By: Oscar Valdés Viera
Even more stories broke this week that troubles in the private credit market are mounting. The increasing instability in these largely unregulated and opaque non-bank loans is an ominous sign that the hidden risks are starting to spiral. Because the private loans interconnect major Wall Street private equity firms and banks, defaults could transmit financial contagion that could threaten the economy.
Morgan Stanley and Cliffwater LLC capped withdrawals from their private credit funds and Apollo Global Management and JPMorgan Chase are reassessing the value of their private credit holdings. Private credit lending exists outside the regulated banking system and tends to lend to riskier borrowers—including financing private equity leveraged buyouts. Unlike bank loans, regulators cannot see the full scope of these deals, how they are valued, or whether the borrowers can repay. This ballooning sector now represents a $1.8 trillion slice of the much larger universe of opaque private markets.
Morgan Stanley and Cliffwater freeze private credit withdrawals
Bloomberg reported this week that Morgan Stanley and Cliffwater LLC, which runs a $33 billion private credit fund, both blocked investors from pulling money out of their private credit funds. Morgan Stanley capped withdrawals from its $8 billion private credit fund, returning less than half of what investors requested.
Cliffwater investors sought to take out 14 percent of the fund’s assets—nearly double what the fund allows. Cliffwater plans to cover about half of the redemption requests, but many investors who wanted out will still be stuck waiting. These two firms now join the growing list of major private credit vehicles facing redemption pressures, after BlackRock, Blackstone, and Blue Owl have all also seen investors head for the exits at the same time.
Apollo and JPMorgan flash private credit warning signs
Bloomberg also reported that Apollo Global Management is now preparing to publish daily valuations of its private credit holdings, an implicit acknowledgment that the opacity of this sector has itself become a crisis of confidence. This is mostly a public relations ploy to distract from the rising concerns over the push to cram opaque private credit into retirement accounts. But, it’s a telling concession (confession?) that Apollo acknowledges that investors—including retail investors—deserve real visibility into what those private loans are actually worth.
Then there is a Financial Times report that JPMorgan Chase has marked down the value of loans that private credit funds have extended and used as collateral to borrow from the bank. Now even Wall Street’s biggest bank distrusts the stated values on private credit books and is restricting how much it lends to private credit funds to get ahead of more potential turbulence.
Private credit warning signs could be tip of the iceberg
The growing drumbeat of bad private credit news bangs on. These are not isolated incidents—it’s likely the tip of an iceberg of real trouble in private credit. AFR has been raising alarms over the risks of private credit for years. Last week, we hosted a webinar with Professor Lenore Palladino on the rise of unregulated lending, examining some of the current dynamics that make private credit a potential ticking time bomb.
Trump administration regulators appear blasé about these risks—with Securities and Exchange Commission Chair Paul Atkins implying that the non-bank sector posed almost no risk to the financial system. But regulators should be treating these developments as an urgent warning because if losses continue to mount in private credit, the damage will not stay confined to Wall Street balance sheets. The contagion can spread outward, tightening credit, amplifying instability, and ultimately hitting the real economy where workers, communities, and retirement savers pay the price.