From global banks to alternative fund managers, more senior financiers are joining a growing chorus warning of cracks in private credit.
TCW Group Inc.’s Chief Executive Officer Katie Koch told a forum in Hong Kong on Wednesday that she’s “ver
y nervous” about parts of private credit. Tony Yoseloff, chief investment officer of Davidson Kempner Capital Mana
gement LP, said there’s been a “race to the bottom” in terms of covenants.
Their comments come as private credit — or lending done outside the heavily regulated banking sect
or — has ballooned to a $1.7 trillion industry. Some banks are mak
ing conscious decisions to collaborate with private credit players to earn fees and tap ever-deeper pools of capital, w
hile others say the combinations are risky and could infect the banking sector.
Los Angeles-based asset manager TCW is 15% underweight
credit right now, Koch said at the Global Financial Leaders’ Investmen
t Summit. Yoseloff said on a separate panel that private credit’s impact is particularly being seen in the US, and “the real
ity of that is, there’s been a race to the bottom in terms of the covenants that are provided, the coupons that are earned.”
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They spoke a day after UBS Group AG Chairman Colm Kelleher highlighted risks in the US insurance indus
try, citing weak and complex regulation as private financing booms.
US life insurers have ramped up private debt investments over the past few years, allocating close to one-thir
d of their $5.6 trillion in assets to the sector last year, up from 22% a decad
e ago, according to data compiled by research firm CreditSights.
Marc Rowan, CEO of Apollo Global Management Inc., shot back at Kelleher on an earnings call, saying he was “just wrong.” Apollo’s Athene Holding Ltd. i
nsurance unit mostly uses the big three credit rating companies to assess its assets, while most of banks’ balance sheets
don’t have credit ratings at all, Rowan said.
Still, Rowan agreed that risks are posed by offshore jurisdic
tions that don’t have the same regulatory and ratings standards as the U
S. “So, Colm is not wrong at this point in the credit cycle to say that there are systemic risks piling up,” he said on the call with analysts.
Chris Gradel, co-founder of PAG, told the Hong Kong forum that there are areas that need to be watched in private
debt, including liquidity mismatches and funding through open-ended veh
icles. In Australia, there is even financing through retail funds that can be bought and sold on a daily basis, he said.