The Private Credit Turmoil

 

First Brands, Tricolor and now Market Financial Solutions (MFS) are all high profile defaults that have rocked the nearly 2 trillion USDs in assets under management private credit sector.

Mohamed El-Erian and some other high profile analysts and portfolio managers are talking about a canary in the coal mine event. Some investors and analysts compare the  First Brands, Tricolor bankrupties and the Blue Owl holding redemption from its 1.6 billion OBDC II fund to the freezing of assets and withdrawals from one BNP Paribas and now defunct Bear Stearns mortgage backed securities funds that were a precursor to the financial crisis and Great Recession in 2008-2009.

Are we on the precipice of a new financial crisis?

No.

Even being 3.5 trillions USDs in assets under management, the private credit sector is not big enough to drag down the global economy and its more than 300 trillion USDs in financial assets, according to Wolfteam Ltd.'s projections and estimates.

The main players in private credit, which are also the leaders in the 9.917 trillion of assets under management, private equity business, namely Blackstone, KKR, Apollo, Carlyle, Ares, Blue Owl, CVC, EQT, Partners Group etc. will not be disastrously affected, because the private credit losses of  First Brands, Tricolor and now Market Financial Solutions (MFS) do not eat directly at their equity capital. 

Yes,  Blackstone, KKR, Apollo, Carlyle, TPG, Ares, Blue Owl, CVC, EQT, Partners Group have lost more than 30 % from their market capitalization from their stocks' peaks in the last two years, but Blackstone, KKR, Apollo, Carlyle, TPG Ares, Blue Owl, CVC, EQT, Partners Group are still raising hundreds of billions of USDs of assets each year, which drive their revenue and profits.

Blackstone, KKR, Apollo, Carlyle, Ares, TPG, Blue Owl, CVC, EQT, Partners Group could be really hurt if the artificial intelligence, AI boom we are currently experiencing turns into a bust and destroys hundreds of billions of USDs of value in  Blackstone, KKR, Apollo, Carlyle, Ares, Blue Owl, CVC, EQT, Partners Group's more than 2.5 trillions of assets under management altogether.

Another black swan event for the private credit sector is if banks stop providing the leading private equity private credit asset managers with credit lines and high yield bonds with which Blackstone, KKR, Apollo, Carlyle, TPG, Ares, Blue Owl, CVC, EQT, Partners Group finance leveraged buyouts both via high-yield, 'junk' bonds and high interest bank loans.