In Charles MacKay’s 1841 book Extraordinary Popular Delusions and the Madness of Crowds, he highlights how mass human behavior can lead to irrationality: “They go mad in herds while they only recover their senses slowly, one by one.”
That line feels apt today amid a wave of intense conjecture in the media and elsewhere about the risks embedded in so-called private credit. (Private credit is privately negotiated loans and debt sold directly to long-term investors — an alternative to bank lending and publicly issued debt securities.) Most of this noise has come from a misunderstanding of the risk in the market and the funding sources, and from a failure to distinguish “leveraged lending,” a small subset of the market, from private credit.
The market for private credit is an estimated $40 trillion. It is a big engine for the economy that fuels innovation, growth and the industrial renaissance now underway across the US and around the world. We and other providers of private capital help finance both publicly traded companies — they are large users of private credit — and private companies, which represent roughly 86% of US businesses with revenue over $100 million.
Of the $40 trillion private credit market, roughly $38 trillion is debt rated as investment grade, about 95% of the market. This vast pool is split between bank balance sheets and investors and plays a critical role in financing the economy. Increasingly, long-dated private credit held by pension funds and insurers is financing the long-term needs of critical infrastructure — from energy transition to data and manufacturing — providing the patient, flexible funding that traditional markets cannot offer. Simply put, banks generally finance shorter durations while investors finance longer ones.
A much smaller amount, just $2 trillion of the $40 trillion private credit market, is so-called leveraged lending, below investment grade. This generally comes in two flavors: broadly syndicated (typically originated by banks for resale) and direct lending (typically originated by asset managers that intend to hold for the long term). This small quantity also plays a vital role in the financing of markets that provide much-needed capital for less-established companies or for businesses going through some sort of transition.
Investors in leveraged lending have the ability to generate equity-like returns with more security and less volatility than equities or high-yield bonds. In fact, investors typically invest in leveraged lending by selling their equity or high-yield bond portfolios, thus reducing their risk and volatility.
This small sliver of leveraged lending is what some market observers believe represents all “private credit,” obscuring the fact that the bulk of the vibrant private credit market is investment grade. Further, when discussing the private credit holdings of financial institutions, particularly insurance companies, some in the news media fail to note that almost all of these holdings are of investment-grade credit rather than leveraged lending.
Isolated incidents of corporate bankruptcies within this smaller subset of leveraged lending say nothing about the broader private credit market and are just that, isolated. Incidentally, both Tricolor and First Brands, which have received a lot of attention, were originated in the broadly syndicated market by banks.
