The public is eyeing private credit

If there’s one thing Wall Street bros love more than Sperry slides, Patagonia sweater vests, and BowlSlop lunches, it’s coming up with seemingly endless new ways to profit from little-known financial instruments.

Just take private credit, a shadowy asset class that has exploded in popularity over the past few years among Wall Street firms. But private credit took another step into the spotlight today after BlackRock announced it has acquired HPS Investment Partners—one of the largest private credit firms on the market—for $12 billion in stock. It’s a signal that the world’s biggest asset management firm is looking to join the private credit boom.

But first, what exactly is private credit?

The short version: Private credit is typically direct lending to private, usually mid-size, companies. When a private business is looking to raise capital but can’t get funding from a bank or by going public, another option is to negotiate a loan with a non-bank lender—aka, a private credit firm.

Think of it like how private equity firms take a stake in a business—but when you’re investing in private credit, you’re technically lending your money, and making returns from interest payments.

Since interest rates have been so high over the past three years, returns from private credit funds have been lucrative, which has drawn more money into the space. The private credit market is now approaching $2 trillion, and is expected to grow to $2.7 trillion by 2027, according to data firm Preqin.

This kind of alternative, illiquid investment is typically only accessible to institutional investors, not everyday traders. But asset managers are increasingly trying to change that. Just today, the first-ever exchange-traded fund with direct exposure to private credit started trading on the Nasdaq.

Will Wall Street break its new toy?

BlackRock’s acquisition today is just the latest in a series of moves made by the biggest firms on Wall Street to capitalize on private credit profits by helping everyday investors get in on the action. That might be a problem.

We hate to bring up the ultimate sore subject for finance bros, but some argue that private lending has subprime mortgage vibes, and the sudden surge of interest could lead to a 2008-style bubble.

"Rapid growth of this opaque and highly interconnected segment of the financial system could heighten financial vulnerabilities given its limited oversight," the International Monetary Fund wrote earlier this year.

The fear is that in a high-rate environment, some businesses could become overwhelmed with payments and default on their loans. Plus, the entire industry largely operates in the dark, making it hard for banks to even know how much exposure they have to private credit.

Of course, dragging the industry out into the light through regulation could ease economists' concerns, but until that time comes (if it ever does), be aware that although these strategies can come with high yields, they also come with serious risks.—LB