Private Credit Explained: Why It’s Booming (And What Could Go Wrong)

Hello and welcome to this deep dive on private credit. And if you read any financial news or listen to any podcast, not that you'd listen to any other podcast, of course, apart from The Market Maker, but you've probably heard about private credit. And in this episode, I've got Steven to join me to break this down. What is it? How big is it? Why has it grown so quickly? And importantly, what are the risks? Because you're probably reading a lot about it. We're also going to focus on two big names in private credit, of course, Blackstone and Blue Owl, and get into what exactly a business development company is. So, Steven, probably a good place to start. What is it?

Yeah, absolutely. Thank you, and you've given me 20 minutes to do private credit. So either I'm going to speak faster or I'm going to have to miss little bits out, but hopefully 20 minutes will be enough to give people a decent overview of what private credit is. Private credit, as the name suggests, it is credit lending, but it's done outside of the traditional banking system and it is not public. I.e., you cannot trade it. It's not tradable debt like a bond or like a leveraged loan. Private credit, that's what it is. The way that I really liked, so the head of the CIO of credit for Blackstone, Michael Zawadzki, he described the growth of private credit a little bit like a kind of farm to table. So previously, if you were a company and you wanted to take out a loan, or if you wanted to do a syndicated loan, you had to go through a bank, right? And the bank might lend you some money, but they would probably, you know, in the case of, in lots of cases, they would facilitate, broker, arrange a series of investors to come and lend money to you through a various product, right? Whereas private credit is farm to table. It is cutting out the arranger in the middle and going, all right, We are an investor and we want to directly invest in companies across the US and across the world. He actually says it's a little bit like Amazon. Instead of going through high street stores, you now go straight to source, to Amazon, and you get your lending products, you get your direct relationship. So I think really, really importantly, It's not traded on the public markets, it's debt, but really importantly, the relationship is between the investor, the private credit fund, the likes of Blackstone and Ares, and the company. And that is incredibly important when it comes to controls, when it comes to risk, when it comes to returns and things like that.

And so as a next step then, why has it become so important and like how big of a market are we talking here? Who has access to it? How much are they deploying in their activities and what they're doing?

Yeah, so a little bit of a, maybe a little bit of a history lesson goes a long way. So private credit's been around for a long time, way before 2008, 2009. Global Financial Crisis, but it was a very, very, very small, teeny tiny pocket with not many big investors. What happened after the GFC in 2008, 2009, banks went super, super risk-off, right? And banks were one of the, traditionally one of the biggest lenders into non-investment grade, biggest direct lenders into non-investment grade. Highly levered, highly indebted, often private equity-backed or private equity-owned companies that wanted, you know, that needed debt in order for the private equity economics to work appropriately. But post-global financial crisis, a lot of these banks retrenched. They had really, really strict risk limits, tier 1 assets, risk-weighted assets, et cetera. And there was a bit of a void that needed to be filled. And at the same time, there was a generational, uh, lull in interest rates, meaning that some of the more traditional public debt instruments were not providing the yield, the return on investment, that big institutional investors, the pension funds, the insurance funds, the endowment funds needed. So they went hunting for yield in a low interest rate environment when banks had pulled out of slightly riskier leverage lending. And who fills this void? Private credit. And private credit has grown almost in lockstep and actually has started to grow a lot quicker than private equity. We've spoken on previous podcasts around the growth dominance and significance of private equity. $15 trillion of assets under management, companies staying private for longer. Well, private credit's catching up. It's $3 trillion, maybe even $3.5 trillion of assets under management as of April 2026. That's growing double digits every single year, still growing double digits despite maybe some wobbles that we'll talk about. And the reason why it's popular, well, let's say from an investor's perspective, what do I care about as an investor? I care about return on investment. And private credit has shown to have really, really enduring internal rates of return, return on investment through the cycle. Through the cycle being recessionary, but also through the interest rate cycle as well. Its yield, its spread is about 200 basis points, 2% higher than publicly traded debt instruments, high yield debt instruments. So if you're going for yield, if you're going for return, private credit's provided a really nice source of returns for these large institutional investors. And then on the flip side, from a company perspective, You know, the asset manager sits in between the institutional investor and the company. On the flip side, companies really want, really want customizable, flexible, direct borrowing relationships with counterparties, with investors, with private credit funds that kind of get their particular business need. So there's a bit, there's a, this direct lending thing has been a real positive for all of these middle market, you know, profitable, stable companies that want to do something and have finally got a counterparty, a pool of money. That's not the banks that are really one size fits all, very slow, very stodgy. It's not the public bond market, which you have to get credit ratings, you have to go through all the whole process, then it gets traded on the secondary market. Well, actually, no, why don't I just go to Blackstone? You know, they got $500 billion of assets under management in credit. Let's go and forge a relationship with them where we can actually speak to the person that's taking our debt.

Quick question. Does that change the composition of the Blackstone workforce then? Is there roles that exist? It sounds like there's some, I don't know, some sort of origination activity or something that's going on where there's people now going direct to market, so to speak, to these companies. But, or is that, I guess those, as you said, this is pre-financial crisis activities were happening. Have they just like beefed up those teams essentially?

They have massively beefed up these teams. I think one of the big differences is scale. So Blackstone is now, it's a $1.3 trillion global asset manager that was traditionally private equity focused. But the fastest growing division at Blackstone is private credit growing at an 18% compound annual growth rate. And it's, and it is diversifying in terms of its strategies within private credit as well. So you're absolutely right in terms of new roles. There are originators, there's big salespeople pounding the pavements, going to companies in Idaho and Arkansas and places like that and going, hey, would you like a piece of private credit? But then there's this big kind of investment team. It's about 120, 130 investment professionals that sit on top that invest across a wide range of private credit strategies. So the most traditional private credit strategy is secured direct lending. You need money, you want to borrow some money, we're going to lend you some money. We're going to take some security or collateral, the most vanilla kind of thing that you can do. But then increasingly, there's been a focus on asset-backed lending, and this has been a massive trend the world of data center financing and even GPU financing. And that's where a couple of the ripples of risk have maybe started to surface. We are going to lend directly to you, but lend against an asset book as opposed to just directly lending on a cash flow basis. And what's really interesting to kind of wrap up the Blackstone mini case study is that $123 billion of their $500 billion of private credit assets under management, $123 billion of that is on investment-grade companies. So this is no longer the domain. If anyone thinks that private credit is just for, you know, private equity-backed, highly levered, really risky junk bond style companies, this is not true. $123 billion is going to investment-grade companies, the blue chip companies. That have realized that actually, yeah, we can issue an investment-grade bond, but we can also go direct to Blackstone and say, hey, like, you know, we want some flexibility. We're doing this interesting thing. Can you give us some covenant benefits or whatever it might be? So this thing's kind of spreading out, right?

Sounds like you're trying to calm the market here, Steven. You're kind of like the spokesman for Blackstone. But maybe we could talk quickly about Blue Owl because that's a name that you see a lot at the, you know, when people have been searching private credit, it kind of pops up. So what is BDC?

So Blue Owl is a business development company. So Blue Owl is a, as an asset manager, is an asset manager that manages circa $300 billion of assets across different strategies. And it is a listed asset manager in its own right, like a Carlyle or a KKR. But what it specializes in is starting funds that are called business development companies. And this is a key, key part of this private credit puzzle. So business development company is a, and sorry to get technical for a second, but it's a closed-end investment company that was passed through Congress in 1980 in response to trying to get more lending into the kind of US mid-market post-1970s recession. And it acts a little bit like a real estate investment trust. There are tax advantages to a business development company, and the BDC has to pass on 90% of its taxable income to its shareholders. So it is like a real estate investment trust. It is a closed-ended vehicle that importantly can be traded publicly. So you have two different types of business development companies. Just get into the weeds very quickly. You have a traded business development company. The flagship one of Blue Owl is Blue Owl Capital. So you can type in Blue Owl Capital share price and you'll see the share price movement. It's gone down just as a bit of a tip. And this is retail investors like me and you being able to pile into exposure to private credit through this listed business development company. With some tax advantage, and it's a dividend play because they have to return 90% as dividends. There's also this concept of the non-traded business development company. So, um, Blue Owl, um, Technology Income Credit, I think it's called. That's an example of a non-traded BDC. So if you want to avoid stock market volatility, you can invest in this non-traded business development company, and your returns will be based on a net asset value. Mark, you can still, a retail investor can still invest in it, but you have to go through professional investment channels. Now, the reason why this is important is because Blue Owl, remember, if you are investing, if you're a pension fund and you're investing in Blackstone, it's not going to be public. If Blackstone, if The Norwegian sovereign wealth fund want to take a little, redeem a little bit of their money, right? And it's often very illiquid. You've got a lock-in period, you can't take out your money, dot, dot, dot. So you don't really know the signals of getting cold feet in traditional private credit aren't really there. But in this business development company environment, if everyone's getting spooked, about private credit as an asset class, worried about a few defaults, worried about a few bankruptcies, worried about AI exposure, they can just take their money out, right? So they can take their money out of the traded business development company, Blue Owl Capital, or at certain periods of time, they can take their money out of the non-traded BDC. And we've seen headlines I think there were $5.4 billion of redemption requests in Blue Owl Credit Income and Blue Owl Technology Income. These are two non-traded BDCs in April, representing about 30% of the total funds assets under management, resulting in Blue Owl saying no maximum redemptions every quarter are going to be 5%. The share price of the overall asset manager blew out, is down 35% this year. And this is why people are starting to get a little bit freaked out.

So in terms of then what you just said, freaked out, how big is this risk from a systemic point of view? Because that's the way often is the narrative that gets spun. This is like financial crisis 2.0. You'll read that. A lot when it comes to private credit as a fundamental risk to the system. Where does that come from? Is that a realistic thing to say, or is it just the media doing what the media does?

I think it's the media doing what the media does, but to an extent spurred on by some inopportune comments from very senior figures in the banking world. You would remember, I think probably late last year, Jamie Dimon with his famous cockroaches. When you see a cockroach, there are probably more. And this is referencing the bankruptcies, insolvencies of two companies, two auto parts companies in the US, First Brands and Tricolor. Now I can say a lot about these two companies. We don't have time to talk about them now, but I don't necessarily think that they were canaries in the coal mine for private credit. And by the way, we have to realize that in the world of credit, and I used to work in lending, you know, you will get companies that go bankrupt. You will get companies that default. This is the risk-return paradigm. Not all companies are going to exist forever. So Jamie Dimon's cockroach comments got people a little bit worried that this could be something where a wave of defaults ripples through the private credit industry and it has associative downside effects on banks and on the financial system in general. But I think what's really important to note is the risk. If there is, you know, if there is a little bit of froth in this market, if there are maybe slightly lax lending standards to a bunch of companies that might end up defaulting, the risk is so much more dispersed than it was during the financial crisis. In the financial crisis, you know, there are 6 or 7 systemically important institutions, whether it's Fannie Mae and Freddie Mac, or whether it's insurance companies, or whether it's the banks. You know, these are important for every person in the country and every person in the world. These private credit firms, yes, there might be some losses. Yes, there might be some redemptions, but these are super isolated, right? The flagship Blue Owl fund, tradable fund, tradable BDC is $16 billion. One six, right? That is not a large, even if that goes pop, that's not going to be systemically important. So the risk has definitely been distributed. That's not to say that there's no risk there, but the nature of investing is risk and return, right? It's just we need to figure out whether the risk is commensurate with those spreads that we've spoken about earlier on.

Awesome.

All right.

Well, look, if anyone has any follow-up questions at all, feel free to drop us a comment. Obviously, if it's on YouTube, on Spotify, I know you can do that. And I'm sure Steven will have half an eye on those and be willing to take part in conversations. So yeah, any questions at all, let us know, but hope you found that useful. This is going to be the first in a series of kind of mini deep dives we'll do over certain topics that are very common that come up when talking about financial markets. So I hope you enjoyed it, and thank you as always, Steven.

Thanks, Ant.