I say this to say... who knows? I guess if you shuffle deck chairs fast enough everything works out fine (?)
Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI
Think pre-IPO buy-in. Investors in the know and other well connected institutional investors get first dibs on all of the good ones. The bad ones are pawned off to retail investors. It's no different with private credit and private equity. These sorts of deals have good ones and bad ones - the good ones will have been taken by the time it flows down to retail.
So unlike money-market funds, these private-credit funds can gate withdrawals and extend and pretend by turning cash coupons into PIKs. So I don't actually see credit concerns directly driving liquidity issues for the banks that didn't hold the risk on their balance sheet glares Germanically.
Instead, I think the contagion risk is psychological. Which is an unsatisfying answer. But if there are massive losses on e.g. DBIP and DB USA halts withdrawals, then the 2% stock loss Morgan Stanley suffered when it capped withdrawals [1] could become a bigger issue.
[1] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...
Or never invoked. It's a safety feature for the fund and, arguably, systemic stability.
People eventually want to spend their money.
What is the risk, probability of actualizing the risk, and the outcome of actualized risk?
The ticktock ticktock routine reads like baseless fearmongering to me.
For example, take First Brands, a multi-billion-dollar company which filed for bankruptcy last year. First Brands had pledged the same assets as collateral for loans from multiple private-credit funds. Those loans were being carried at a fantasy NAV of 100 cents per dollar, until suddenly they were not. Did none of these lenders submit UCC filings so other lenders could check which assets had already been pledged as collateral? Did none of these lenders ever check to see which assets had already been pledged? Did all these lenders make loans based on blind trust?
Failing to check and verify that assets have not been pledged as collateral to other lenders is an amateur mistake. It's reckless, really. The equivalent in home-mortgage lending would for a mortgage lender never even bothering to check that a homeowner isn't getting multiple first-lien mortgages simultaneously on the same home, then forgetting to put the first lien on the property title.
My take is that for many private credit funds, NAVs are basically fantasy.
Oh boy, if this is the case, oh boy.
Lessons not learned indeed.
I resorted to the mortgage-lending analogy so others could quickly grok what multi-pledging means.