Why private credit has experts fearing the next financial crisis is looming | The Business

The multi-trillion-dollar private credit industry is in the throws of a crisis and analysts warn it could soon infect the broader monetary system.
Investors are pulling their money out of several US funds facing financial stress (known as redemptions) and those same funds have responded by limiting redemptions.
While the private lending space makes up a relatively small proportion of overall lending in the US, its capacity to create a major problem for the financial system represents a clear and present danger to the global economy.

Founder and portfolio manager at Verdad Advisers, Dan Rasmussen spoke to The Business from the US. He says private credit is in the early stages of a crisis. “What you’re seeing is that people are realising private credit was offering yields that were very high, much higher than you would have earned from safer fixed income instruments, and all of a sudden, investors in these high-yielding vehicles are learning that the marks are coming down, and that maybe they’re not going to earn the very high yields they were promised,” he says.

He says as people are pulling their money out of some of these funds, there’s less money in the asset class, and then it becomes harder to refinance. “Those loans can’t get rolled over to the same extent they might have been otherwise, which actually creates an increased default risk … So, there’s a little bit of a spiral effect, like a bank run that’s happening now in private credit.” He said.

One of the big threats to private credit, he says, is the growth of AI. “Now what we’re learning is, oh my gosh, what a surprise, there actually is risk and there’s real default risk. AI is showing where the risk might be, which is in these software loans, which are somewhere between 20 and 40% of the lending books of these different private credit lenders,” he says.

Mr Rasmussen says the big difference between now and the financial crisis of 2008/2009 is that the holders of credit this time are private companies, rather than the public-traded banks. However, the concern is that some of the holders of private credit are life insurance and retirement funds.
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