This piece explains how private credit (lending outside banks) grew from niche to $1.5 trillion. Oaktree's co-CEO says it's a structural trend: every time regulators force banks to pull back, private credit steps in. But he warns the biggest risk is U.S. fiscal deficit—interest payments on national debt are over $1 trillion, and if rates go crazy, the economy could tank. One key deal: a $1.25 billion rescue loan to LATAM Airlines, structured by Oaktree's multiple teams, with good risk-adjusted returns.
In 2023, the global private credit market reached $2.1 trillion in assets and committed capital. The program examines the growth drivers, supply-demand dynamics, and regulatory implications of private credit from the perspective of Armen Panossian, co-CEO of Oaktree (which manages $192 billion in as
Armen Panossian (Co-CEO of Oaktree) analyzes, from the perspective of a firsthand participant managing $192 billion in assets, the logic of private credit "filling the gap" left by banks after the subprime crisis, evolving to the current stage of supply-demand mismatch and divergence among sub-strategies. The most powerful judgment of the entire piece: Private credit is not a single bubble, but a long-term process of continuous expansion across multiple sub-markets amid regulatory and market failures. The biggest risk currently is not credit quality, but the systemic crisis that could be triggered by the U.S. fiscal deficit and loss of control over interest rates.
Armen believes that every major expansion of private credit corresponds to a failure in public markets or regulation. From the inability of banks to meet SME financing needs in the late 1990s → giving rise to mezzanine financing; the post-2008 financial crisis Dodd-Frank forcing banks to shrink their balance sheets → private credit shifting to first-lien/unitranche loans; the 2022 SVB/Signature failures and Basel III Endgame rules → private credit moving into asset-backed finance. Data chain: The private credit market has grown from approximately $250 billion in 2007 to nearly $1.5 trillion today, roughly a 5-fold increase. Extrapolation: As long as regulation continues to compress bank balance sheets, private credit has structural room for growth, but it is important to note that each "filling" may face the next round of regulatory backlash.
Armen points out that while average monthly transaction volumes are down in the short term, the medium-to-long-term gap between the dry powder of private equity (PE) (trillions of dollars) and private credit's dry powder of only about $300 billion is enormous. With current base rates exceeding 5% and spreads around 500bp, the cost of first-lien loans is over 10%, significantly above PE fund expectations, leading to subdued LBO activity. Mechanism: Most private credit is floating-rate, so high rates actually attract capital into products like BDCs, creating an illusion of short-term capital oversupply; however, PE funds will need to refinance a large volume of maturing debt in the future, driving up demand for rescue lending. Falsification condition: If rates remain persistently high and PE funds are forced to deleverage, transaction volumes could stay low for an extended period, but loan demand will still shift toward restructuring and rescue.
Armen emphasizes that long-term advantages come from: ① Sourcing (industry specialization + PE relationships), ② Underwriting (avoiding landmines), ③ Structuring (protective covenants in complex transactions). The current market offers two types of opportunities simultaneously: conventional LBO (requiring sourcing and relationships) and tail-end stressed companies (leveraged transactions from the 2018-2021 low-rate period facing a 5% SOFR shock and upcoming maturities), the latter requiring rescue lending where structuring capability is key. Data: Oaktree has a large-scale private credit platform internally and boasts the longest distressed debt history on Wall Street (initiated in 1988), enabling cross-strategy collaboration (e.g., during COVID, working with the emerging markets team to complete a $1.25 billion rescue loan for LATAM Airlines). Unique perspective: Life sciences lending is a differentiated product "uncorrelated with GDP" – targeting pharmaceutical companies post-FDA approval or in commercial stage, with structures incorporating milestone mechanisms, offering risk and return profiles superior to traditional first-lien loans.
Armen believes that in opportunistic private credit (rescue lending), bigger is better because it provides "speed + certainty" in exchange for favorable terms. However, in performing loans, a single PE transaction typically does not exceed $1 billion, and PE firms tend to diversify among 3-4 lenders, so fund size has an upper limit. Key data: Currently, only 5-6 lenders in the market can independently write a $1 billion check, but PE firms are reluctant to let a single lender take the entire loan. Extrapolation: The scale advantage is more pronounced in rescue lending scenarios – for example, Oaktree's collaboration with Brookfield, leveraging its balance sheet and industry knowledge, can quickly complete large transactions.
Armen warns that U.S. Treasury interest payments have reached $1.1-1.2 trillion, and neither party has the will to cut deficits or raise taxes, potentially causing long-term rates to spiral out of control, thereby impacting asset prices and the economy. He judges that the Fed will not cut rates solely to lower inflation; it will only act during a recession or major shock. Extrapolation: If rates continue to rise from current levels, consumer and business confidence could collapse, triggering a recession. Falsification condition: If Congress passes a fiscal austerity or tax increase bill, or if inflation recedes leading to natural rate cuts, this risk could be mitigated.
| Target | Guest Attitude (Bullish/Risk Warning/Neutral) | Key Data |
|---|---|---|
| LATAM Airlines | Bullish (excellent risk-adjusted return) | US$1.25 billion debtor-in-possession (DIP) loan, jointly provided by multiple Oaktree strategies, including emerging markets and BDC |
1. Armen Panossian: "Every expansion of private credit is a failure of public markets or regulation—this is structural, not cyclical." — Bank exits from financial crises, Basel III's compression of banks, and the collapse of SVB have all been filled by private credit, and its market share does not retreat.
2. Armen Panossian: "The current market simultaneously has two parallel worlds: high interest rates suppressing conventional LBOs, and rescue demand from stressed tail-end companies." — The leverage ratios from the low-rate period of 2018-2021 have not been fully digested, and the maturity wave of 2024-2025 will generate a large number of rescue loans.
3. Armen Panossian: "Life sciences lending is a rare 'GDP-uncorrelated' asset in private credit, where structure design matters more than scale." — With commercial financing for already-approved drugs as a safety cushion, milestone mechanisms incentivize R&D, and risk is controlled before returns are exposed.
4. Armen Panossian: "In rescue lending, scale itself is a moat—no more than five counterparties can write a $700 million check." — Speed and certainty premiums bring terms advantages, while small funds can only participate in syndicated loans led by large funds, diluting returns.
5. Armen Panossian: "The secondary market for private credit barely exists; liquidity is determined by negotiation, often at unfavorable prices." — Unless it is a whole portfolio transfer (e.g., LP stakes), the sale of individual positions is restricted by PE sponsors, making transaction efficiency extremely low.
6. Armen Panossian: "The fiscal deficit is a bigger risk than credit quality—Treasury interest payments of $1.1 trillion, both parties have no will to address it, and rates could spiral out of control." — If long-term rates rise disorderly, it will trigger asset price repricing and an economic recession, and private credit will not be spared.
7. Armen Panossian: "Private credit valuations during COVID (only down 6-9 points) were more reasonable than public markets (down 18-20 points), because the latter's liquidity discount and sentiment effects were overestimated." — Ex post, private credit's fundamental recovery rate matched public markets, but with less volatility, suggesting criticism of its 'lack of transparency' is biased.
8. Armen Panossian: "The Oaktree and Brookfield partnership is '1+1>2'—Brookfield's industry knowledge in PE, infrastructure, and real estate, combined with Oaktree's credit capabilities, can create deals unimaginable in traditional credit." — Case: LATAM Airlines $1.25 billion loan, leveraging Oaktree's distressed restructuring, emerging markets, and operating credit teams, along with Brookfield's aviation industry knowledge.