Big Short investor Steve Eisman warns that a booming area of the financial market has reached a scale that could pose broader economic risks.
In a new episode of the Steve Eisman Playbook podcast, Eisman says he’s keeping a close watch on the private credit market, after news emerged that Blue Owl Capital suddenly halted retail investor redemption in a debt fund.
“The private credit market has exploded into a $1.8 trillion market. It’s huge. And if it ever blew up, it would hurt the US economy badly. Investors have been showing fear about this market for about a year, and the Blue Owl news from last week, in my view, was particularly bad.
Over the last five years, private credit firms have been expanding their distribution from institutional investors to retail investors. They created private lending funds specifically designed to attract retail investors. The yield on private credits is higher than public credits, so retail investors are enticed.”
According to Eisman, the playbook of offering high yields to retail investors works great in good times. But he questions whether the private credit market can withstand a storm of simultaneous stressors.
“It has never been stress-tested for a scenario where the asset valuations are being questioned, there is liquidity pressure, and there is a major sector-specific disruption, software, and all of this is happening simultaneously now…
Part of the problem is that private credit is overexposed to software. These loans are a result of buyouts of software companies at high valuations, which were funded by private equity and private credit funds. There are some estimates that over 20% of the entire private credit market is composed of loans to software buyout transactions.”
Eisman also flags a report from the banking giant UBS, which laid out a very bearish scenario for private credit.
“In a recent report, a strategist at UBS said that private credit could see default rates surge to 15% because of AI disruption. Now, I have no idea if a 15% default rate is realistic at all, but such a level would be disastrous.”
Disclaimer: Opinions expressed at CapitalAI Daily are not investment advice. Investors should do their own due diligence before making any decisions involving securities, cryptocurrencies, or digital assets. Your transfers and trades are at your own risk, and any losses you may incur are your responsibility. CapitalAI Daily does not recommend the buying or selling of any assets, nor is CapitalAI Daily an investment advisor. See our Editorial Standards and Terms of Use.