[https://www.blackstone.com/insights/article/private-credit-myth-vs-fact/](https://www.blackstone.com/insights/article/private-credit-myth-vs-fact/)
Blackstone defends private credit:
1/ BDCs borrow 40cts per dollar of loan vs banks leverage at 25-40x
2/ BDCs are not opaque; They report a lot of loan details and are marked down when needed
3/ Credit quality is strong, with 10% average EBITDA growth and 2.1x interest coverage
4/ Historically, private credit significantly outperformed S&P 500 & leveraged loans during downturns
5/ SaaS-pocalypse is overblown; Average exposure to SaaS has 60% equity buffer before lenders get hit
All valid points. But as Howard Marks said:
“The things that affect the investment world so profoundly are the things that were not foreseen. If they could be foreseen or anticipated…they wouldn’t have that cataclysmic effect.”
What problems in PC are not anticipated today?
I’ll start with a few counterpoints to Blackstone, then I’ll list some unanticipated problems that might be concerning.
1/ Unlike banks that lend mostly to good borrowers, the PC industry lends exclusively to junk borrowers (unrated or rated below BB-)
2/ PC funds work with credit valuers who are highly dependent on PCs for income. So valuers who are lenient and/or are easily pressured by PC managers will get more work. In the GFC post-mortem, all three rating agencies (Moody’s, S&P & Fitch) were found to have inflated ratings in order to win business from MBS/CDO issuers.
3/ A 2.1x interest coverage ratio is clearly below investment grade (prob BB or at best BBB-). Not sure why this is cited as a positive.
\*\*Where might unanticipated problems arise?\*\*
