It's called 'private credit' — and it could lead to big trouble on Wall Street

Consider This from NPR The rise of private credit, and why 'ordinary people's money is on the line' "Private credit" refers to an opaque but fast-growing corner of the financial world: When private-equity firms and other companies that aren't banks lend money to businesses, such as software companies and auto lenders. Banks often are more reluctant to lend directly to these businesses, which they see as riskier bets — but they're still exposed to them, because banks do lend to private credit firms. But its mounting problems are also becoming increasingly visible, especially after two companies backed by private credit companies declared bankruptcy in September. Those bankruptcies raised concerns about how carefully private credit firms were vetting the companies they lend to — and how they, and the banks and investors that finance them in turn, would get their money back. "When you see one cockroach, there's probably more," JPMorgan Chase CEO Jamie Dimon, whose bank had also financed one of the failed companies, warned during an October conference call. More "cockroaches" have been skittering out of the private-credit woodwork in recent weeks. Blue Owl, one of the largest and most prominent private-credit lenders, in February said it would sell off $1.4 billion in assets in order to give money back to some of its investors. Blue Owl's shares have fallen about 40% since the start of the year. The shares of other big private credit companies, including KKR, Apollo, and Blackstone, are also down by 20% or more. "When everyone is rushing to the door at the same time, there's an inherent panic that occurs that also affects sentiment. I think we're seeing some of that here," says investor Olaolu Aganga, head of portfolio construction for Citigroup's wealth-management division. This growing panic comes at a time when U.S. Technology Here's why concerns about an AI bubble are bigger than ever So as Wall Street swings from record high to selloff and back again, private credit's onetime promise has turned into another source of market instability. Some of the private credit angst is directly intertwined with AI. At the same time, they're also worried that AI will soon render many software companies obsolete — and private credit companies are big lenders to those software companies. "Everyone's terrified. They don't know who the winners are. "The great fear is that private credit is going to turn out to have financed a lot of the losers, and then those private credit funds are going to be left with huge losses," he says. The even bigger-picture worry for ordinary consumers is that the problems with private credit will ripple throughout the mainstream financial system, sparking some sort of larger meltdown. "If investors get spooked about risk and start to pull their money out, we could see a 'run' on the companies doing the lending and a crisis," he adds in an email to NPR. Lipton and investors also worry about how much the problems with private credit lenders can infect the mainstream banking system. U.S. banks have lent some $300 billion to private credit companies, according to Moody's. As more problems with private credit companies have surfaced in recent weeks, bank stocks have sold off. The KBW Nasdaq Bank Index is down more than 11% since the start of the year, while the benchmark S&P 500 is only down about 3%. Still, Harvard's Ellias says he's not currently worried about private credit companies sparking a 2008-style conflagration. "This isn't AIG, this isn't Lehman Brothers — this is a bunch of investors who may turn out to have made a bad bet," says Ellias. If small or medium-sized businesses can't get funding to help grow, the overall economy could slow down. But he acknowledges that at a certain point, bad bets can snowball into a bigger problem for Wall Street and the larger economy. "Financial stability is always about confidence," Ellias says.