The private credit drama continues

Turns out, the cockroaches Jamie Dimon warned about last year didn’t stay hidden for long.

Private credit is back in the spotlight once again, with fund managers under pressure amid the so-called “SaaSpocalypse,” as concerns over struggling software companies grow and investors head for the exits.

Here’s how that’s playing out:

• Apollo is capping withdrawals from its flagship private credit fund after redemption requests surged to over 11% of shares—more than double its quarterly limit—leaving investors able to withdraw only a fraction of what they requested. Software remains its largest exposure, accounting for 12.3% of loans.
• Ares is facing similar pressure, with its $10.7 billion Strategic Income Fund hitting its redemption ceiling. Investors requested to redeem roughly 11.6% of shares, forcing the fund to enforce a 5% cap.
• KKR/Future Standard: Moody’s downgraded a fund managed by the firms to junk, citing deteriorating asset quality and a rise in non-performing loans to 5.5% of the portfolio.

It’s not all bad news

Shares of Apollo, Ares, and KKR are all down sharply over the last six months as investors worry that the risks of holding on through the private credit industry upheaval are beginning to outweigh the rewards.

Of course, these fund managers argue that the restrictions are not signs of distress, but rather a form of disciplined stewardship. Limiting withdrawals helps avoid forced asset sales at unfavorable prices, protecting long-term value and balancing the interests of investors seeking liquidity with those who remain invested.

While doom-and-gloom headlines have pervaded as private credit problems come to light, Goldman Sachs says the risks may be overstated in the grander scheme of things. Economist Manuel Abecasis noted that private credit makes up only about 4% of lending to the private non-financial sector, and a rise in defaults to between 3% and 4% would shave just 10 basis points off GDP, suggesting limited systemic impact.

On the other hand, DoubleLine CEO Jeffrey Gundlach warned that today’s stagnant, directionless market environment resembles the period leading up to the 2008 financial crisis, where muted performance masked underlying vulnerabilities that only became apparent later. He pointed to private credit as one area where stress may not be as contained as investors believe.

The house always wins

But no matter how it all plays out, one industry will prosper: banks.

Big banks are playing both defense and offense: pulling back risk, tightening credit, and scrutinizing exposure to limit downside, while at the same time positioning to profit from the stress by structuring trades that let clients bet against private credit. However, as might be expected, this dynamic is somewhat controversial, as banks are effectively taking positions against firms that are simultaneously their clients and competitors.

As pressure builds in private credit, banks may have the luxury of playing both sides. But if conditions deteriorate sharply, they risk being exposed on both fronts rather than benefiting from either.—SY