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September 2023
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September 2023
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PE Panorama: A respected industry figure warns of peak private credit

private credit
By Paul Mackintosh   
May 22, 2023

When a respected industry voice speaks out against their own asset class, it's time to take note, as was the case when Hunter Lewis, former chief executive of Cambridge Associates, spoke out against the current climate for buyout investing. And it's definitely the case when Howard Marks, co-founder of the US$172 billion Oaktree Capital Management, warns that private credit is also peaking and about to face a reckoning.

I have long respected Marks and his firm, based both on personal acquaintance and his thoughtful investment approach that eschews headline-grabbing, typified by his regular investor memos rather than the celebrity birthday parties and other indulgences that other investment group heads go for. So I'm even more inclined to take comment from that direction seriously.

Marks warns in the Financial Times that private credit may be about to enter the same testing times currently facing private equity. After all, private debt has been stepping up to replace banks as the preferred lender to buyout funds, so it's hardly surprising that the two may be affected similarly by market stresses. The FT cites Preqin data estimating that the private debt market now constitutes some $1.5 trillion - coincidentally, not far off current estimates for the amount of dry powder that the private equity industry has sitting on its books waiting to be invested.

Referencing the well-worn adage about a rising tide raising all boats and covering everybody's sins, Marks cautions that some private debt funds may have been carried away by the floods of cheap money coming in before the market turned. “Did the managers make good credit decisions, ensuring an adequate margin of safety, or did they invest fast because they could accumulate more capital? We’ll see.”

Ironically Oaktree itself launched a $10 billion private credit fund in February, aiming to tap into the leveraged buyout lending market. So is Marks talking against himself?

Well, his argument is that poorly-disciplined funds lending at the tail end of the cheap money boom before interest rates started to rise are the ones most likely to have stressed portfolios in the new climate. He notes that increased pressure on the banking sector triggered by the collapse of several US regional lenders and Credit Suisse makes bank debt even harder to come by, and the scarcity of supply means private lenders can secure better terms, especially with interest rates so much higher. Even with the current headwinds for buyouts, it’s unlikely that the major buyout funds will be able to hold back on investing, especially with so much dry powder to burn.

The new Oaktree fund will presumably be prepared to function in this far more disciplined environment. As Marks himself says, we'll see. But I'd certainly be more inclined to put faith in him than a number of other market players.