I agree @Randy

To be honest, as a concept, I really like private credit. Unlike banks, they can only lend out money they actually have -- there's no ex nihilo money creation, so it's far more ethical in that sense.

Especially if the investors providing the credit are duration-matched to the loans, meaning the capital is locked in for the life of the loan. It’s how banking more broadly should be structured, in my humble opinion.

If a PC lender does stupid stuff, the loan goes bad and they take a loss. If it’s big enough or widespread enough, the investors in that PC firm lose their money. This sounds harsh, but that’s exactly how it should be. There’s no such thing as a risk-free return, and the genuine threat of loss is what keeps the industry honest. (Or would if there werent so many moral hazards.)

Want a 10% yield via a PC fund? Go for it. But you always need to ask "where does the yield come from?" and understand the risks. If you don't, well... play stupid games, win stupid prizes.

The real danger is when the "liquidity mismatch" creeps in. This is where funds promise investors they can get their money out quickly (eg quarterly redemptions) even though the underlying loans are locked up for years. When trust evaporates, as you mentioned you risk a bank run, of sorts, and funds tend to freeze redemptions. Nasty stuff, but welcome to the world of credit.

Prudent lenders have nothing to worry about.

It only becomes a systemic problem if financial intermediaries, like pension funds looking after the savings of ordinary people, make big allocations while remaining oblivious to these real risks. There’s a massive principal-agent problem here. If losses are incurred on behalf of savers, they should absolutely seek recompense in the courts, and negligence should be thoroughly prosecuted.

But what usually happens when the losses are big enough is that the government steps in to bail everyone out with borrowed money. If those borrowings can't be absorbed by the markets, we end up printing a bunch of money. Every time.

It’s always pitched as an "emergency," but the bottom line is that it saves the very scumbags who made reckless decisions with other people’s money and socialises the losses across all of society. The people who had nothing to do with it cop a very real indirect cost through inflation and its usually the poor who cop it worst because they don’t have assets to shelter in.

All of which is to say, private credit as an idea is perfectly good. It’s only when the issues become systemic, and the "moral hazard" of a bailout is assumed, that it becomes a concern. As you say, that might be bubbling away under the hood right now.

If (or when) there is another big credit shock, my hope is we let the investors wear the loss. No matter how much we pretend otherwise, there’s just no way to wish a loss away. We can only spread the pain to make it feel less severe (at least to those who should have worn it all)

If bailouts have to happen, then bail out the "mum and dad" investors who were victims of principal imprudence, and let the bad actors and their institutions face the music.

Never going to happen, of course.

Hi @Strawman

Apologies for the slow reply.

Enjoyed your reply – and wanted to respond on a few interesting points you raised:

To be honest, as a concept, I really like private credit. Unlike banks, they can only lend out money they actually have -- there's no ex nihilo money creation, so it's far more ethical in that sense.  

Agree technically safer in a downturn than the fractional lending system of the mainstream banks. However at the end of the day they are still lending money of someone else’s – rather than the bank’s proprietary money. Some of the latest pop-up Private Credit shops amy also not care like the banks about being around in another 10-20 years.

Especially if the investors providing the credit are duration-matched to the loans, meaning the capital is locked in for the life of the loan. It’s how banking more broadly should be structured, in my humble opinion.

Absolutely agree with your sentiment – alas I don’t believe duration-matching is the status quo expectation of most investors in the sector. Rather most probably believe (and the glossy fund marketing likely reaffirms) that they’re able to withdraw their money anytime they like. We all know from previous times of elevated stress in financial markets this often turns out to be an illusion - and the managers of certain investment fund products can & will freeze investor redemptions in order to avoid a run on the fund & realise their investments in an orderly fashion when it makes sense, and without risking triggering negative feedback loops of MTM losses.

If a PC lender does stupid stuff, the loan goes bad and they take a loss. If it’s big enough or widespread enough, the investors in that PC firm lose their money. This sounds harsh, but that’s exactly how it should be. There’s no such thing as a risk-free return, and the genuine threat of loss is what keeps the industry honest. (Or would if there werent so many moral hazards.)

Want a 10% yield via a PC fund? Go for it. But you always need to ask "where does the yield come from?" and understand the risks. If you don't, well... play stupid games, win stupid prizes.

Absolutely agree with your sentiments under a well-regulated sector – however I believe the Private Credit industry is currently very lightly regulated, which combined with so many new investors in the sector for the first time – I suspect there will be many new and unsophisticated investors investing money without really understanding the potential risks, or getting any really accurate reading (or say on) the counterparties they will be lending to. Reputation risk for the intermediaries isn’t always enough – greed will usually see certain cowboys push the risk envelope well beyond where it should be, blinded by maximising their own short-term financial interests.

The real danger is when the "liquidity mismatch" creeps in. This is where funds promise investors they can get their money out quickly (eg quarterly redemptions) even though the underlying loans are locked up for years. When trust evaporates, as you mentioned you risk a bank run, of sorts, and funds tend to freeze redemptions. Nasty stuff, but welcome to the world of credit.

Prudent lenders have nothing to worry about.

It only becomes a systemic problem if financial intermediaries, like pension funds looking after the savings of ordinary people, make big allocations while remaining oblivious to these real risks. There’s a massive principal-agent problem here. If losses are incurred on behalf of savers, they should absolutely seek recompense in the courts, and negligence should be thoroughly prosecuted.

Agreed – albeit in modern Western society we are just so damn soft on white collar crime / negligence – and the principle of justice & recourse via the courts if often just that – a principle, which in reality takes many years to enforce at great cost – with the perpetrators often coming out ahead (net-net) with the ill-gotten gains from their misdemeanours outweighing any penalties enforced.

But what usually happens when the losses are big enough is that the government steps in to bail everyone out with borrowed money. If those borrowings can't be absorbed by the markets, we end up printing a bunch of money. Every time.

It’s always pitched as an "emergency," but the bottom line is that it saves the very scumbags who made reckless decisions with other people’s money and socialises the losses across all of society. The people who had nothing to do with it cop a very real indirect cost through inflation and its usually the poor who cop it worst because they don’t have assets to shelter in.

Agreed – the perils of Moral Hazard were on full display in the GFC – when so many architects of the carnage who should have been wiped out were bailed out by tax-payers. Main Street couldn’t afford Wall Street’s bankruptcy – sadly pragmatism meant the embrace of the lesser of two evils.

All of which is to say, private credit as an idea is perfectly good. It’s only when the issues become systemic, and the "moral hazard" of a bailout is assumed, that it becomes a concern. As you say, that might be bubbling away under the hood right now.

This is my real fear – given the sheer magnitude of the growth in Private Credit over the past 2-3 years, and the breadth of the investors enticed in - it is highly likely that in certain pockets of the market lending standards have become far more lax than they should be – sewing the seeds for the risk of future troubles.

If (or when) there is another big credit shock, my hope is we let the investors wear the loss. No matter how much we pretend otherwise, there’s just no way to wish a loss away. We can only spread the pain to make it feel less severe (at least to those who should have worn it all)

If bailouts have to happen, then bail out the "mum and dad" investors who were victims of principal imprudence, and let the bad actors and their institutions face the music.

Never going to happen, of course.

Amen!

While we’re on the topic – a very interesting article published in this afternoon’s AFR from highly respected industry veteran Howard Marks (of Oaktree Capital fame) who specialised in distressed debt and bonds.

He speaks to some of the very same fears I hold what potentially lies under the opaque surface of the Private Credit sector, especially given its absolutely phenomenal growth of the past few years (has grown by 10X to over US$2 trillion dollars!!).

He also has some very interesting observations around AI and its looming impacts on society, but also on its likely limitations (and with respect to current SaaSpocalypse).

Thought provoking…

*******************************************************

Oaktree Capital Management’s Howard Marks calls time on private credit as lending standards slip

Analysis | Jonathan Shapiro

One of the world’s debt champions is calling time on private credit

Oaktree’s Howard Marks says returns are ordinary, and lending standards are sliding as the fear of investing is replaced by the fear of missing out.

Jonathan Shapiro Senior reporter

Howard Marks didn’t quite say it. But he’s effectively declared the golden age of private credit well and truly over.

Marks, the folksy Wall Street legend who cut his teeth investing in distressed loans and bonds, loves a good adage and his description of the state of private credit was summed up with the old phrase: What the wise man does in the beginning, the fool does at the end.

The retreat of the banks from corporate lending after the global financial crisis meant the $US200 billion ($281 billion) industry of lenders could demand high interest rates and safety in the form of favourable loan terms.

Those attractive conditions lured ever more investors and private credit has grown by 10 times to $US2 trillion. Now Marks believes this has crowded out the good returns.

“The onrush of more investors and capital has turned private credit from something special to something ordinary,” he says. “The competition to do deals has driven down the specialness.”

Marks co-founded Oaktree Capital Management in 1995. The firm’s credentials are in corporate debt, particularly distressed bonds and loans, and he’s seen his fair share of booms and busts in credit markets.

His broader concern is that in the sector’s rush to deploy and raise more capital, lending standards might have lapsed.

“In go-go eras, discipline declines and worse deals get done. The fear of losing money is replaced by the fear of missing out,” Marks says.

There’s more evidence that private credit investors and, to be frank, the old school banking sector are letting their standards slip. That’s led to two episodic waves that have rocked the confidence of private credit investors.

The first was in September with the collapse of auto lenders Tricolor and First Brands. Now the market is worried about the existential fears of software businesses after the release of Anthropic’s Claude Code.

Given the large exposures to software by private credit funds, investors are growing anxious about the risk of future loan wipe-outs. The markets recovered from the first shock, but is still reeling from the second sentiment crusher.

Another issue in private credit – and the broader private asset management industry – is the proliferation of open-ended or evergreen funds which invest in hard-to-sell private assets but allow investors to put more cash in, and take it out every month or quarter. These structures are facing an intense stress test. Fast-growing private credit fund Blue Owl elected to halt redemptions on a $US1.7 billion open-ended private credit fund.

Overnight, Blackstone said investors pulled $US3.7 billion from its $US82 billion private credit evergreen fund known as BCRED.

On this issue, Marks says there are two ways to go broke. The first is to borrow money to amplify gains but face a potential wipe-out.

“The other way to go broke is to buy private, illiquid assets in vehicles that promise liquidity to the investors, and then have a run on the bank,” he says.

Marks is no longer overseeing investment at Oaktree but his insights on markets and investing are coveted by clients. He is a prolific writer of memos in which he outlines his thoughts. Over the weekend, he published his latest missive, in which he explained how his experimentation with Claude, the artificial intelligence platform developed by American giant Anthropic, has turned him from an AI sceptic to a believer.

But he says he finds the potential for job losses to be “deeply concerning for society” because the pace of change will exceed our ability to adapt.

Block’s decision late last Friday to lay-off 4000 of its 10,000 staff was a “canary in the coal mine”, he says. Those laid-off workers will take six to 12 months to find a new job. “The Silicon Valley types, who are merely pro-technology and maybe pro-making money, say things like ‘the good news, you are not going to have to work’. I don’t see that.”

Work, he says, is about more than income. We all need a reason to get out of the house and meet challenges. Mass displacement is hugely worrying to societal welfare.

He’s not convinced, as others are, that new jobs we haven’t imagined will emerge to replace those that are made redundant by AI.

“I am not enough of an optimist to count on that happening and not enough of a futurist to know where those jobs are going to come from.”

What does give Marks some hope is that AI cannot do everything.

Since AI relies on recognising established patterns of the past, it cannot really make sense ideas that are brand new.

The lack of emotion, may make AI better, or worse, at managing capital.

“AI probably does not have an innate sense of caution. It doesn’t have money at risk, so it doesn’t have sweaty palms,” he says.

Marks, however, is never going to get AI to write his memos, and says he resisted the temptation to outsource his job to Claude.

“I like the act of putting words on paper. I don’t want to turn it over to someone else.”

@Randy great post, Mark has certainly given us something to think about.

Howard Marks is right about one thing: the pace of AI change is faster than society can absorb. But where I think he’s working off an older mental model is in assuming that AI is limited to pattern‑recognition and can’t make sense of genuinely new ideas. That was true five years ago. It’s not true today.

Modern AI systems already generate new molecules, new materials, new code architectures, new designs, and new strategies that surprise their creators. These aren’t “past patterns” — they’re new territory. The comfort line that “AI can’t handle novelty” has already expired.

But the bigger shift isn’t even about cognition. It’s about what happens when AI stops being trapped inside a screen and starts acting in the physical world.

Most people still imagine AI as a chatbot or a coding assistant. The real disruption comes when you pair it with general‑purpose robotic manipulators — not humanoids, not sci‑fi androids, but something far more practical.

Imagine a structure closer to an octopus than a human. Eight arms, each with human‑level dexterity. Fingertips that can grip, sense, turn, cut, drill, screw, weld, or hold tension. A machine that doesn’t get tired, doesn’t fall off ladders, doesn’t need smoko, and doesn’t complain about tight spaces.

Call it an Octorobot. You heard it here first!!!

An Octorobot could lift roofing sheets into place, hold onto rafters while fastening, pin insulation down while screwing the sheet, and work safely at heights. It could crawl into tight spaces, dig trenches in awkward terrain, assemble frames, run wiring, lay plumbing, and handle repetitive or dangerous tasks with zero WHS risk. Scale it down to 20 kilograms or up to two tonnes and you’ve got a family of machines that can build almost anything.

Give a team of Octorobots a set of plans and they could build an entire house. Not in theory — in practice. The components already exist. We’re just waiting for someone to assemble them.

This is why the “new jobs will appear” debate feels increasingly misplaced. Historically, new industries created new roles because execution required people. AI‑native industries don’t. Once thinking becomes cheap and physical capability becomes abundant, the economic logic that required millions of workers simply dissolves.

The question isn’t “What new jobs will replace the old ones?”

The question is “What happens when both cognitive and physical labour become cheap, scalable, and on‑demand?”

That’s the part we’re not ready for.

As always, welcome debate!

100% the Octorobots are on the way.

i wonder if on a collective level, we’re caring enough to use it to make a better world.

clearly as a collective we don’t give a shit about each other enough at the moment as the vast gap between the haves and have nots increases……

there’s a lot of people in this country who don’t have assets (have nots), and with the advent of ai octorobots, a lot of them then won’t have jobs….

hopefully democracy can do its thing and they can create a voting block that changes the paradigms of politics in this country to giving a shit about each other.

@Foxlowe , I just want to know which company is going to build Octorobot so I can buy shares now. Sadly, odds are it will be China, not a western company where I can invest. Maybe FBR might utilise AI and manage to build it first and that company might finally be worth something. I won't hold my breath.

Anyone on SM in Robotics? Maybe we can seed our own Octorobot Industries Pty Ltd.

@tomsmithidg I like how you're thinking!

There's probably enough talent on SM to pull this off, the biggest problem is coordinating it. FBR seems to have its hands full with what they are doing now.

Sadly I think China will end up with doing something in this space, or India, there's some smart cookies over there, we'll then end up paying ten times for it.