Private credit - How bad is this going to get?
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Hello, welcome to the Australian's Money Puzzle podcast. I'm James Kirby. Welcome aboard, everybody. This is a show I've been looking forward to. I'll tell you why. I am as curious as you are, I imagine, about what is happening around the world and in Australia in relation to private credit. Private credit, this is this business which has been promising investors it would replace banks, that it would give us an alternative stream of income that would be a useful alternative lucrative for years. And advisors, of course, telling us that, you know, if you're not on board, you're going to miss out. Well, you may have already heard there's quite dramatic issues, problems emerging with private credit. It's captured most perfectly in the 50% share price slide of a group called Blue Owl, the giant US private wealth empire.
Now, We are reporting in The Australian that some groups, Coda Capital, one of the top private wealth managers, has $220 million linked with Blue Owl. One of the super funds, NGS Super, sort of a mid-sized industry super fund, has another $200 million in interests connected with the fund. Now, look, I'm an active investor, folks, so no way do I wish to close you off from private credit, but equally, I don't want you to be led astray. My guest today is Andy Darroch of Independent Wealth Advice. He's been on the show before. He's particularly across and articulate on the issue of private credit, something perhaps of a thorn in their side sometimes. How are you, Andy? Very well. Thanks, James. Lovely to be here.
Good to have you on the show again. I think most of our listeners will probably have some idea and probably have aspired to get involved in private credit if they haven't already. We know there is, we're just starting to realise basically that a lot of the wealth managers and big names in Australia in wealth managers are including people in the very top ranks of the Barron's advisor list, have made arrangements and have basically been putting clients or suggesting to them or recommending to them in various ways that they go into private credit. This was largely because so much money had seemed to be made by the big super funds and future fund in private credit in recent times. But the problem perhaps, and we'll explore this in the show, is the old adage, if you can see the bandwagon,
What are the current issues facing private credit?
Might be too late, but just explain. Maybe it isn't too late. Tell us about private credit. Why did it suddenly become so popular?
So private credit was really born out of filling a gap left post the GFC. So what you saw was banks retreated from certain kinds of lending post the GFC. And this has led to, I suppose, what you call an explosion in private credit. So broadly speaking, it's about $3 trillion, give or take, globally. And in Australia, it's $200 billion alone. So again, another thing that really fueled its rise, I think, is three major factors. First of all, it's got a very symbiotic relationship with private equity. Secondly, as well, I think it coincided with a period of low rates. So you had a lot of investors on their fixed income side of the portfolio not getting returns that they had hoped for. And private credit seemed to offer an ability to get a high rate of return on what was broadly classed as fixed income.
The last thing I'll just quickly mention is these firms are extremely profitable. And so there's been an intense desire from the firms that manage these kinds of assets to get as widely distributed as possible.
And these gigantic names, BlackRock, Blackstone, Apollo, and of course, Blue Owl being this sort of, well, perhaps for a while, the sort of golden child of private equity. It now has all sorts of problems, and I suppose it encapsulates their problems of the sector with a 50% folks share price slide in the US. I just want to ask you, Andy, broadly to the everyday investor, not completely across how all this works, what is wrong at Blue Owl, and why do you think its shares have halved?
So Blue Hour is kind of the poster bird for things that aren't going perfectly in private credit.
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