Private credit has attracted interest from big banks like Goldman Sachs (GS) and Wells Fargo (WFC), which have raised roughly $50 billion in private credit investments, Bloomberg reports. Yahoo Finance's Julie Hyman breaks down the private credit landscape.
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Video Transcript
Multi-Billion Dollar Private Credit Banks and major corporations have invested more than $50 billion in private credit in recent months, a relatively new asset class.
This is a Bloomberg segment that analyzed private credit trends and the risks they pose.
Julie Hyman from Yellow Finances has more details.
Julie, Hey Joshua.
Really.
On private credit, the headlines are piling up, including the Bloomberg report today that you mentioned, which said that big banks like Goldman Sachs and Citi Wells Fargo have raised or committed about $50 billion in capital to put into private credit.
Which brings me to this chart from the International Monetary Fund, which compiles the numbers through 2023, showing that invested or committed capital in private credit is at $2.1 trillion, as shown by the blue line.
As you can see, they are small in size compared to private companies, and below you can see the S&P 500 and the MS CI World Stock Price Index.
So basically, private investment is booming and the same can be said about private credit.
What on earth are we talking about here?
Is it the same as having private equity where companies like Blackstone and its parent company Apollo raise money to invest in companies?
Private credit is about raising funds to invest in things like direct loans to businesses, other types of financing instruments, real estate, or other types of lending instruments.
And as these companies have explored various opportunities, the sector has seen substantial growth over the past few years.
This was a kind of competition for the incumbent banks, and also a seduction for them, as evidenced by the fact that they raised this money.
And the other reason this has made the headlines this week is because we have Jamie and JP's CEO.
Morgan spoke at the conference about private credit and perhaps some of the pitfalls that lie here.
For example, he said, individual investors could get into trouble if they invested in these financial products without fully understanding them.
That's because many banks have lockup periods during which people can't get their money back.
He's been saying for years that if grandma, the theoretical grandma, puts money in here, she can't get it back.
And, you know, it had kind of a ripple effect.
There could conceivably be runs on the funds or attempts to manipulate them.
Perhaps Washington might take notice.
Al spoke about bad actors in the industry, but said they appear to be in the minority for now.
jp. Japanese
Incidentally, Morgan is also in the business.
So it's really interesting to see this increasing over the last few years, Josh.
And I think you're heading in the direction that I was heading in, the direction that you described.
That's a great explanation.
If you're listening to this and thinking, “What are the risks of this trend? I should be careful.”
How would you explain it?
Yes, those are the two risks Diamond presents.
But actually, there's more to talk about.
I mean, it's a civilian market, so they don't have those.
You know, the corporate bond market would be the public counterpart to this, which is not as liquid as, say, the stock market.
It is relatively liquid and mark-to-market is also carried out here.
Valuations are infrequent and somewhat opaque, just as credit quality is not always clear or easily accessible.
And finally, one that is difficult to understand, is systemic risk.
He said he was aware that pension funds were pumping money into these ventures and that Jamie Diamond had also raised this concern.
The ratings of some of these instruments were reminiscent of pre-financial crisis mortgages.
Well, maybe that's an exaggeration.
But either way, it's hard to know where all these investments are now.
Okay, Julie.
thank you.
appreciate.
