Chart of the day: What is private credit?

Private credit has piqued the interest of major banks such as Goldman Sachs (GS) and Wells Fargo (WFC), with these financial institutions raising approximately $50 billion in private credit investments, according to a Bloomberg report. Yahoo Finance's Julie Hyman breaks down the private credit trend.

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This post was written by Angel Smith

Video transcript

There's a relatively new asset class that's been attracting billions of dollars private credit bank and giants putting together over $50 billion into private credit in recent months.

That's Corner Bloomberg to break down private credit trends and its risks.

Yellow finances Very own Julie Hyman is here with the details.

Julie, Hey there, Joshua.

Really.

Headlines have been piling up when it comes to private credit, including that report that you mentioned B Bloomberg today saying that the largest banks, including the likes of Goldman Sachs and City Wells Fargo, have indeed raised about $50 billion of raised or committed capital to put into private credit.

So that brought me to this chart from the International Monetary Fund, which put together the numbers for this going into 2023 where they found and this is the Blue line, $2.1 trillion in invested or committed capital into private credit.

You see that only is dwarfed by private, and then you see down here stocks the S and P 500 the MS C I world index of stock.

So basically there has been a boom in private investments, and when we talk about private credit.

What are we even talking about here with?

Just like you have private equity where firms like Blackstone and our parent, Apollo, raise money to invest into companies?

Private credit is them raising money for funds to invest in either things like direct lending to companies, other types of financing vehicles, real estate or other types of lending vehicles and the like.

And there has been a real growth in this area in the past few years, as these companies have been looking for different opportunities.

That has both been a sort of competition to the establishment banks, as well as something that has enticed them, as we see from the fact that they have raised this money.

And the other reason it got headlines this week is because Jamie and the CEO of JP.

Morgan talked about private credit at a conference and talked about maybe some of the pitfalls here.

He said there could be hell to pay, for example, if retail investors got into these instruments without fully understanding them.

That's because many of them have lock up periods where people can't get back their money.

For several years, he talked about a granny, a theoretical granny, if she put her money in here, couldn't get it back.

And then, uh, you know, there was sort of a ripple effect.

Maybe there could be a run on the fund or an attempt to run the fund.

Maybe Washington could turn its eye towards this.

He Al also talked about bad actors in this industry, but he said that seems like the minority for now.

JP.

Morgan, by the way, is also getting into this business.

So it's, uh it's quite interesting that we have seen the rise of this over the past few years, Josh.

And I guess you you you're sort of going where I was headed, which is, you know, you laid it out.

Great explainer there.

If you're listening to this and you're thinking OK, what what are some risks of this trend I should have on my radar?

How would you explain it?

Yes, So those are a couple of risks that diamond laid out.

But really, there's other stuff to talk about.

I mean, it's a private market, so you don't have them.

The corporate bond market would be the public counterpart to this, you know, And even though that is not quite as liquid as, say, the public stock market.

It is relatively liquid, and it also marks to market here.

The valuation is infrequent, and it's somewhat opaque, just like the credit quality is not necessarily clear or easily accessible.

And finally, it's hard to understand, necessarily the systemic risks.

We know that pension funds have been pouring money into these, and just like and and Jamie Diamon kind of raised the spectre of this, he said.

The ratings on some of these instruments reminded him of mortgages back before the financial crisis.

You know, maybe an exaggeration.

But in any case, you know, it's hard to know where all of these investments are right now.

All right, Julie.

Thank you.

Appreciate it.