In the Market: Financiers fret over 'leverage on leverage' in private credit

- To some elite financiers who gathered in Los Angeles for the Milken Institute conference, a debt binge in private markets is reminding them of the go-go days of risk-taking before the 2008 financial crisis.

In many cases, the money is being raised to pay investors in these funds, such as pensions and endowments, dividends to meet demands for payouts, the financiers said. That also enables the fund managers to ask investors for new money, generating more fee income. In some cases, the money is being used to prop up struggling portfolio companies or to invest in them for growth, and to fund new acquisitions.

Private credit has grown exponentially over the past few years, as banks pulled back their balance sheets due to tighter regulations. Major fund managers such as Oaktree Capital Management, Apollo Global Management as well as Wall Street banks such as Goldman Sachs and Morgan Stanley are active in the market. In the United States, private credit's size is now comparable to leveraged loans and high yield bond markets.

One said while their firm would write large checks running into hundreds of millions of dollars, they spent time properly underwriting the loan and wrote in protections. For example, in their dealings with the most sophisticated private equity firms they would build in protections that prevent the borrower from removing assets from the pool of collateral for the loan or stop them from incurring more debt.

While several financiers said their investors were pressing private equity firms to take on loans to pay them dividends, leaving them with no choice, Christopher Ailman, the outgoing chief investment officer of the $336 billion California State Teachers’ Retirement System, said he "would rather see them not add leverage."

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