Billionaire investor Jeffrey Gundlach warned that America’s booming private credit market is showing cracks, comparing it to the unregulated CDO market that existed before the 2008 financial crisis — calling it “the Wild West” of finance.
Gundlach, founder and CEO of DoubleLine Capital and known as the “Bond King,” said the shakeout in private credit is no longer theoretical.
“The private credit thing is starting to be less of a theoretical shakeout, where some will be survivors and some may experience troubles. And now we’re starting to see sort of the canaries in the coal mine kind of falling to the bottom of the cage,” Gundlach said on “Making Money with Charles Payne,” Wednesday.
“It’s like the Wild West. And it starts out with the sheriff in town and things are going pretty well. But then, as the frontier town grows, more people come in trying to exploit opportunity,” he continued. “So this, I think, could be a problem.”
Gundlach’s comments came the same day Blue Owl Capital Corporation scrapped plans to merge its two private credit funds, citing “current market conditions” in an investor statement. The company said the decision reflected market volatility; shares of OBDC rose on the news while Blue Owl’s parent stock slipped slightly.
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Private credit is money loaned directly to companies by investors or funds, as opposed to banks, and has become a multitrillion-dollar market. These funds pool money from pension funds, insurance companies or wealthy investors and make loans that often pay higher interest rates than traditional bonds or bank loans.
Because these deals happen privately, there is no public market price, less regulation, less transparency, and less liquidity. Experts like Gundlach caution that the same lack of transparency and liquidity that makes private credit appealing in good times could make it dangerous in bad times.
“We saw one deal where it was called Renovo, where a reputable firm, frankly, had the bonds marked at 100 cents on the dollar. And then a month later, they revised the mark to zero. That’s a pretty big change, 100 to zero,” he noted.
“This is starting to show up to be the problem that I’ve been referencing… that private credit and private equity, frankly, is being borrowed from private equity. It’s sold on a volatility argument, primarily,” Gundlach added. “Maybe there’s some excess return for your illiquidity that you can get, but it’s largely a volatility argument.”
Illiquidity could turn paper losses into real ones, Gundlach cautioned, pointing to the kind of liquidity squeeze that worsened the 2008 financial crisis, when investors were unable to meet capital calls.
“You’re in a market where pricing is estimated and not known,” he said. “When people are fearful, they don’t like being in illiquid assets.”
“So you say you’re going to invest in a fund, and the sponsor rightly and responsibly says we’re waiting for it to get cheap … And when it does, we’re going to draw your capital. But when it gets cheap, nobody has any capital because they’re already locked up and everybody thinks it’s cheap now because it probably is. And you start getting capital calls and these entities can’t fund them. And so we have, I think, a mismatch here in terms of large asset pools and needs, particularly during times of some stress and their liquidity.”
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