"Jeffrey Gundlach, the billionaire founder and CEO of DoubleLine Capital, warned on Monday of an area he's concerned about, and it's not a bubble related to artificial intelligence. "The next big crisis in the financial markets, it's going to be private credit," the so-called "Bond King" said on Bloomberg's Odd Lots podcast. Gundlach said the sector "has the same trappings as subprime mortgage repackaging had back in 2006," arguing the issues underpinning private credit are severe."
"Gundlach explained that, in recent years, the "garbage lending" that plagued public markets before the Great Recession has shifted into private markets. Private credit has become increasingly popular and is now over-allocated to by large asset pools. The core problem, according to Gundlach, lies in the fundamental lack of transparency and liquidity. A major element of the private credit appeal is the Sharpe ratio argument, which suggests investors get comparable returns to public markets but with much lower volatility."
"However, Gundlach contends this is an illusion achieved by failing to market assets to market, similar to how a five-year CD appears stable even if its true value declines as interest rates rise. He provided an anecdote about private equity firms marking positions down slightly when the S&P 500 corrects, only to mark them back up when the market recovers, thereby underreporting volatility."
Private credit has grown popular and is heavily allocated by large asset pools, shifting risky "garbage lending" from public to private markets. The sector suffers from fundamental opacity and illiquidity that mask true risk. Reported stability often reflects assets not marked to market, creating an illusion of low volatility through mark-to-model and selective markdown practices. Private assets can behave binary in value, effectively 100 or zero, leaving valuations fragile. A recent Renovo bankruptcy revealed liabilities vastly exceeding reported assets, demonstrating severe valuation disparities and signaling elevated systemic-crisis risk within private credit markets.
Read at Fortune
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