No fear of 'cockroaches'? Private credit funds raise billions as investors look past warnings

Investor appetite for private credit remains strong, even as warnings mount over looser loan approval and risk-assessment practices, alongside rising pockets of borrower stress. Despite these concerns, major private credit funds are successfully raising billions, demonstrating sustained investor confidence.

The troubles at First Brands Group last September became a flashpoint for critics, highlighting how aggressive debt structures had built up quietly. This heightened fears, prompting JPMorgan CEO Jamie Dimon to warn that private credit risks were "hiding in plain sight," suggesting "cockroaches" would likely emerge once economic conditions deteriorate. Bridgewater founder Ray Dalio also cautioned of mounting stress in venture capital and private credit markets due to higher rates squeezing leveraged private assets.

However, capital continues to flow into private credit funds. KKR recently completed a $2.5 billion fundraise for its Asia Credit Opportunities Fund II. TPG closed over $6 billion for its third flagship Credit Solutions fund, surpassing its target, and Neuberger Berman secured $7.3 billion for its fifth private debt fund. Granite Asia also announced a first close of over $350 million for its pan-Asia strategy, underscoring solid regional demand.

JPMorgan, despite Dimon's earlier alarm, appears to have reassessed the market, noting that private credit demand is underpinned by structural forces. Goldman Sachs adds that private credit has grown into a multi-trillion-dollar market, now a core allocation for many institutional investors who once treated it as niche. The withdrawal of traditional banks from lending due to post-2008 regulatory constraints has also created a significant gap, which private credit firms are expertly filling.

Yet, signs of strain are becoming harder to ignore. Goldman Sachs warned that high interest rates have pushed up borrowing costs, with around 15% of borrowers no longer generating enough cash to service interest. Morningstar also highlighted worsening credit profiles among borrowers. While rate cuts might offer some relief, they are unlikely to fix underlying weaknesses.

Crucially, concerns about leverage and borrower stress are not evenly distributed. Ming Eng, managing director at Granite Asia, notes that Asia's private credit markets are far less saturated than in the U.S. or Europe. "We don't see the same kind of leverage or covenant erosion that people are worried about in the U.S.," Eng stated, emphasizing Asia's different stage of development with more conservative practices, less leverage, stronger covenants, and real operating stories behind the capital, rather than financial engineering.