El-Erian Warns of Financial Crisis Echo as Key Credit Fund Freezes Withdrawals

Mohamed El-Erian believes a recent development in private credit echoes the financial crisis.

El-Erian said there is a risk that the “investing phenomenon” in private markets has already “gone too far overall.” (Photo: Mohamed El-Erian Facebook)

In a recent LinkedIn post, the former PIMCO CEO highlighted a Financial Times report stating that private credit giant Blue Owl Capital is permanently halting withdrawals from its Capital Corporation II fund, a private debt fund open to retail investors, Jennifer Sor reported for Business Insider.

El-Erian said the move could parallel events leading up to the last financial crisis.

In August 2007, BNP Paribas froze three funds due to a liquidity decline in the securitization market, saying it was impossible to “value certain assets fairly.”

Nearly two decades later, that move is viewed by some as the start of the downturn that culminated in the collapse of Lehman Brothers the following year.

Private firms are not required to publicly disclose their earnings and financials, and private assets tend to be more illiquid than investments in public companies or public credit funds.

El-Erian said there is a risk that the “investing phenomenon” in private markets has already “gone too far overall.”

“Is this a ‘canary-in-the-coal-mine’ moment, similar to August 2007?” El-Erian wrote.

“There’s also the ‘elephant in the room’ question regarding much larger systemic risks (nowhere near the magnitude of those that fueled the 2008 Global Financial Crisis, but a significant — and necessary — valuation hit is looming for specific assets),” he added.

Assets under management in private credit rose to $2.2 trillion last year, an 86% increase from five years ago, according to analytics firm Preqin. Investments in the sector carry greater risk due to lower liquidity and less transparency.