Private credit’s public reckoning

0:00Hi, listeners.

0:01Eric Platt: It's Michaela. Before we get into this week's show, I want to share some important news. Next week will be Behind the Money's final episode. Every week for almost four years now, I've had the opportunity to bring the best in class corporate and financial reporting from my FT colleagues to your ears. And it has been an absolute privilege and a highlight of my career thus far to do that. I hope you've enjoyed listening as much as I've enjoyed making this show. I'll say a little more on all this next week. But until then, on to this week's episode. And thank you for listening. My colleague Eric Platt has covered a range of topics at the FT, from asset management to M &A.

0:52Eric Platt: And right now, he's our U.S. investment editor. And in that role, he tells me that the bulk of what he reports on isn't often the topic of conversation when he's, say, out with friends. I cover Berkshire Hathaway. People are normally really curious how Warren is doing. They're never asking me what's happening at Apollo or Aries or KKR. They're never asking me about, you know, private credit returns and whether software loans are going to go bad. But recently, the people in his life seem to keep bringing up the same topic. Private credit. It feels like private credit has broken through to the mainstream, right?

1:30It's in the zeitgeist. My mom is texting asking about private credit. Friend groups and at brunch it comes up, right? I was at the gym the other week and someone was like, holy shit, your story moved the market. And I was like, I knew it, but I didn't, how do you know? This didn't happen a few years ago because it was like a nascent growing corner of Wall Street.

1:49Eric Platt: And this is all happening now because private credit is experiencing some problems in a very public way. An intensifying drop in stocks that have exposure to private credit. Private credit is experiencing its roach motel moment. Morgan Stanley and Cliffwater joining the list of firms capping withdrawals from private credit funds. So private credit right now is facing, you could almost call it like a paradigm shift. This was an industry that was just growing so rapidly for much of the past decade, really with just wholesale enthusiasm. And we've gotten to this point where suddenly there are real fears about the impact of recent redemptions and the loans that they've made.

2:36Eric Platt: Investors are pulling money out of the sector by the billions. And people are asking about contagion or whether this is another 2008. And so suddenly the scrutiny on this industry has intensified maybe 10x and everyone is trying to get an understanding of private credit.

2:59Eric Platt: I'm Michaela Tendera from the Financial Times. My colleagues here at the FT have been following private credit's rise for years now. Today on Behind the Money, we're talking with those colleagues about how we got to this crucial moment and what's next for this area of private capital.

3:31Eric Platt: This story, like a lot of what we've covered on this show, begins about 15 years ago. After the financial crisis, private equity firms really pulled back from doing these things called mega deals, like club deals, where five firms would team up together and try to buy Hilton Hotels or some massive U .S. corporation. That's Antoine Guerra. He's the FT's U.S. PE and deals editor. He's been reporting on this with Eric, and he says that rather than going after these mega deals, private equity firms started looking elsewhere. Niche software companies, niche business services companies like consulting firms or insurance brokerage roll-ups, you know, sort of companies you kind of need to use, but you really don't actually care about the brand.

4:25Eric Platt: These kinds of businesses had another perk, too. They can often promise massive returns, sometimes of 30 % annually or more. But here's the thing. As private equity firms change the way they do business, focusing on buying up more things like software companies, they're also changing the kinds of loans they're using to finance these deals. Here's Eric again. Traditional banks who finance private equity takeovers really had to change their tune after the financial crisis. They weren't allowed to underwrite deals with a certain amount of leverage, and they needed the companies to be profitable by certain metrics.

5:03Private credit had other levers that they could pull.

5:06Eric Platt: So thanks to new regulations put in place to safeguard the broader financial system, banks had to hang back, which left an opening for private credit to work with private equity. But what you could do as a private equity firm was you could say, can you give me kind of a bespoke loan where I lay out the business case as to why I'm buying this software company that currently doesn't have much profits, but I will create profits in year two, in year three. And can you give me a loan that essentially embeds the future profitability I see in this business? Now, this area of finance proves really successful.

5:46Eric Platt: Capital rushes into this space. And ultimately, a few big companies take the lead. Companies like Blackstone, Apollo, KKR, and Aries. If you think about it, credit is just financing whatever the private equity firms want to buy. It was like, hey, look, you're only dealing with us as opposed to hundreds of credit investors when you're trying to raise money. Like, just call your friends at Aries and Apollo and we'll stump up the money. And it was a hugely successful pitch. So private credit is, of course, appealing to the P.E. dealmakers. But the pitch to investors is also really appealing. Eric, what is that pitch or promise that private credit's making?

6:30The promise was better returns than high-yield bond or leveraged loan markets, bespoke loans, that they controlled the terms, which made them safer. That was the pitch, right?

6:41Eric Platt: Better returns and safer? Who would say no? Now, over the last few years, private credit has ballooned to a$2 trillion sector. And it's not just those big-name companies I mentioned, like KKR and Apollo, who have gotten in on this. It's a lot of smaller ones, too. Put all that together, and you get to something we've talked about on the show a few times before. There you go. It is the golden age. This is a golden age for private credit. The golden age of private credit. By 2022, 2023, it's really touching every part of the U.S. and global economy in unexpected ways, right? They're making loans directly to companies.

7:24They're also providing student loans and buying auto loans and, you know, helping you finance solar panels on your roofs. This is somewhat unthinkable compared to decades ago when you would need a bank to really help line up borrowers with lenders. Private credit had really established itself. The deals were working. People were making money. And it was doing it at a time when there were really few bad headlines.

7:48Eric Platt: But private credit's fortunes start to change. And that begins around September of last year. Good afternoon. My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. Pressure on the Federal Reserve to cut interest rates is really ramping them from the White House. And the Fed starts to move. Today, the Federal Open Market Committee decided to lower our policy interest rate by a quarter percentage point. And this starts to pressure private credit, right? They're making loans that are basically shifting in tandem with the Fed's benchmark interest rates.

8:29And so as the Fed cuts rates, that means the returns for these funds start to decline. And if you're an investor looking at returns that used to be 11%, 12%, 13%, and now you're seeing 10%, 9%, 8%, you're less enthusiastic. And you're also starting to see these funds, which pay out the vast majority of their income to shareholders and dividends, have to start cutting those dividends. And so when you hear that as an investor, you're even less enthusiastic.

8:58Eric Platt: So basically, investors who had piled into private credit funds for these outsized returns start to see that they might not be quite as outsized as they had anticipated, thanks to the Fed's rate cuts, which happened in September, October and December. Now that's one factor. But Eric tells me there's more that's happening at the same time. You start to see these like blowups in credit markets, unrelated to the lending that was being done mostly by the private credit funds we're talking about. Eric's talking here about the collapse of the subprime auto lender Tricolor and the car parts supplier First Brands.

9:37Eric Platt: These events even catch the attention of J.P. Morgan CEO Jamie Dimon. He talks about Tricolor and First Brands specifically on a call with analysts in October. My antenna goes up when things like that happen. And I probably shouldn't say this, but when you see one cockroach, there are probably more. So you have Jamie Dimon, the chief executive of J.P. Morgan, talking about these cockroaches. And the media really starts to pick up on it. Focus on one thing. Cockroaches on Wall Street. Jamie Dimon called them cockroaches. Jamie Dimon said when you see one cockroach, prepare to see more, right? In the meantime.

10:14You're seeing headlines everywhere. where those headlines are read by wealthy individuals who have piled into private credit. And I should say it's a little bit more nuanced, right? Jamie's talking about deals that actually JP was around, right? They were involved in Tricolor. These weren't necessarily private credit deals. But the retail investor, these wealthy individuals who have piled into the asset class, don't necessarily know that distinction. And so their sentiment really starts to sour. Or they're starting to talk to their wealth advisors more saying, like, you know, I'm seeing headlines constantly.

10:50What's happening? Why am I in this? And so what starts happening? You start to see redemptions picking up from these private credit funds. And it's this really perfect storm brewing. And then you get to the end of the year and you have Blue Owl.

11:07Eric Platt: Blue Owl. It's another leading private credit firm. And what happens with this firm ripples out into the rest of private credit. Blue Owl is really one of Wall Street's most interesting firms because it currently manages over$300 billion, which is like a staggering figure. Huge, huge success. And they probably, you know, were one of, if not the fastest growing firm on Wall Street in the past handful of years. So, Eric, what makes Blue Owl special? The biggest groups in private credit are really the giants of private markets, right? It's groups like Aries Management, Apollo Global, KKR, and Blackstone.

11:49Alongside that, you've got this group that really targeted kind of wealthy investors. So companies like Blue Owl and Cliffwater who targeted financial advisors with products that were really in the past just for institutional investors. And so when you look at Blue Owl's overall assets, they're tilted much heavier towards wealth than Aries or Apollo or KKR.

12:12Eric Platt: So basically, these wealthy individual investors who we've been talking about, they're this group that's heavily tilted toward firms like Blue Owl and Cliffwater. So tell me a little bit more, you know, who is this group? Wealth meaning, right, like they went to independent financial advisors sensing a real market opportunity. So these are like families in America who have a net worth of like a million,$5 million, right, who decided, oh, I used to be in like a PIMCO bond fund. But yeah, let's amp up the returns. Let's shift into private credit. And so Blue Owl is really kind of the big beneficiary of the wealth advisor channel saying like, yeah, let's go into private credit.

12:55All these funds that went to wealthy individual investors, they grew really fast. And they generated an incredible amount of fees for all of these firms. They were probably the highest margin product at most of the firms like a Blackstone or a Blue Owl. And the public markets were really valuing these funds because they kicked off so many fees.

13:22Eric Platt: Now, this idea that Blue Owl had tilted so heavily into this wealth area is important to understand for the next thing that happens. Now, I'm not going to get into all the details here because it is complicated. But the important thing to know is this. Throughout the course of 2025, investors were redeeming more and more money from one of Blue Owl's funds. And in the fall, Blue Owl makes a decision. What Blue Owl decided was to merge the fund with its larger publicly traded private credit fund. But the public fund, given all the headwinds in private credit, had begun trading at a very large discount.

14:01So the actual merger, if you were to sell your shares, you would sort of immediately have a paper loss of about 15 to 20 percent.

14:12Eric Platt: On November 16th, Antoine writes a story in the FT with the headline, Blue Owl private credit fund merger leaves some investors facing 20 % hit. And as part of the merger, the concept was you couldn't pull your money from the fund anymore. And so we basically wrote a story that explained all of this. And it sort of raised questions on like, can you get the money out of these funds at the price you're expecting, which is their stated value? And, you know, within a few days, I guess there was investor concern over the fund and they called it off. And all the headlines really spooked retail investors and really created a tsunami where many of them started to pull out of these funds.

15:00Eric Platt: Antoine and Eric tell me that not only is this a bit of a bad look for Blue Owl, it's all coming at just the wrong time for private credit. And it's something that intensifies even more into 2026.

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15:49Eric Platt: Eric, to recap a bit, how important was what happened with Blue Owl to the wider story of what's happening now with private credit? It sent a chilling impact across the market, where if you were talking to your Morgan Stanley Wealth Advisor, they were not pitching you on private credit anymore. The tide turned at that moment. And we go back to that because it was like, while it was one fund, it's really had reverberations for the entire industry. Right. So these other factors were building. The Fed's interest rate cuts, putting pressure on returns, the other blowups in credit markets, and then this thing with Blue Owl.

16:26I think the other thing to acknowledge is like there are older funds, some from KKR, one from BlackRock, which have been having difficulties. And as they've reported big losses in their portfolio, people have extrapolated from that as like there is a huge problem in private credit. I want to get out. And that's creating issues for Blackstone and Aries and Apollo and the others because it's just chilled the entire private credit market.

16:52Eric Platt: Now there's one more thing to mention here that's become even more apparent this year and it's causing even more trouble for private credit. Remember back when Antoine was saying that PE firms stopped focusing on big so-called mega deals? And that's because they found this new niche buying software companies? Well, that has also become an important problem this year. And that all has to do with artificial intelligence. Software stocks again facing pressure. The Nasdaq, though, is still on pace for its worst three-day drop since last April. As for today's paper... The real fear, right, is that AI keeps advancing.

17:33And in a few years from now, a software company that a business has been using for years, that you get replaced by an offering from Anthropic or OpenAI or Google or Microsoft, right? And what does that mean for the private equity firms that bought those software businesses? And what does that mean for Aries and Blue Owl, which lent hundreds of billions of dollars to these companies? Now, when you talk to the executives across private credit and if you listen to earnings calls, they're like, no, these businesses are still growing so rapidly. And like, yeah, of course, right now that's rearview mirror.

18:08The question is, when these loans come due in 2028 and 2029, how do you refinance them?

18:18Eric Platt: So, Eric, it's late March now. We've been watching the headlines, this wave of redemptions. How big has this gotten for the sector? The FT has calculated that so far, investors have attempted to get back more than$10 billion from these funds. And you've seen them kind of just rising in proportion as different funds have announced them, right? Blackstone was first. It said investors tried to get 7.9 % of their money back. A few days later, HPS, which is owned by BlackRock, said 9.3 % of investors had tried to get their money back. And then a few days after that, Cliffwater, which is this big investment firm that's really targeting independent wealth advisors, said nearly 14 percent of investors had tried to get their money back.

19:04This is compounding the fears in the market, right? Every headline is increasing. Every headline is increasingly red. And it's just having a chilling effect.

19:14Eric Platt: So we've talked about how we got here. But now the question is, how do we make sense of this? I mean, how are you guys making sense of this? It seems like a lot of these redemptions we're seeing are coming from just individual investor reaction to the news. Yeah, this has really been sparked by a fear in the broad market, right? Like retail investors are seeing on CNBC every day software companies take it on the chin, right? And they're looking across their portfolios and they're seeing headlines about private credit and fears there. And as opposed to being patient or trying to like knuckle down, they're hitting the redeem button.

19:57They're calling up their financial advisor and they're saying, why am I in this private credit fund? I keep hearing bad things about private credit. Get me out. And that wealth advisor, even if they believe in private credit and they think everything will work out, is saying, OK, let's get you out. Because if I'm wrong, like I will lose you as a client. And so the retail and the high net worth individuals, it's hugely reactionary to the new cycle.

20:21Eric Platt: Right. I think that's a really interesting point. How much of what you're saying has been going on here is tied to the headlines that investors are seeing. But I think another important question here is, is there something deeper or more concerning going on with these loans underneath the surface that people should be worried about? There's a fundamental question that people are beginning to raise on Wall Street beyond AI disruption, which is out in the future. There are some really smart investors who are also saying, let's go look into these loans with a bit more of a magnifying glass. And what they're arguing, basically all the problems are here.

21:00We've looked through these loans. They have way more leverage than people realize. The cushion that's supporting the loan, that cushion is a lot smaller than people realize because the actual equity is worth less now than what people thought it was when the deal was originated. And all of the fundamentals of the loan, those are like treading water at best. A lot of companies are not even paying their interest with cash. They're just paying their interest by adding to the debt balance.

21:33Eric Platt: So are we at a turning point for private credit? A hundred percent. If you are at one of these firms, you are looking at due diligence on loans very differently. And then if you were an investor in the funds, if you're a state pension plan or an endowment, you're looking at this credit and you're saying, is this more dangerous or is this riskier than junk bonds and leveraged loans? Like, have I been exposing myself to more risk that's really centered in software? And are the returns going to be pretty disappointing going forward? And so I think that itself will gum up how much capital some of these firms can raise.

22:13And it's interesting, right? While I've been covering private credit over the last few years, anytime they went out trying to raise a fund, oversubscribed. They could raise more money than expected. Whereas Antoine was covering private equity firms, which were struggling to raise their next vintage. And I think you may start to see that in the private credit space where people are like, until you return my money, I'm not giving you more to invest. And that will really limit the growth of these firms, which have been, as one person described it, like the bell of the ball for a long time.

22:48Eric Platt: So what does that future look like for private credit then? Yeah. So the debate is really like, is it the private equity firm, which is going to take a few zeros? Or is it going to be the private credit firm which lent to the private equity group? And this is like open for debate. Like ARIES is only getting paid back 100 cents on the dollar if everything goes right. The private equity group, by contrast, if they were a big software buyer, if they recognize some huge AI win, one of those companies, if they sell it or if it goes public, could double or triple in value. And so like they might take some losses on a few companies, But like the portfolio overall might still really boom.

23:29The problem is on the private credit side, like if you take a few zeros, your returns are garbage. And like are we setting ourselves up for like a great disappointment across private equity and private credit going forward?

23:41Eric Platt: Do you see these private credit firms making changes to their business? What are they saying now about how they're trying to navigate? So a number of private credit firms have been hiring restructuring advisors where they're like getting ready where if they have to take the keys from a private equity group that they can try to go in and fix the business. Right. Because ultimately, if the company defaults on its loans, the company gets handed over to them. And so, like, how do they try to recover as much value as they can? But what about this focus on wealthy retail investors? Are private credit firms going to keep courting these sorts of clients?

24:16Eric Platt: or has this group proven too fickle? We haven't gotten any sense that any of these private credit firms want to backtrack from this market. They already have institutional investors who are largely at their allocations to private markets. So there's not much more they can draw from that area, right? The endowments are already in these funds. So if they want to grow, if they want their stock price to increase, they need to find new money. And where is that new money coming from? It's coming from wealthy individuals and potentially the U.S. retirement system, right? In the backdrop of all of this, we have this executive order from Donald Trump, which is going to open 401ks to private credit and private equity.

24:59And so it's really important for these firms that your 401k advisor is comfortable allowing you to enter private credit. So they need to change the narrative because if they don't, you know, that stock price isn't going much higher.

25:14Eric Platt: How long is this going to play out for, do you think? I think, like, we were talking to, we've been talking to private credit executives and CEOs for the last few weeks. And they acknowledge, like, they won't know the fallout from this for several years. And that's true for the PE sponsors as well, right? Like, they don't know how Anthropic and OpenAI are going to impact their businesses. And that just means there's inherently more risk than maybe there was a few years ago when they were looking at this. So talking about risk, as this plays out, the question that everyone has, you know, the point your mom and friends and the person at the gym are asking about, you know, what's the broader concern for the financial system?

25:57Eric Platt: Is there one? There's one group that should definitely take a victory lap. And those are the senators and congressmen who helped pass Dodd-Frank, right? This was landmark post-crisis financial regulation that was meant to safeguard the financial system. And why do I say that? As much as we talk about all of these issues in private credit, we're not really talking about systemic financial issues. We're not talking about a bank bailout yet, I should say. And that's a real win. We might be talking about really bad returns for a group of people. We might be talking about a poor outlook for retirees, which is another social problem that we may need to solve.

26:39We're not talking about the crumbling of the financial system because of some bad loans. And so this problem doesn't seem anywhere as kind of severe as like the 2008 crisis or the pandemic. But it just feels like this grinding and crunching of like returns and investor expectations and basically an unwinding of like a boom that, you know, hundreds of billions of dollars fueled into individual firms, trillions of dollars fueled into private markets. And now the tide is coming out and it's going to be a very, very long tide.

27:26Eric Platt: This episode of Behind the Money was hosted and produced by me, Michela Tendera. Fact-checking by Simon Greaves. Sound design and mixing by Kelly Gary and Sam Giovinco. Original music is by Hannes Brown. Topher Forges is our executive producer. Cheryl Brumley is the FT's global head of audio. Thanks for listening. See you next week.

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