World's Largest Bond Manager: "No Risk of Financial Crisis from Private Credit"

"Investments in Direct Lending Require Caution"
ABF and CRE in Private Credit Deserve Closer Attention

As concerns grow in the private credit market, with investment management firm Blackstone restricting redemptions from its private credit funds, a recent opinion has emerged that the risks in private credit are not severe enough to trigger a financial crisis.

Lotfi Karoui, Multi-Asset Credit Strategist and Co-Head of Client Solutions and Analytics at PIMCO, stated at a media roundtable held at Conrad Seoul on the afternoon of the 8th that "while there are indeed some risks in the direct lending segment of the private credit market, they are nowhere near the level that could bring about a financial crisis like in 2008." PIMCO is the world’s largest fixed income investment manager.

Karoui pointed out that certain risks are being detected in the direct lending segment of private credit. First, he diagnosed that the share of software-related loans in the portfolios of U.S. Business Development Companies (BDCs) has surpassed 20% since 2022, which could be problematic. He explained that as the era of artificial intelligence (AI) approaches, the software sector is likely to face negative impacts, making the high exposure in that industry a cause for concern. Financially, he also noted an increase in the proportion of Payment-In-Kind (PIK) loans within BDC portfolios. PIK loans refer to loans where the borrowing company pays interest not in cash but in kind, such as stocks or bonds. Karoui added, "This is essentially a flashing yellow light, signaling that borrowers may fundamentally be unable to repay their debts, and warrants caution."

Rotfi Carui, PIMCO Multi-Asset Credit Strategist and Co-Head of Client Solutions and Analytics, shared insights at the 'PIMCO 2026 Media Briefing' held on the 8th at Conrad Seoul Hotel. PIMCO

However, he drew a clear line, emphasizing that this does not represent the kind of risk that could trigger a major crisis like the one in 2008. Karoui explained that private lending, which is a broader concept than direct lending, is not fundamentally an asset class that relies heavily on leverage. "The most critical factor that causes a financial crisis is excessive leverage. Considering this, such a factor does not exist in the private credit market," he said. He also pointed out that the vast majority of capital related to private lending is typically in structures with little or no liquidity mismatch and is locked up until maturity. Most of the capital collected for private credit funds is structured so that investors cannot freely withdraw their money for several years from the inception of the fund. This means that even if the market becomes volatile, there is an extremely low probability that a redemption crisis could occur within the fund or escalate into a systemic crisis.

Therefore, rather than removing private credit from portfolios altogether, he suggested reducing the proportion of direct lending and paying closer attention to asset-based finance (ABF) and commercial real estate (CRE) assets. Asset-based finance refers to lending based on the cash flow of assets rather than on corporate credit, and includes asset-based lending (ABL), where companies borrow money by using inventory or accounts receivable as collateral. According to Karoui, when investing in asset-based finance through private credit, the median excess spread for direct lending is 85 basis points (bp, with 1bp=0.01%) compared to investments through the public market (such as syndicated loans). In contrast, asset-based finance offers a spread of 210bp, and CRE offers 177bp, both higher than direct lending. He explained, "The commercial real estate market has gone through a significant downturn from 2022 to 2023, but as a new cycle begins, it is attractive to be a lender during a downturn. The market is less crowded than direct lending, and from a valuation perspective, it offers higher interest returns."

Lottepi Karui, PIMCO multi-asset credit strategist and co-head of client solutions and analytics, shared insights on the 8th at the 'PIMCO 2026 Media Briefing' held at Conrad Seoul Hotel. PIMCO

Additionally, Karoui emphasized the importance of active management in bond investing. He noted that while risk assets are historically overvalued, bond yields are at their highest levels in 20 years. "A high starting yield is positive for long-term total returns, and because index spreads are expensive, security selection and credit structure selection are more important than ever," he said. He added, "Right now is truly a critical time for active management." He also highlighted that increased capital expenditures (CAPEX) for AI are driving new structural demand in the credit market. Hyperscalers such as Google, Amazon, and Microsoft are expected to make capital expenditures worth $1.5 trillion (approximately 2,294.85 trillion won) over the next year and a half and invest more than $5 trillion cumulatively in AI over five years. "Since a significant portion of this investment is being financed through borrowing, it will also impact the credit market," he said. However, he explained that because these investments are debt-based, monetization must occur simultaneously with spending in order to minimize risk.

Regarding the U.S. Federal Reserve's interest rate hikes, he stated that they are not a direct factor restricting capital expenditures for AI. "Hyperscalers raise funds through long-term instruments rather than short-term policy rates, and this has already been reflected in pricing," he said. However, he anticipated that the stock market would be sensitive. He explained, "The stock market tends to punish companies for excessive capital spending when capital expenditures slow down, because it reacts negatively to such pullbacks."

This content was produced with the assistance of AI translation services.