One senior private credit executive put it bluntly to the FT last week:
“The [private credit] model is going to be pushed to extremes.” “
This was the problem in 2008, we got to the end of the possible in the banking system and then we were lifting cushions in the conference rooms in the hope that someone’s coins fell out.”
These are the ties between banks and private credit funds that have fuelled the rise of non-bank financing.
That’s a macro view and above my pay grade. This blog is about my concerns for the people on the omnibus who rely on retirement savings for their later lives, please read on..
My worry
I am worried for pensions, especially as we see the private markets “retailed” as they become more important to DC portfolios in the UK.
I first picked up on problems here in a story by Alexandra Heal of the FT in November, latterly in a conversation with Naomi Rovnick of Reuters earlier this week and today it is repeated by Mary McDougall. All three are excellent in their understanding and articulation of the problems which look downstream for ordinary savers. I do not claim to be expert but when I see a congregation of people who do care for end users (like me) I want to know more.
The problem , as Rovnick explained to me, is that a lot of the value of private credit funds is fictional. She talked with me as if I knew about “special purpose vehicles” and “collateralised loan obligations”, that went one ear and out the other, what stuck was the import.
The capital that has been leant, will not be repaid , because the borrowers are broke. But rather than being accounted for in valuations, the private credit firms are rolling on the problem by transferring it to new funds so that the problem is “evergreen”. We have had one fund manager “Blue Owl” called out for for trying to smooth away systemic problems in its private credit funds. It tried to prop up Blue Owl’s share price when it fell like a knife last week.
I recognise these kind of behaviours from 2008
Private equity too…
In her article in the FT (Nov 4th) , Alexandra Heal had warned of an impending problem
Hear it is private equity rather than private credit that is under scrutiny , not least because the public are picking up on the extra returns promised from markets they do not understand but suspect are a source of untapped value.
There are large “fees” – commissions to you and me, from selling funds and funds of funds. Worse, they appear to be impacting the market for institutional purchasers.
The number of deals needed to deploy wealthy individuals’ cash could pull managers’ attention away from investing the capital of pension plans and endowments, the Institutional Limited Partners Association warned.
Fees on offer from evergreen funds, a newly popular type of vehicle suited to retail investors, could encourage buyout firms to prioritise them instead of the traditional funds backed by institutions, ILPA said in a new report.
Billions of dollars are flowing into evergreen funds, and institutional investors have expressed fears privately that this influx of new cash could undermine their standing as the sector’s top clients.
Yesterday, Oxford Said’s Ludovic Phallipou warned that the “retailisation” of private markets was an accident waiting to happen – in America the courts are waiting to side with “Mom and Dad” as private equity gets caught out rolling over valueless investments, till they get caught out
British Pensions
So we come to this morning and Mary McDougall’s warning. She reinforces the concern expressed to me by Naomi Rovnik (who is doing a wider search on private credit).
I worry that due diligence on the private credit being bought to back up retirement payments in the UK (whether pensions or annuities) is insufficient. John Graham is a leading Canadian purchaser for pension funds.
He said to non-investment grade private credit investors: “It’s a ‘buyer beware’ market. You should be sophisticated and you should know what you’re buying.”
Once again the problems seem to go hand in hand with the retailisation of a market sector that has been well used. by UK pension funds. Here is the report in the FT today.
Consultancy Oliver Wyman said that private credit holdings by the wealthy have grown 2.5 fold in the past three years — four times faster than the traditional institutional business. However, the sector has faced a series of setbacks this year.
Blackstone president Jon Gray said in October that the era of excess returns had ended as central banks had cut interest rates, with mid-teens returns in private lending giving way to more muted results.
The implosions of auto parts maker First Brands and subprime auto lender Tricolor, which had both amassed debt from non-bank lenders, also reverberated across credit markets and prompted further warnings on wider risks from private credit blow-ups.
I am aware of UK pension funds who have profited by adroit use of private credit markets and have surpluses to prove it. But billion pound funds investing at leisure do the due diligence. We have the whirling world of buy-ins to our markets by insurance companies, some of which are owned by private equity companies , some whose deals are supported by private market money. And where standards slip in one area, they can slip in another.
Is there a systemic problem in a market , alerted to us by Blue Owl then other fund managers with problems lurking in their credit portfolios? If there are equivalent issues with private market funds and their hard to understand Internal Rates of Return, I worry for the end user – the pensioner and those saving for pensions. The wealthy may be able to withstand it, those stuck in workplace DC funds may not.