The private credit market does not pose a systemic risk to the wider financial system, bond giant PIMCO’s group chief investment officer Daniel Ivascyn said on Wednesday, echoing Wall Street executives who have signalled the sector’s problems are manageable.
The US$3.5-trillion private credit sector has been in the spotlight after risks linked to artificial intelligence, fund outflows and fears of credit stress have hammered alternative asset managers’ stocks this year.
“We do not see systemic risks within private credit, we see disappointment, we see lower returns than anticipated,” Ivascyn said at a PIMCO media conference in London.
PIMCO manages more than US$2-trillion.
Ivascyn said he expected more private credit trading, given liquidity challenges in the sector, noting that risk in private credit markets could be transferred in a variety of ways.
“So out of necessity, there’s going to be a lot more of this selling, and that’s going to create a great opportunity for investors with fresh balance sheets, including PIMCO,” Ivascyn said. “We’ve already participated in certain deals that have taken advantage of this dynamic, and we think that there’ll be more motivated sellers later in the year.”
Ivascyn did not give any details of specific deals PIMCO has been involved in.
When asked what made the deals attractive, Ivascyn said there would be opportunities to secure more favourable investor protections, called covenants, more cheaply. PIMCO has purchased all US$400-million of bonds issued by a Blue Owl Capital private credit fund, Bloomberg News reported on Tuesday, citing people familiar with the matter.
Blue Owl Capital, Ares Management, Apollo Global and KKR have all limited redemptions from private credit funds. Private credit defaults are relatively contained, with most of the stress in the sector being liquidity- and rate-driven, the head of Ares Management Corp., said earlier on Wednesday.
When asked on an analyst call whether risks in private credit were systemic, JPMorgan Chase, CEO Jamie Dimon, widely seen as one of Wall Street’s most influential voices, said, “I don’t think it’s systemic.”
Speaking later at the same event, Lotfi Karoui, multi-asset strategist at the firm, said that even if defaults increased an economic downturn, the bar for this to pose a financial stability threat was high.
Current market conditions are different than the global financial crisis of 2008, when leverage and the mismatch between assets and liabilities amplified the shock, Karoui said.
“Private credit as an asset class is not a leveraged asset class,” he said, adding limits on redemptions helped avoid a fire sale of assets.
“The risk of a full-blown systemic shock because of rising financial distress among borrowers in direct lending seems very low to me.”