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

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A report from the halls of the Beverly Hilton at the Milken Institute conference in Los Angeles.

May 11 - 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.

The massive size of the market means excessive debt and financial engineering are causes for concern, as losses stemming from an economic slowdown or other shocks can threaten broader financial stability. Further, the opacity of the market can undermine confidence in the system and complicate regulatory response in case of problems, as has been evident with shadow banking debt issues elsewhere,

But that person and other financiers said that may not hold true across the market. Tony Yoseloff, managing partner at Davidson Kempner Capital Management, during a panel discussion cited Bank of America data to say that 22% of direct lending borrowers generated negative operating cash flow, and of them 8% had only enough cash to last two years or less.Rapid growth has meant increased competition, with both more money and players flooding into the private credit market.

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