April 14, 2026 — 12:10pm
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Warren Buffett once famously said that “only when the tide goes out do you discover who’s been swimming naked.”
The tide is ebbing now for private credit, with some unsettling images exposed.
Since last year, there has been an accelerating rush for the exit at private credit funds. The funds are non-banks that lend money to borrowers that don’t meet bank-lending criteria, at higher interest rates. Typically, although not exclusively, those are private companies.
Legendary investor Warren Buffett’s words seem prescient for the private credit sector.Bloomberg
Where originally most of the funds were designed to attract investments from big institutions – insurance companies and pension funds that wanted assets that matched their long-term liabilities and weren’t deterred by the illiquid nature of the loans – in recent years, asset managers have set up funds that target retail investors.
The failures of two companies last year – First Brands Group and Tricolor – triggered a bout of redemptions from private credit funds, not necessarily because of their direct exposures, but because their bankruptcies pointed to weak underwriting standards in the unregulated credit markets.
The major risk represented by the private credit sector [...] is one of contagion, driven by fears that could spread into other investment sectors.
More recently, fear about the impact of artificial intelligence on software companies – to which some private credit funds have large and concentrated exposures – has triggered a larger wave of redemptions and forced some of the world’s larger asset managers to limit investors’ ability to withdraw their money.
Most publicly-traded funds have a 5 per cent cap on the total of quarterly redemptions they allow, a cap enforced at their discretion to avoid a “run” on their funds that would force them into a firesale of illiquid assets, ensuring and exacerbating the losses for those investors trapped within the funds.
Blue Owl, Apollo Global Management, Blackstone, Ares Management, Carlyle, KKR and Goldman Sachs are among the big alternative asset managers that have experienced that surge in redemptions.
Regulators are taking notice, concerned that instability within the private credit industry might trigger broader issues for the financial system even though, with assets estimated at somewhere between $US1.8 trillion ($2.5 trillion) and $US3 trillion ($4.2 trillion) the sector represents only a fraction of the wider financial system.
The Australian Securities and Investments Commission, for instance, has been intensifying its supervision and regulation of private credit, as have other regulators in the region.
The US Federal Reserve Board, concerned about potential contagion, has been asking the major US banks for details of their exposures to the sector. The UK’s Financial Stability Board is compiling a report on the sector’s vulnerabilities.
Insurance regulators, mindful that insurers and pension/superannuation funds have the biggest exposures to alterative assets, are also questioning their vulnerability.
The sector isn’t – at this stage – substantial enough itself to threaten a financial crisis, even though there have been comparisons with the sub-prime mortgage crisis that led to the 2008 global financial crisis.
What’s not known, however, is how interconnected it is with the regulated banking system or, indeed, how fear in its corner of the system might spread to other parts of the system.
The US banking system does have connections with private credit. The US Treasury has estimated that the major US banks have exposures of somewhere between $US410 billion and $US540 billion through loans to private credit funds, which often leverage their portfolios of loans to private companies to boost their returns.
The US banking system, to put the numbers into perspective, has close to $US30 trillion of assets, with just one bank – JPMorgan Chase -- having nearly $US4 trillion by itself.
The private credit funds are also often parts of larger alternative asset management companies, with the links within those groups opaque.
They are part of an alternate universe of unregulated financial entities that has grown dramatically since banking regulators’ responses to the 2008 crisis, forcing lenders to hold a lot more capital and high-quality liquidity, caused the regulated institutions to withdraw from riskier and therefore more capital-intensive lending.
The “shadow” banking system is now substantially larger than its regulated counterpart.
While a “run” on the funds might look similar to the kind of bank runs that precipitate crises, investors aren’t depositors. If they suffer losses, the financial system isn’t at risk, just the investors concerned.
That was what regulators intended with their bank prudential reforms – they wanted to push the riskiest lending into unregulated markets where the individual investors would bear, and effectively diversify, the risks.
The means the major risk represented by the private credit sector, if it does represent a risk to the wider system, is one of contagion, driven by fears that could spread into other investment sectors, the non-investment grade credit sector more broadly and the mainstream financial system.
US President Donald Trump, pictured with his Treasury Secretary Scott Bessent, plans to deregulate US banks to enable them to do more risky lending and allowing alterative assets to be included in Americans’ pension plans.Bloomberg
It is also conceivable that, if their funds are frozen behind the locked gates created by redemption limits, investors might be forced to dump other assets to generate liquidity and, perhaps, service or repay any debt associated with their private credit investments. There is leverage within the funds and, almost inevitably, some investor leverage outside them.
The sector is, however, quarantined to a significant degree from the rest of the financial system by those redemption caps.
That points to a controversial aspect of alternative assets more generally. The institutions that pioneered the sector were attracted by the prospect of premium returns in exchange for the illiquidity of the investments.
Another appeal was that the underlying investments are valued only periodically and on their notional, subjectively assessed net asset values, rather than continuously and objectively in real time by financial markets, providing an apparent shelter from the volatility of public markets, although that’s an illusion.
Investors in the funds are now being reminded of the downside of the premium returns they received for the illiquidity of their investments. They can’t get their money out.
The value of the assets does move from moment to moment, but is only recorded by, generally, quarterly snapshots. The abrupt meltdown in the value of software companies shows how misleading that approach to valuations can be.
In any event, investors in the funds are now being reminded of the downside of the premium returns they received for the illiquidity of their investments. They can’t get their money out.
Given the plight of those investors and the concerns that the issues within private credit have raised about the quality of unregulated credit generally, it might appear odd that the Trump administration is pressing ahead with plans to both deregulate US banks to enable them to do more risky lending and allowing alterative assets to be included in individuals’ 401(k) pension plans.
The opening up of the 401(k) plans to Wall Street is pursuant to an executive order from Donald Trump last year, which has been interpreted as a boon for the firms that backed his re-election. Those plans hold more than $US14 trillion of assets, but have been excluded from investing in alternative assets. They represent a honey pot for Wall Street’s asset managers.
With the war in the Middle East causing the biggest oil shock in history and already generating higher inflation rates -- potentially leading to higher interest rates – as well as lower economic growth, the financial system and its credit underwriting standards may well be stress-tested.
It might not be the optimal time to introduce households to a sector that - as the rush of redemptions in private credit shows - is already experiencing significant stress, with naked swimmers surfacing at a disturbing rate.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.