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The Trump administration proposed a rule this week for retirement accounts that would make it easier for companies to offer their employees private credit investment options for their 401(k)s. Still, there are growing jitters about this market. The Indicator's Vito Emanuel talked to one retiree who cashed out of his private credit because of those jitters.
VITO EMANUEL, BYLINE: When Richard Cox retired back in 2024, his new broker encouraged him to invest $30,000 into this hot new place called private credit. But when he got a second opinion from his old broker?
RICHARD COX: There was this long silence on the phone and, like, an audible gasp.
EMANUEL: His old broker thought it was too risky for a guy like Richard. Private credit is a $3 trillion industry where powerful financial institutions pool vast sums of money and loan it out to businesses without much oversight because even though they act like banks, they're not banks. Richard invested in Blue Owl, and last summer, it offered him a share redemption. These firms do this routinely, and investors agreeing to one is finance speak for, I want my money back.
COX: I saw it and immediately decided, I want to do this.
EMANUEL: The catch is that investors are usually only able to redeem about 5% of the funds' total value per quarter. That's the trade-off they agree to for the promise of fat returns. Still, Richard's old broker had convinced him. He wanted out.
COX: I started hearing more and more stories about, private credit was looking more shaky, and people were concerned about it being stable.
EMANUEL: Shaky because investors got worried that private credit is way overexposed on some deals involving software and AI. Natasha Sarin, the president of the Budget Lab at Yale, says these firms are all tangled up with other players in the financial system. Big banks are in private credit. Insurers are too.
NATASHA SARIN: If they make bad investments, those insurance policy holders are on the hook when they get their life insurance paid out or get their home insurance paid out.
EMANUEL: And it can be incredibly difficult for investors to know what they've invested in. These funds don't have to disclose as much information as banks do. So to people like Richard, they are black boxes.
COX: I really didn't know how much risk Blue Owl was taking on. Therefore, I was not aware of how much risk I was taking on.
EMANUEL: When lots of people start asking for their money back, others follow suit, aka, a classic bank run. Natasha says that's what the built in 5% cap is for, at least in theory.
SARIN: But what you're starting to see now is, like, they're not sufficient to meet the types of run dynamics that invariably are here.
EMANUEL: Investors want 22% back from one of Blue Owl's funds. It said, best we can do is that 5%. The firm said in a shareholder letter yesterday that there's a big disconnect between what the public thinks about private credit and its actual portfolio performance, which is fine. And Natasha says this could all be the downswing of a normal credit cycle. Still, risky loans, little oversight, people racing for their money back - isn't this all sounding a bit like 2008? It's hard to tell. Remember, Natasha says, it's private credit.
SARIN: And so there isn't much transparency about what types of loans are being made, the terms of those loans, the types of exposures, the correlation between firms, between firms and banks.
EMANUEL: Richard says, he got almost all his money back. But then again, he asked long before the current rush. Vito Emanuel, NPR News. Transcript provided by NPR, Copyright NPR.
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