By: Oscar Valdés Viera
There is trouble brewing in opaque private markets. That’s why Wall Street firms are pushing full steam ahead to pull working families into these high-risk, high-fee investments. The administration, Congress, and private equity industry pretend that they are democratizing investing by letting retirement savers and mom and pop investors into the exciting world of private markets. The reality is that Wall Street is looking to dump their struggling private equity and private credit investments onto people who should not face their risks, costs, and opacity. A recent blow-up at a private credit company should raise alarms.
Trouble brewing at Blue Owl Capital
Last week, the private credit firm Blue Owl Capital set off alarm bells when it admitted trouble on its loan books. Private equity firms, hedge funds, and other private lenders make giant, unregulated, and unmonitored loans to companies, including to finance private equity takeovers. Unlike bank loans, no regulator has visibility or supervision of this growing and increasingly risky non-bank credit. The scale and unknown risk of these private non-bank loans could threaten financial stability if borrowers cannot repay their loans. Since private credit entangles private firms and the banking system, widespread private credit defaults could become a contagion that transmits instability across the financial system.
Despite these risks, there has been a push to let retail investors buy into private credit. Private credit funds are pitched to small investors with the promise of periodic payouts, like quarterly redemptions that offer some ability to get money out on a regular basis. But Blue Owl Capital’s announcement this week that it was shutting the gates on investors looking to withdraw their money rattled investors and the private credit market. Blue Owl restricted redemptions and was forced to sell $1.4 billion in loans to cover investors wanting to exit.
Blue Owl’s redemption reversal demonstrates the type of risks in store for retirement savers or mom and pop investors that get dragged into private market investing. Unilaterally changing the rules and replacing a predictable withdrawal system with one where fund managers get to decide if, how, and when investors can cash out are not appropriate features of a retail investment product. Everyday savers often need to tap into their retirement accounts to meet a financial hardship like avoiding eviction or foreclosure (the most frequent reason why people take hardship distributions). The Blue Owl switcheroo should be a cautionary tale for regulators and legislators trying to push private credit funds onto workers saving for retirement or small investors. Instead of a promise of liquidity, people could get locked into private funds that they cannot get rid of without taking double-digit losses offloading struggling private loans on secondary markets.
If BlackRock gets hoodwinked, what hope is there for the rest of us?
The Blue Owl revelation wasn’t the only private credit alarm bell ringing last week. The Wall Street Journal reported that a BlackRock subsidiary was duped into making a more-than $400 million private loan to a shady telecom entrepreneur. The loan was extended against entirely fabricated invoices, fake emails, and forged signatures of customers—making the collateral worthless and the investment had to be written down to zero.
Earlier this year, BlackRock reported a $140 million loss on other private credit investments that had a 19 percent collapse in the value (an abrupt reversal from Blackrock’s rosier assessment just weeks earlier). The Wall Street Journal noted that “BlackRock’s disclosure underscores the risks investors face inside the opaque private-credit world.”
BlackRock’s expensive private credit stumbles do not inspire confidence for the rest of us. As one of the world’s most sophisticated and resourceful investors, BlackRock regularly conducts due diligence, engages major consultants and accounting firms, performs audits, gets the latest insider information—none of which are available to everyday retirement savers and retail investors—and still took major losses due to fraud, sketchy valuations, and excessive risks in opaque private markets.
The Blue Owl blue note
The market reacted swiftly to the Blue Owl news. Not only did Blue Owl take a beating, shares of major private credit providers were “shellacked,” reflecting the widespread view that the private credit industry may be in serious trouble. It also echoed JPMorgan Chase CEO Jamie Dimon’s warning that “when you see one cockroach, there are probably more.”
Private markets are opaque by design. The assets are difficult to value, challenging to sell quickly, and governed by terms like redemption limits that can be changed or suspended. Those complex features can even sandbag institutional investors that are big enough to negotiate terms, run deep diligence, and wait out long downturns. This makes private markets totally inappropriate for families relying on retirement savings for predictable income, financial security, or emergency liquidity.
The recent warning signs in private credit show how fast losses can surface, how abruptly rosy valuations can reverse, and how quickly liquidity can evaporate. Opening this market to retail does not democratize opportunity—it is nothing short of a private equity industry bailout paid for by working people.
Congress and administration try and shove private markets into retirement funds
The current push to cram private equity into retirement accounts would amount to a regressive and unfair private equity bailout by workers saving for retirement and small retail investors. For decades, private equity firms have captured billions of dollars from the main street economy by buying up companies and sucking them dry, driving firms into bankruptcy and costing millions of jobs. For half a century, only the biggest, accredited investors such as rich families, university endowments, and pension funds were eligible to buy into the opaque, illiquid, high-risk private equity funds—federal guardrails prevented private equity firms from preying upon retirement savers and small investors.
Congress and the administration aren’t pushing private equity investments onto everyday people because private markets suddenly became a safer, simpler deal. Just the opposite. Private market giants are struggling to raise money because their traditional investors are seeing the writing on the wall and getting out. The $14 trillion in retirement accounts is an appealing and vulnerable target for the industry. The big investors are increasingly wary of making new commitments because their previous investments have been tied up in zombie funds. These sophisticated investors cannot get their money out because the private equity firms cannot offload their deteriorating investments in the promised timeline or with the expected returns.
Private equity and credit firms—including giants like Blackstone, KKR, and Apollo—have spent millions lobbying Washington—$25 million last year alone—to push their legislative and regulatory agenda. They’ve launched a sophisticated public relations campaign to rebrand themselves and overcome the industry’s much-deserved odious reputation. Now, the industry is trying “to portray private-markets managers as responsible stewards of retirement money,” according to the Wall Street Journal. So now, with an industry friendly administration full of private equity magnates, the push to offload private equity junk onto retirement savers and small investors is accelerating.
The mounting evidence of trouble in private markets should be a warning for what retail investors would be stepping into—and for the whole economy as private market distress will be easily transmitted to the rest of the financial system.