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Posted March 11, 2026 at 1:15 pm
The situation in the Persian Gulf is undoubtedly the most important factor affecting global asset prices, even if the most interesting aspect of the story might be the lack of market reaction. As we have discussed, closure of the Strait of Hormuz was always among risk managers’ biggest fears, yet the consequences – at least so far – have been far less dire than feared. Even amidst the general lack of risk aversion related to those events, another set of concerns is spooking at least some investors – fears over private credit.
Although this is our first time discussing this topic at length, it has been coming up in conversation for some time. After two well-reported blowups occurred in October (Tricolor and First Brands), JPMorgan (JPM) CEO Jamie Dimon famously commented, “I probably shouldn’t say this, but when you see one cockroach, there are probably more… Everyone should be forewarned on this.” Mohammed El-Erian, formerly CEO of PIMCO, called the suspension of quarterly withdrawals from a Blue Owl (OWL) fund a “canary in the coal mine.” Today, we see another round of selling in business development companies and other private credit sponsors after JPM marked down the value of certain loans held by private credit groups. At this point, there are plenty of investors avoiding, if not fleeing, the sector.
One could, of course, ask, why if Dimon warned about private credit cockroaches in October, is JPM only getting around to marking down exposure today?
Last week, I offered the following comments to a CNN reporter:
“You’ve got an opaque set of loans, in many cases, backing an opaque set of companies,” Steve Sosnick, chief strategist at Interactive Brokers, told me. “You can come up with a scenario where it’s unpleasant but relatively benign, but you can also come up with a scenario wherein a lot of mistakes are being papered over.”
“That doesn’t mean we’re set up for a private credit disaster that will unfold the same way the subprime mortgage disaster unfolded,” he said. At the same time, “there are echoes” of that earlier reckoning.
The reason why this matters is that the total amount of private credit is believed to be about $1.8 trillion. If even a modest proportion of those loans are either mis-marked, let alone severely impaired, that is a large hit to those who hold the loans and thus to those who lent money to those holders. This was the root of the problem in the Global Financial Crisis (GFC). Impaired loans related to subprime mortgages created problems throughout an interconnected financial system that metastasized in a highly unpleasant manner. As various people in the industry have related to me, there was a huge rush to deploy capital to a sector offering higher-than-normal returns and due diligence got skipped – both in the GFC and the private credit rush.
Remember, one person’s liabilities are usually another’s assets. If those liabilities get written down, then someone’s assets are impaired. If they have liabilities backed by their assets, then someone else’s assets are impaired. And so on, deflating the value of assets and liabilities throughout the system. This is why although inflation is bad, deflation is worse.
Every new major financial innovation eventually gets a real-world test, and this is it for private credit. Yes, people have been lending money for thousands of years, but not in this specific manner. Ironically, the rush to tighten bank lending standards in the wake of the GFC led to the popularity of private credit to fill the void, first for leveraged buyout loans, then for a wide array of corporate lending. This pushed a huge segment of borrowing outside of a regulated environment.
At best, what we are seeing is a temporary, classic liquidity mismatch. These loans are long-term and illiquid in nature, and most of the funds that invest in them thus have gates that limit withdrawals. Most of the disgruntled investors are institutional, meaning they should have understood this feature and been prepared for this possibility. But investors have been storming those gates, forcing the funds either to disappoint those hoping to redeem their investments or to consider selling assets at steep discounts. (This raises the question about whether these funds should be allowed for retirement accounts as some sponsors have been lobbying. What will happen when retirees need to take minimum required distributions from 401(K) investments in illiquid funds of this type?)
Unfortunately, financial history is littered with temporary liquidity mismatches that became major problems. The S&L crisis of the ‘80s, let alone the bank runs in the ‘30s, started when short-term depositors overwhelmed banks and other institutions whose assets were primarily long-term in nature. We should all hope that this poorly-lit corner of the financial industry will benefit from some disinfecting sunshine.
6-Month Normalized Performance of Selected Publicly Traded Business Development Companies
Source: Bloomberg
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Stock prices don’t reflect business performance. They are purely a reflection of emotion driven sentiment by writers like this that provide no evidence that BDCs widely have large numbers of non-performing loans or loans that are classified as high risk. Remember, BDCs were created by congress to fill an enormous need from companies who cannot get loans from banks. BDCs are highly regulated and must disclose their loans to companies that are at risk or non-performing. In general, these types of loans represent less than 2% of a typical BDC’s portfolio. Read the financial statements and 10Ks before you believe this kind of fear mongering by the uninformed.
Dude, In simple english – this is a run on the bank. Yes folks are “emotional” and they want their money back now, but lenders won’t have them until later. Get it?
Steve, You are mistaking the emotion driven stock price to risk. BDCs were created by Congress for fill the lending needs of small to mid-sized businesses that cannot get loans from banks. (Outside of SBA loans, no small to mid-size businesses can get loans from banks as you know.) BDCs are highly regulated and have to report on their loan portfolios regularly, identifying loans that might present the possibility of becoming non performing. Typically watch list loans represent less than 2% of a BDCs loan portfolio. BDCs, unlike banks, don’t want any of their customers to go into default. They have the ability to take seats on boards or management, take over operations or seize assets of customers who don’t meet terms of their loans. Articles like yours foment fear with no basis in fact. Pick some BDCs and look at their financials, 10Ks and listen to their management on earnings reports. Then put that data into your article to make your case.
nice, learned something new. Thanks.
Who determines whether a loan is included in Business Development Companies (BDCs) are safe or in the non-performing watchlist and what are the loan’s risk metrics? These loans inherently carry a risk premium, making them opaque, illiquid and backing risky companies. We’ve witnessed numerous instances of investments or loans being mismarked. The primary catalyst for the 2008 crisis was the revelation that mortgage-backed securities (MBS) marked as AAA were actually junk. Typically, failures in the financial markets are built on assumptions. The safety and classification of loans within a BDC are primarily determined by the BDC’s internal management team and their investment committee. Because these loans are often illiquid and “level 3” assets, their valuation relies heavily on internal estimates rather than public market prices.