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It is been a tough few months for the $1.8 trillion private credit market. The market is going through its biggest crisis of confidence in its history. Private credit firms make loans directly to companies giving them a way to borrow outside of banks and bank-led channels. They use money predominantly from institutional investors, but recently from some wealthy retail investors too, and became major lenders to software companies, especially those backed by private equity firms, which by
and large had seemed to be going pretty well. Now you just have this existential risk in the form of AI that can change everything and private credit's just at the center of that now. Late last year concerned retail investors started trying to pull their money out. Blue Owl allowed investors to take 15% of shares out of one of its private credit funds. It also sold assets to return capital to investors and reduce debt. Others got more creative. We did see some Blackstone employees basically pitch in some of their own money to help meet redemption requests. But this wasn't enough to calm investors.
Blue Owl's shares have fallen sharply since the start of the year. Industry-wide concern though meant it was far from a unique case. People have been talking for years about how private credit has been untested, and this is the first time that they've really been under this amount of pressure. Some observers have drawn parallels with the lead up to the 2008 financial crisis. It has the same trappings as subprime mortgage repackaging had. While others say that fear is overblown, especially since private credit firms don't use your bank
deposits to make loans. It's just really hard to assess because these loans are private. Private credit lenders will tell you that they made really smart investments, but the concern is that, what if they didn't? Good news, everyone. Today you are going to learn the connection between one of these, lots of these, and even this. Private credit. You can think of private credit as lending that's not arranged by banks. It could be an insurance company or in many cases these days it could be a private credit fund.
These deals are managed by some of the biggest names in private markets like Blackstone, BlackRock, Blue Owl, and even some not named after colors, Greek gods for instance. But what is it? It's really a very broad umbrella term that refers to multiple forms of lending. The type that's in the news most these days is what's called direct lending, and that's when basically these institutions lend money directly to companies. If you're a company and you need to borrow money, you might go to a bank, but if you're really, really big, a bank can't provide that much of a loan to a single company. So instead you go to the debt capital markets where a bank arranges a bond or loan
and sells it on to multiple investors for a fee, of course. Private credit is a way to accomplish the same type of transaction, but just directly between the borrower and the ultimate buyer of that debt. cutting out all those like middle stages. And it became central to the global financial system. Back in 2015, I think this market was around $500 billion. The overall assets under management for private credit is roughly 1.8 trillion as of today. The 1.8 trillion market that most people talk about is just a subset of what some managers see as a total opportunity of as big as $40 trillion. In other words, the current market's just the tip of the iceberg for private credit, far bigger opportunities
lurk underneath. There is supply chain finance. There is consumer auto loans, mortgages, there is railcar financing. There is different kinds of trade financing, music royalties. We did a story last year about them getting into things that would've normally been financed by municipal bonds. A lot of lenders, especially places like Apollo, feel like the sky's the limit. About two thirds of the private debt market is in North America. Europe takes the next biggest slice followed by Asia Pacific and the rest of the world. And you could say private credit has been around for decades, really.
I think the 1980s is probably when a lot of this started, but really back then it looked nothing like it does today. One event in particular didn't so much grease the wheels, as crashed the car and set fire to it. The 2008 financial crisis led to numerous regulations to try to keep that from happening again. And one of the key things regulators essentially said was they wanted banks to do less risky lending. Regulators didn't want banks to make a lot of loans with their own money, and that's what allowed private credit to sort of step in and start doing a lot of this stuff.
It can also help out when things get choppy in other debt markets. For example, in 2022, the Federal Reserve had to start raising interest rates. It really caused some problems in the high-yield bond and leveraged loan markets and made those much harder to borrow from. And private credit lenders really stepped up and they saw it as a massive way to grow their market share. Now, their loans can be more expensive than traditional financing, but borrowers often accept that for speed, certainty, and longer-term relationships with lenders and software has been one of the biggest targets for direct lenders in recent years.
A lot of these companies have very strong revenue growth, but they're not making money. That's something that banks have a hard time financing, but private credit can do quite easily. - This is the S&P 500, and since 2022, firms like Ares, Apollo, Blackstone, and Blue Owl have seen their share prices generally outperform it as they expanded their credit strategies and grew their assets under management. Over that period Blue Owl's AUM flew up from around a hundred billion dollars to more than 300 billion, but something else happened in those four years.
OpenAI is now valued at $852 billion. Anthropics making headlines almost on a weekly basis. The rise of AI has completely upended the private credit market. So now the spotlight is on how much exposure private credit firms have to software. And so retail investors in particular have been pulling their money. Shares of KKR and Blue Owl were down as much as 10%. Blue Owl is one of the most exposed. And it's why investors are trying to figure out if those loans were underwritten with sound principles Or based on overly optimistic growth trajectories that the AI revolution could now put in jeopardy.
Towards the end of 2025, Blue Owl co-CEO Marc Lipschultz was pretty confident. Credit quality is excellent in our book, and that doesn't mean no defaults. Everyone's gonna have defaults now and then, you just can't have many and you have to get good recoveries, and that's exactly what we do at Blue Owl. And by the way, so do our peers and so do the banks. In November, though it called off a merger of two of its funds amid scrutiny over potential investor losses. It coincided with redemption requests. That is people asking for their money back climbing sharply across the industry, including at Blackstone Blue Owl and Apollo.
There's really not a fund that's been spared over the last few months here. We've seen huge funds receive massive redemption requests that are unprecedented in the history of private credit markets. A lot of the firms that had made a big push into the retail market have had to deal with these redemption requests in an amount that was unprecedented and to preserve the value of the funds, they've had to limit in many cases the amount of money that investors could take out. In the first quarter, funds were enforcing caps and denying billions of dollars of withdrawal requests, predominantly from wealthy retail investors who'd sunk capital into special products tailored for them
by private credit firms. In some cases, their unmet requests were tens of percentage points higher than the money actually allowed to be taken out. This all comes years after heavy inflows from institutional investors and retail-focused funds. Much of that money going into software businesses that were seen as durable. Now, AI is starting to challenge that assumption, and all of this is harder to judge because the market is so opaque. Some of the main drawbacks of private credit is there's much less transparency.
Private credit are bespoke loans between sophisticated parties and it's all private loans, are not securities. And crucially that privacy means they don't really trade, so there isn't a market deciding what they're worth. Skeptics have begun questioning the accuracy of private loan valuations, particularly after a string of investments recently had their values slashed to zero with little to no warning. It follows the collapse of subprime auto lender Tricolor and auto parts supplier First Brands last year. While only tangentially related to private credit, their demise raised broader questions about underwriting and hidden leverage across all credit markets.
Jamie Dimon has been sort of a vocal critic of the private credit market, is how I would say it. The JP Morgan CEO was among the bankers facing losses tied to Tricolor, and he went full insect in his assessment. My antenna goes up when things like that happen. And I probably shouldn't say this, but when you see one cockroach, there's probably more. It's a very visual image of hidden problems coming to the surface as cockroaches tend to do when lights go off. But the bigger point that he was making is there could be more problems and this could be just the beginning and no one is really safe.
This is what led some observers to draw comparisons to what happened in 2008. I think the counter argument to that is that the regulation following the 2008 financial crisis intentionally pushed risky lending off of bank balance sheets and instead ended up with investors. And so they can afford to lose that. They may not like to lose that, but they can afford to lose that. We're not really seeing that sort of widespread distress just yet. But definitely I think we can say that the best days for private credit are probably behind us, and the next few, quarters years, are gonna be more challenging.
