Big Short investor Steve Eisman warns that the stress in one credit market poses a greater risk to economic growth than geopolitical conflict.
In a new CNBC interview, Eisman says the private credit market is facing rising redemption pressures as retail investors rush to withdraw funds.
He specifically mentions Blue Owl Capital, a private lender that recently teamed up with Meta to build a $27 billion AI data center.
“So just for your viewers, Blue Owl’s flagship fund had a 22% redemption notice. And they have a smaller fund that’s about only $3.3 billion, but it’s totally devoted to tech and had a 40% redemption notice. Retail investors in private credit are freaking out.”
Eisman says he’s keeping a close watch on private credit because the market has been the main driver of loan growth in the US since the 2008 global financial crisis, after regulators forced banks to reduce their risk exposure following the event.
“I think it has much longer-term implications [than the Iran war]. I mean, almost 100% of loan growth in the United States since the Great Financial Crisis has occurred outside of the banking system. So if all these funds are getting redemption notices and they’re going to start to tighten underwriting standards, they’ll make fewer loans. It’s going to have implications on the economy. It’s very early stages here for this.”
According to the investor, a tightening of lending activity in private credit could be a big drag on economic growth.
“The banks are better capitalized today than they’ve ever been in history. And I mean all of history. So I’m not worried about the banks even though they do have exposure to private credit because they lend to the private credit funds. They give them the leverage. So if there are losses, they’ll be more losses, but it’s not a systemic issue.
It’s how much are the private credit funds going to reduce lending and how much is that going to impact the economy.”
The private credit market works like a shadow banking system, where firms issue loans to businesses at higher interest rates.
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