Private equity has a private credit problem
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Illustration: Gabriella Turrisi/Axios
Private equity operated and thrived for decades before most investors had ever heard the term "private credit."
- But the two now are inextricably linked, which means that private credit's problems are private equity's problems.
Catch up quick: Private equity today has around 3x the amount of assets under management as it did heading into the Great Financial Crisis.
- That growth was largely enabled by the rise of private credit, particularly as Wall Street banks became more limited in how and how much they could lend.
- Near-zero interest rates also played a major role in more recent years, but no longer.
State of play: A private credit contraction would likely mean a private equity contraction.
- Yes, there could be some reweighting toward leveraged loans, even for sponsor-to-sponsor deals, but not necessarily enough to make up the difference. Let alone enable further growth.
Zoom in: We don't know for certain that private credit will shrink in the aggregate. Particularly if some of the underlying software assets prove more resilient to Claude than is conventional wisdom (i.e., solvency saves liquidity), or if more opportunistic credit funds step into the void.
- The warning signs, however, are bright.
- One of Carlyle's private credit funds just got hit with 15.7% redemption requests — more than triple the 5% limit. Other managers who've been asked for more than they can give include Blue Owl and BlackRock.
The bottom line: Private equity rode the wave of private credit. It may get slammed by some breakers.
