A Shadow of Mordor Looms Over Private Credit? A Wizard's Warning

A New Power is Rising

Hmph a strange wind blows from the East and I sense a disturbance in the Force… er I mean in the financial markets! This "private credit," once a humble hobbit of the economic world has grown into a towering Ent of an industry now valued at a staggering $1.7 trillion. It seems even Goblins are now taking an interest in these dealings! It is being whispered that this realm is a key pillar behind private equity deals asset based finance and retail investor portfolios.

The Shadow Deepens

But beware for even the fairest mountain can hide treacherous paths! Some say this rapid ascent is akin to Sauron's rise to power – unchecked and fraught with peril. There are rumblings of lowered lending standards a fool's errand if ever I heard one! As Morningstar's Shihan Abeyguna wisely notes interconnectedness can amplify financial instability. It seems these connections are not unlike the tangled roots of Fangorn Forest – efficient in calm weather but a nightmare when the storm hits.

Dry Powder or Dragon's Hoard?

Ah but here's a riddle worthy of Gollum: $566.8 billion worth of "dry powder" sits waiting to be deployed. Managers are incentivized to lend quickly. It is like waving the One Ring in front of Boromir – a temptation too great to resist! Abeyguna warns that this eagerness could lead to further erosion of lending standards. 'Fly you fools!' I say before you rush headlong into disaster! Even JPMorgan echoes these concerns fearing relaxed underwriting in the face of such overwhelming capital.

A House of PIKs: Built on Sand?

And what's this I hear of "paid in kind (PIK) loans"? Borrowers deferring cash interest payments promising even more IOUs? It sounds like a deal with a Balrog offering short term gain for long term ruin! PIMCO's David Forgash warns that this hidden debt could become a mountain of trouble in a recession. Indeed recessions are bad news for anyone who rely on borrowed money especially those with a lot of debt. 'Not all those who wander are lost,' but those who borrow carelessly are surely doomed!

Hope Remains: Not All is Lost

Fear not for even in the darkest night a star shines! Some analysts remain confident in the sector's resilience. Michael Ostro of Union Bancaire Privee points out that banks' direct exposure is limited and lending sits atop solid capital structures. Suvir Varma of Bain & Company believes that underwriting is far more disciplined now than before the GFC. This is unlike the events leading to the 2008 crisis where risky loans bundled with complex financial products were sold to investors.

A Wizard's Final Word

Ludovic Phalippou of the University of Oxford cautions against complacency warning that private credit isn't entirely safe. 'This isn't a house of cards but it smells like one,' he says 'and definitely a house with a lot of mezzanine floors and a very expensive elevator.' Hmmm wise words indeed. So let us tread carefully examine the fine print and remember the lessons of the past. For as I always say 'It is not our part to master all the tides of the world but to do what is in us for the succour of those years wherein we are set uprooting the evil in the fields that we know so that those who live after may have clean earth to till.'