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Howard Marks made his fortune primarily through credit. He specializes in distressed assets/high yield bonds, and so private credit as an asset class, is his competition. I would assume he has thoroughly sized up his competitors.
Gimme Credit
For me, the most important observation about private credit is that it mostly emerged since 2011 in response to banks’ reduced lending activity after the Global Financial Crisis. Since then, the economy has witnessed an unusually long string of years without a recession (if you don’t count the two-month Covid 19-related recession that flared up and was reversed in mid-2020). To paraphrase Warren Buffett, the tide has never gone out on private credit, meaning we haven’t had an opportunity to see its flaws. As far as I’m concerned, the main one is the possibility that some managers have been in such a hurry to scoop up capital and put it to work – so they could come back for more – that they relaxed their credit standards and failed to demand a sufficient margin of safety. If there’s ever another difficult period in the economy and the market, we’ll see the result. Note: this isn’t a sweeping concern about the loans themselves, just a question about the behavior of individual managers.
Connected to the above (and to the absence of marking to market), we don’t know what’ll happen if and when a difficult environment does arrive. Is there a limit on the ability of managers to keep marks too high? Is it right for fund returns to ignore deteriorated fundamentals? Can managers avoid recognizing credit difficulties by granting forbearances and “kicking the can down the road”? For how long? Are there ill effects on fund investors in the meantime? Since private credit managers are mostly unregulated, will the truth come out? Which truth? Questions like these also are answered only when the tide goes out.
Lastly, I don’t believe private credit represents a systemic risk. People have been on the lookout for systemic risk ever since the GFC, in which troubled banks brought trouble to other banks and took them down. My belief is that the risk in private credit isn’t systemic, since (a) private loan portfolios and their owners aren’t levered nearly as much as banks were in 2007-08 and (b) there isn’t the same level of interconnectedness, or “counterparty risk,” since the holders haven’t sold each other default protection and other forms of hedging, like banks did before the GFC. There are those who believe some holders of private credit have multiple layers of leverage, which could increase the risk in a downside scenario, but I have no way of knowing.
https://www.oaktreecapital.com/insights/...mme-credit
Gimme Credit
For me, the most important observation about private credit is that it mostly emerged since 2011 in response to banks’ reduced lending activity after the Global Financial Crisis. Since then, the economy has witnessed an unusually long string of years without a recession (if you don’t count the two-month Covid 19-related recession that flared up and was reversed in mid-2020). To paraphrase Warren Buffett, the tide has never gone out on private credit, meaning we haven’t had an opportunity to see its flaws. As far as I’m concerned, the main one is the possibility that some managers have been in such a hurry to scoop up capital and put it to work – so they could come back for more – that they relaxed their credit standards and failed to demand a sufficient margin of safety. If there’s ever another difficult period in the economy and the market, we’ll see the result. Note: this isn’t a sweeping concern about the loans themselves, just a question about the behavior of individual managers.
Connected to the above (and to the absence of marking to market), we don’t know what’ll happen if and when a difficult environment does arrive. Is there a limit on the ability of managers to keep marks too high? Is it right for fund returns to ignore deteriorated fundamentals? Can managers avoid recognizing credit difficulties by granting forbearances and “kicking the can down the road”? For how long? Are there ill effects on fund investors in the meantime? Since private credit managers are mostly unregulated, will the truth come out? Which truth? Questions like these also are answered only when the tide goes out.
Lastly, I don’t believe private credit represents a systemic risk. People have been on the lookout for systemic risk ever since the GFC, in which troubled banks brought trouble to other banks and took them down. My belief is that the risk in private credit isn’t systemic, since (a) private loan portfolios and their owners aren’t levered nearly as much as banks were in 2007-08 and (b) there isn’t the same level of interconnectedness, or “counterparty risk,” since the holders haven’t sold each other default protection and other forms of hedging, like banks did before the GFC. There are those who believe some holders of private credit have multiple layers of leverage, which could increase the risk in a downside scenario, but I have no way of knowing.
https://www.oaktreecapital.com/insights/...mme-credit