the next financial crisis?

1:49Support for this podcast and the following message come from Rivian, makers of the all-electric three-row R1S SUV and the always capable R1T pickup. With impressive range, storage for any expedition, and technology that feels like second nature, Rivian vehicles are designed for those who seek to explore the planet and preserve it for generations to come. Learn more or schedule a demo drive at Rivian.com. Natasha Sarin is an economist and the president of the Budget Lab at Yale. When Lehman Brothers went under in 2008, she was sitting in a college economics class. She still remembers the moment they all learned the bank had collapsed.

2:28Total shock on our professor's face. As we were watching the headlines come in, he turned on CNBC. That was the class that day. He said, you don't know it yet, but this day and this moment is going to fundamentally change the way that the American economy works. And it did. Natasha recalls seeing people on TV lined up outside their banks to withdraw their money. Remember, 2008 happened because banks had filled their portfolios with risky subprime mortgages, loans to people with bad credit. When housing prices fell and homeowners stopped making payments, those loans unraveled, and then so did everything else.

3:06People lost their homes, their life savings. Congress wanted to make it more expensive and therefore less attractive for banks to engage in risky activity that led us there. So it enacted tighter regulations like Dodd-Frank. That's the massive 2010 law aimed at clamping down on Wall Street so another crisis couldn't happen again. And at the time, people were already nervous that doing that would have the effect of pushing a lot of financial activity out of the traditional banks and into shadow banking. That's what ended up happening. Private credit is a type of shadow banking. Big financial firms, including Blackstone and Apollo, pool money from investors like high net worth individuals, insurance companies and retail investors like Richard.

3:52Then they lend out this money to other companies. Natasha says these private credit firms are not technically banks, but they function much like banks. And private credit is attractive to borrowers for precisely that reason. Much of Dodd-Frank and many other banking regulations don't apply to these firms. Loans are easier to make and their terms can be more flexible or better tailored to borrowers. So when it comes to riskier corporate loans. Over 50 percent of loans that were traditionally originated by banks is now being done by these private credit firms like Apollo, like Blackstone. Private credit is also attractive to investors who are looking for returns.

4:31They wanted an alternative to vanilla stocks and bonds. And the universe of investors in private credit has expanded so that it's not just billionaires in hedge funds. In order to be able to grow that dramatically, private credit firms need dollars to invest. They're doing things like taking pension funds or taking dollars from insurance policyholders and then making loans and investing those dollars. Stuff that does touch regular people in a pretty concrete way. Regular people like retiree Richard Cox. He invested in Blue Owl, another private credit firm. It manages different pots of money. On the advice of his broker, Richard had invested some of his retirement savings into one of Blue Owl's pots.

5:15And last summer, Blue Owl sent Richard a mailing offering him a share redemption. These companies do this routinely. And asking for a share redemption is investment speak for, I want my money back. And I recall having received one of those once before and not done anything with it. And this time I saw it and immediately decided, I want to do this. And remember, Richard had talked to another broker who thought private credit was too risky. He wanted to cash out. But these private credit funds are designed so that cashing out isn't always easy. These firms make mostly long-term loans, so investors that put money into private credit typically do it with the understanding that they don't need the money back anytime soon.

5:54Plus, these funds typically only let investors redeem around 5 % of the total fund per quarter. Investors also agree to this fine print. That's the tradeoff for the high returns that private credit offers. Still, firms do offer exit ramps for investors, like that mailing that Richard got. So he submitted the paperwork to line up for his money back. And while he was waiting in line... I started hearing more and more stories in the news about private credit was looking more shaky and people were concerned about it being stable. Way more investors had started asking for their money back than usual.

6:31And private credit firms started having to turn people down. For example, investors wanted 9 % back from one of BlackRock's private credit funds. The firm said it would only give back what it was obligated to, 5%. And private credit investors at Aries and Apollo collectively asked for over a billion dollars more this quarter than they'll get back during this period. Investors are spooked for a few reasons. The first is good old-fashioned bank run dynamics. People clamoring for their money back tends to lead to more people wanting their money back. Another reason is that many private credit firms like Blue Owl invested heavily into AI-related companies.

7:08We covered on the show how Blue Owl is funding a meta data center in Louisiana. Natasha says some investors are nervous about how much of the AI boom is financed with private credit, especially now that we're seeing some big tech companies scale back their plans. A third reason for private credit jitters is that these firms are interconnected with other players in the financial system. Big investment banks are in private credit. So are insurers. If they make bad investments, those insurance policyholders are on the hook when they look to, you know, get their life insurance paid out or get their home insurance paid out.

7:44And the last reason, investors often have no idea what they've invested in. Private credit funds don't have to disclose as much information about their investments as banks do. And what is disclosed is usually a labyrinth of LLCs and holding companies. That was a big reason Richard wanted out. I really didn't know how much risk Blue Owl was taking on, so therefore I was not aware of how much risk I was taking on by having my money tied up in that fund. Richard got his money back. He said he did lose a little bit compared to his original investment, though. Natasha says these headlines we're seeing could just be the downswing of a normal credit cycle.

8:23After all, redemptions are a built-in way for investors to get their money back if they've changed their minds about how much risk they want to take on. After a period of loose credit and low underwriting standards, there is a correction in the market. Still, riskier lending, less oversight, a big financial merry-go-round of packaged and repackaged loans, people racing for their money back. Isn't this all sounding a bit like 2008? Natasha says she's on the lookout for more big blow-ups, bad loans coming to light, evidence of systemic fraud, she hasn't seen much of that yet. But she says, remember, it's private credit.

9:03And so there isn't much transparency about what types of loans are being made. All of that is something that only with time we're really going to appreciate. Still, some top banking figures like Lloyd Blankfein from Goldman Sachs and Jamie Dimon from J.P. Morgan have been ringing alarm bells. Ultimately, though, we just don't know. And we might not, unless something else breaks. By the way, we reached out to Blue Owl multiple times to comment on the uptick in redemptions and the stability concerns. They declined to comment. BlackRock also declined to comment. Apollo and Ares didn't respond. And the Department of Labor didn't meet our deadline.

9:41This episode was produced by Julia Ritchie and engineered by Sina Lafredo. It was fact-checked by Sierra Juarez. Kate Kincannon edits the show. The Indicator is a production of NPR.

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