Private Credit Won't Cause the Next Financial Crisis
The hottest thing in finance could burn some investors, but it shouldn’t spark financial infernos.
Stephen Schwarzman, chief executive officer of Blackstone Group Inc., has pushed his firm into a sector minting new billionaires, private credit.
Photographer: Nathan Laine/Bloomberg
The rapid rise of funds that make loans directly to buyout deals and other highly indebted companies — known as private credit — is among the hottest topics in finance. The sector has minted fresh billionaires, while being called a bubble by traditional financiers like UBS Group AG Chairman Colm Kelleher and attracting warnings about the dangers it could pose.
Investors need to be sharp-eyed about what private credit managers are doing with their money. This is, after all, high-yield, high-risk debt. The mad scramble for new business could easily lead to many bad lending decisions, as it always has in the history of banking. But fears that private credit could threaten the financial system should be more soberly assessed. The structure of most private credit funds answers many of the questions about panics and runs posed by the 2008 meltdown because they typically fund their lending with long-term liabilities that can’t easily take flight.