Oaktree’s Howard Marks has become the latest individual to warn of a private credit problem for retail investors, but Blackstone, which has experienced heavy redemptions from its BCRED fund, has defended the sector against GFC comparisons.
The private credit sector has experienced a wave of redemptions in recent weeks with funds such as Blackstone’s BCRED, BlackRock, Apollo and Ares all being affected.
In a memo last week, Oaktree co-chair Marks weighed in on the discussion, tracing the path that has led investors here. Marks founded Oaktree in 1995 and the firm now has more than US$223 billion in assets under management.
Marks tracked some of the major developments in the credit sector, from the acceptance of non-investment grade debt in the 1970s, to the popularisation of leveraged buyouts (LBOs) and increased leverage of the 1980s, to the broadly syndicated loans and tranched securitisations of the 1990s.
After the tech bubble burst left stocks and bonds out of favour in the 2000s, he explained that investors shifted to alternatives and structured credit like collateralised loan obligations (CLOs). Some banks packaged subprime mortgages into highly-rated residential mortgage backed securities (RMBS) – until their flaws were exposed, triggering the GFC.
“The GFC ended with the banks poorer, chastened, and re-regulated, and as a result there weren’t enough bank loans available to meet the needs of the burgeoning private equity industry. Investment managers moved to fill the vacuum through non-bank lending or ‘private credit’”, Marks wrote, adding the entry of retail investors as the most recent development.
He also emphasised that what many refer to as private credit is in fact direct lending – a subset of the asset class and its fastest-growing segment – comprising private loans to mid-market, private equity-backed companies with sub-investment-grade ratings. Business Development Companies (BDCs) are a major player in direct lending.
While he stopped short of equating today’s private credit market with the GFC, he noted that sharp surges in the popularity of new investment strategies tend to share certain common traits. These include novelty, strong early returns, and a rush of late entrants willing to accept lower standards and higher prices.
“I think it’s fair to say aspects of this progression occurred over the last 15 years in direct lending, a part of the private credit universe,” he wrote.
“The massive amounts of capital that have been available for investment in direct lending created a goldrush mentality…Thus, I imagine some direct lending managers accepted too much money and invested it too fast, applying standards that were too low and setting the scene for a correction.”
In particular, he pointed to private equity’s shift into software companies, once seen as too risky, which also helped drive the rise of direct lending. Now, AI-driven doubts about the durability of subscription models in an era of “vibe coding” have made software exposure a central concern.
Although Marks said the redemption limits built into direct lending funds appear to have worked as designed so far, allowing managers to avoid fire-sale liquidations, “it would be understandable if investors reacted negatively to being told they can’t get their money out when they want.”
“Investors initially fall in love with the new thing, swallow its promises whole, and overpay. Optimism and excitement are never conducive to skepticism, dispassionate analysis, the maintenance of appropriate risk aversion, and the insistence on high standards.
“When disappointment and disillusionment set in, the bravado and confidence that originally supported the investment evaporate. Now the analysis errs in the opposite direction, with excessive pessimism and skepticism replacing eagerness and gullibility, and with sheer terror replacing the blind faith that enabled investment when everything was going well.”
He concluded that the current unease reflects a familiar cycle of initial overconfidence followed by excessive doubt, and that the key is maintaining a balance between the two.
JP Morgan chief executive, Jamie Dimon, also shared in his latest annual letter that he can foresee retail investors seeking remediation in court if they are badly affected by the private credit crisis.
Blackstone decries GFC comparisons
But for Blackstone, where its US$82 billion BCRED fund faced a wave of redemptions early last month, it said private credit is “fundamentally different” to the GFC thanks to lower leverage and stronger funding structures.
In its latest Pattern Recognition update, it said: “In 2008, banks were levered anywhere from 25 to 40 times, primarily funded by short-term deposits and heavily exposed to subprime housing. The underlying assets were 90 per cent loan-to-value mortgages, layered with complex derivatives that obscured risk,” Blackstone wrote.
“Simply put, this in no way resembles what is happening today.”
Unlike in 2008, Blackstone argued that in private credit, BDCs – which are most common in the US – typically borrow less than 1x their own capital, use structures that don’t rely on deposits or overnight capital, and lend to companies rather than subprime homeowners.
BDCs can be viewed as wrappers or vehicles for investors to access ownership in a diversified pool of private credit assets. They are closed-end investment companies for small to middle-market (SME) businesses.
