Glenn August: No Bubble in Private Credit, But Risks Exist

Private Credit Market Outlook

• 🚫 Glenn August, founder and CEO of Oak Hill Advisors, states he does not see a bubble in private credit.
• ⚠️ While acknowledging isolated instances of company bankruptcies and idiosyncratic credit risk, he believes the overall backdrop of the economy, equity markets, and inflation remains reasonably solid.

Identifying Market Risks

• 🪳 August references Jamie Dimon's 'cockroach' analogy, suggesting that while there may be individual company issues, it doesn't indicate a systemic problem.
• 📈 Current market data shows less than 5% of leveraged loans and less than 10% of high-yield bonds trading below 80 or 90, indicating specific, not widespread, risks.
• 💡 Identified risks include impacts from tariffs, the potential obsolescence of some companies due to AI, and higher interest rates affecting costs and the subprime consumer.

Credit Market vs. Equity Market

• 📊 Unlike the equity market where a few large companies dominate, the credit market comprises hundreds of companies, each with unique stories.
• 🔍 This diversity presents good opportunities for credit pickers who have decades of experience.

Systemic Risk and Recessions

• 📉 To have widespread distress, August believes a recession and forced sellers are necessary, neither of which he sees on the horizon.
• 🏦 The credit markets have evolved to reduce forced selling, with less mark-to-market leverage, a strong bank loan market, and bilateral negotiations in private credit.

Private Equity and Private Credit Allocation

• 🏦 Acknowledging the Bank of America fund manager survey indicating private equity and private credit as potential sources of systemic risk, August takes the opposing view.
• 💰 He suggests that returns in private equity will likely be lower due to increased competition and higher interest costs, leading investors to allocate more capital from private equity to private credit.

The Shadow Banking System

• 🧐 August believes fears surrounding the opaque nature of the shadow banking system are overblown.
• 💰 Oak Hill Advisors, for example, focuses on senior direct lending with reasonable leverage and significant equity cushions, indicating a more conservative approach than historical banking crises.
• 📈 Long-term investors like sovereign wealth funds and pension plans hold this capital, allowing them to manage illiquidity premiums.
• ✅ August emphasizes that while credit and liquidity risks exist, they are compensated by higher yields, and his firm continuously monitors its portfolio daily.