Concerns of a risky bubble forming in the private credit market are likely overstated, according to industry executives. However, they noted indications of weakening lending standards in the market for lending to large companies. This sentiment was shared at the Future Investment Initiative (FII) conference in Riyadh. Anne Walsh, chief investment officer at Guggenheim Partners, stated that excessive leverage and insufficient liquidity are potential problem areas, but she does not currently see these issues in private credit. Guggenheim Partners is a global investment and advisory firm. They provide services across various asset classes and industries.
Walsh highlighted signs of over-leveraging and weakened loan covenants specifically within the market for lending to larger companies, which has become increasingly competitive. These remarks come after recent collapses of U.S. auto parts supplier First Brands and car dealership Tricolor. These collapses have resurfaced concerns about weak lending standards and potential risks in the less regulated market where companies have borrowed heavily from non-bank lenders.
Despite these concerns, executives at the conference dismissed the idea that recent collapses were directly linked to private credit issues. They pointed to tailwinds such as U.S. fiscal and monetary stimulus and the AI investment boom. However, David Manlowe, CEO of Benefit Street Partners, acknowledged that competition for lending to large companies has significantly compressed private credit margins in recent years, leading to emerging signs of “froth”. Benefit Street Partners is a credit-focused investment firm and a subsidiary of Franklin Templeton.
Robert O’Leary, co-CEO at Oaktree Capital Management, suggested the artificial intelligence boom could create an economy-wide bubble, impacting direct lending due to the high volume of loans to software companies. He added that the asset class has significant positive attributes as well. A poll at the conference revealed that 43% of attendees believed private credit was in a bubble, while 57% disagreed.
