Jeffrey Gundlach, the billionaire founder and CEO of DoubleLine Capital, warned on Monday of an area he’s concerned about, and it’s not a bubble related to artificial intelligence. “The next big crisis in the financial markets, it’s going to be private credit,” the so-called “Bond King” said on Bloomberg’s Odd Lots podcast. Gundlach said the sector “has the same trappings as subprime mortgage repackaging had back in 2006,” arguing the issues underpinning private credit are severe.
Gundlach explained that, in recent years, the “garbage lending” that plagued public markets before the Great Recession has shifted into private markets. Private credit has become increasingly popular and is now over-allocated to by large asset pools. The core problem, according to Gundlach, lies in the fundamental lack of transparency and liquidity.
A major element of the private credit appeal is the Sharpe ratio argument, which suggests investors get comparable returns to public markets but with much lower volatility. However, Gundlach contends this is an illusion achieved by failing to market assets to market, similar to how a five-year CD appears stable even if its true value declines as interest rates rise. He provided an anecdote about private equity firms marking positions down slightly when the S&P 500 corrects, only to mark them back up when the market recovers, thereby underreporting volatility.
