The chief investment officer of one of the world’s largest charitable foundations has issued a stark warning about the private credit sector, highlighting concerns over relaxed lending standards and excessive capital inflow. Nick Moakes of the £37.6bn Wellcome Trust believes substantial losses could materialise if the US economy enters a recession.
Moakes emphasised that “accidents waiting to happen” characterise the private credit landscape, with potential ramifications for high-profile investors of systemic importance. His cautionary stance aligns with recent warnings from rating agency KBRA, which projects an increase in default rates from 1.9% to 3% by 2025.
The rapid expansion of private credit, filling the void left by traditional banks post-2008 financial crisis, has drawn scrutiny from prominent financial figures, including JPMorgan Chase CEO Jamie Dimon. While Moakes acknowledges that private credit presents lower systemic risks than bank financing due to reduced leverage levels, he points to concerning developments in lending practices.
The market’s popularity has triggered an unprecedented capital influx, leading to diminished lending standards in certain segments. Private equity managers have gained access to substantial borrowing with minimal oversight, creating potentially precarious situations in an economic downturn.
A particularly worrying trend involves the growing influence of large, diversified US-listed alternative investment managers. These organisations, operating across private equity, private credit, hedge funds, and real estate, have created what Moakes describes as a “circular” ecosystem of inter-fund lending.
The Wellcome Trust, which allocates approximately one-third of its portfolio to private equity, achieved a 15.6% return in US dollar terms during the 12 months to September 30. However, sterling returns were limited to 5.2% due to currency strength, highlighting the complex nature of investment performance in current market conditions.
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