Investor who lost everything in private credit wishes several thousand more people had warned him of the risks

By Brett Arends

Area man stunned to learn that high yields and light regulations might also mean high risk

The turmoil currently sweeping through the $3 trillion private-credit market recalls the famous Onion headline from the last crypto crash, where a stunned investor who lost his savings in various coins "Just Wishes Several Thousand More People Had Warned Him."

Private credit, where riskier smaller companies bypass traditional, more heavily regulated banks and borrow money directly from special lending pools, hasn't turned into a crypto-style rout just yet.

But as MarketWatch's Jules Rimmer reports, a growing number of these funds are in crisis as investors try to get their money out. The stampedes have been so intense that a number have been forced to institute caps on daily withdrawals.

You can see the carnage in the share prices of many of the firms most exposed to the industry. VanEck's BDC Income ETF BIZD, which invests in private-credit bellwethers such as Blue Owl Capital (OWL) and Ares Capital (ARCC), has plunged in price especially in recent months.

But none of this should come as a surprise to investors. Regulators and a number of prominent individuals in finance have been sounding the alarm about the fast growth, low transparency, questionable liquidity, high concentration and unknown risks posed by parts of the $2 trillion (and rising) private-credit industry.

Those issuing warnings include the Securities and Exchange Commission, the International Monetary Fund, the international Financial Stability Board, the Bank for International Settlements, the British parliament, the governor of the central bank of Canada and J.P. Morgan & Chase (JPM) head Jamie Dimon.

Among others.

IMF managing director Kristalina Georgieva said the risk in the sector "keeps me awake every so often at night."

How far the turmoil will go isn't clear. A report by the Federal Reserve last year suggested the near-term risks posed by the sector appeared "limited," although cynics may recall the infamous assurance early in the global financial crisis by Ben Bernanke, then the chairman of the Fed, that the risks from subprime mortgages were "contained." Some investors are seizing on the current stampede out of private credit as a chance to buy into funds at significant discounts to reported net assets.

How will that work out? Stay tuned.

Meanwhile, as ever, the question about any investment is why anyone is offering it to you. When a private-credit fund is boasting of a 9% yield, at a time when the risk-free rate of interest is less than half that, it's worth asking whether a major financial institution is just offering you free money out of the goodness of its heart - or whether the investment might involve some risk.

Have a guess.

-Brett Arends

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03-12-26 1540ET