Veteran investor Howard Marks has stated that he does not anticipate a broad problem in the private credit sector, although he warned that its rapid growth over the last 15 years might expose less robust lenders when market conditions change.
"There's not a systemic problem with private credit," Marks, who is the co-chairman and co-founder of Oaktree Capital, remarked during an appearance on CNBC's "Money Movers" aired Thursday.
Marks emphasizes that the risk arises from the swift expansion in direct lending, which has surged to a market size now surpassing $1 trillion, evolving significantly since its early stages around 2011.
His observations come amidst a downturn in sentiments toward direct lenders following the breakdown of auto-related borrowers such as Tricolor and First Brands. Concerns are particularly high over loans extended to software companies, as investors fret that advancements in artificial intelligence may disrupt these businesses.
"There's a saying in the banking business that the worst loans are made during the best of times. We've witnessed 17 years of good times. When the tide turns, or as Warren Buffett would put it, when the tide goes out, we'll discover whose credit analysis was astute, who made fewer software loans to the more robust companies," Marks commented.
The pressure is already affecting fund flows, with investors withdrawing nearly 8% from Blackstone Inc.'s main private credit fund in the latest quarter, signaling increasing caution among investors.
Marks notes that it's challenging to predict the precise timing of a market cycle turn.
"The things that affect the investment world so profoundly are the unforeseen ones," Marks said. "If they could be foreseen, anticipated, adjusted to, and reflected in prices, they wouldn't have that cataclysmic impact."