Every financial market crisis is different, but they do rhyme, and parallels are beginning to emerge between the tremors now rippling through private credit and those in U.S. subprime housing that led to the 2007-09 Global Financial Crisis.
This isn’t to say a repeat of that historic crash is in the cards. But there is a growing risk that the mounting stress in private credit – scarce or nonexistent liquidity, opaque pricing, and spiking redemptions – could spill over into the public securities markets.
BlackRock, the world’s biggest asset manager with some US$14-trillion under management, said on Friday it had limited withdrawals from a flagship debt fund after a surge in redemption requests. A few days earlier, alternative asset manager Blackstone said it had raised the redemption cap on its BCRED private credit fund to meet record withdrawal requests.
The alarm bells at these two behemoths come after a similar event at smaller alternative asset manager Blue Owl last month, and the bankruptcies of U.S. auto-parts supplier First Brands and car dealership Tricolor late last year that prompted JPMorgan Chase CEO Jamie Dimon to warn: “When you see one cockroach, there are probably more.”
Investors with a sense of history, or who were around in the 2000s, may think this all sounds a bit familiar. In 2007, BNP Paribas, Bear Stearns and HSBC blocked redemptions from U.S. subprime funds or warned that they were in trouble – a seemingly small risk that metastasized into a global financial meltdown.
Of course, the GFC didn’t fully explode until September 2008 when U.S. authorities allowed Lehman Brothers to go under. But the crisis had been building up steadily for at least 18 months, with tremors at those subprime funds offering investors early warnings that trouble was brewing.
The rationale for not letting investors access their own money today is likely similar to the justifications in 2007: assets have probably fallen significantly in value and thus would need to be sold at a heavy loss; the asset manager may fear triggering a fire sale in other assets to raise the cash being demanded; or the fund may be struggling to unload illiquid assets. Or it may be a bit of all three.
Either way, as was the case with subprime mortgages and related derivatives in 2007, it is hard to know what private credit assets today are truly worth because the market is so opaque and illiquid. When price discovery evaporates, the more bearish assumptions often win out.
Another similarity with subprime in 2007 is that private credit and private markets more broadly are not believed to pose a systemic financial stability risk. As we all know, that turned out to be wishful thinking back then.
Is it different this time?
Probably, if we’re looking at sheer size. The mortgage-backed securities market, the root of the GFC, was worth around US$7.2-trillion in 2007, or 5 per cent of the total value of global securities at the time, according to Investec. The private credit market today is worth around US$2-trillion, less than 1 per cent of all global securities.
On the other hand, like subprime in 2007, private credit today is loosely regulated, certainly relative to traditional bank lenders, meaning its true reach isn’t easily ascertained.
What’s more, ordinary mom-and-pop investors are getting more involved. Retail investors represented 16.6 per cent of holdings in private credit funds at the end of 2024, up from 5.5 per cent in 2020, according to Investec.
Meanwhile, private credit default rates are rising, hitting a record 9.2 per cent in 2025, credit rating agency Fitch Ratings said last week. That’s up from the previous record of 8.1 per cent in 2024.
Perhaps ominously, these defaults didn’t include any software companies, which have become major private borrowers. The software sector has been hammered this year by fears of artificial intelligence-related disruption, which has slammed shares in private credit giants Blackstone, KKR and Apollo down 30-45 per cent in recent months.
The broader risks from private credit seem skewed to the downside. The U.S. economy is at a delicate juncture, facing a shaky labor market and the fallout from the war in the Middle East, including wild volatility in oil markets and the specter of modern-day “stagflation.”
True, the consensus view is that the economy’s underlying fundamentals are solid and that private credit isn’t large enough or well-integrated enough to torpedo GDP growth or broader asset markets. As strategists at Barclays note, private credit has problems, but they aren’t big enough to push the U.S. into recession.
Of course, this is exactly how subprime was viewed in 2007.
To paraphrase Warren Buffett, when the liquidity tide goes out, you see who’s been swimming naked. Recent events in the private credit market suggest more funds may soon be exposed.