Private Credit Market Starts to Show Cracks

Cracks are beginning to appear in the $1.5 trillion private credit market, where major players like Ares Management, Apollo Global Management, Blue Owl Capital, Blackstone, and KKR have long dominated.

If the economy weakens, the winning streak of firms like Ares Management could end. I Photo: Hathaway Dinwiddie Wiki

The once-booming sector could now face its first real test since expanding rapidly over the past decade, Andrew Bary reported for Barron’s Daily.

These firms typically make high-yield loans—around 10% interest—to smaller, junk-rated companies, many of which are leveraged buyout targets. Private credit has been a key growth area for the alternative asset industry, offering low credit losses and strong returns.

But if the economy weakens, that winning streak could end. While most private credit funds are private or offer limited liquidity, the $70 billion market for publicly traded business development companies (BDCs) provides a glimpse into investor sentiment.

These BDC stocks are down an average of 20% from their February highs.

Investors are closely watching how BDCs value their portfolios as of March 31 in upcoming earnings reports, especially given the sharp widening in junk bond yield spreads this year.

Those widening spreads should depress portfolio values, though BDCs typically only mark down assets when the underlying loans show credit issues.

Some BDCs emphasize senior secured loans, which are less risky than subordinated debt or equity holdings during downturns.

As an alternative, investors may look to junk-bond closed-end funds like BlackRock Corporate High Yield, which holds bonds from larger companies such as Charter Communications.

Still, KBW analyst Paul Johnson warned that BDCs are not a recession-resilient sector due to the illiquid, leveraged nature of private credit. “It is too early to gauge the depth of the slowdown,” he said, “but the potential disruption to business and consumer demand is a significant concern for investors."