As war in the Middle East escalates, the financial fallout extends beyond energy price and supply-chain disruptions. Vulnerabilities in the US$3 trillion-plus global private-credit market are accelerating, driving investors to safe havens, while global finance undergoes a rapid transformation. China, the world’s largest creditor to developing countries, will feel the repercussions.
This is the first real stress test confronting the vast lending empire. A meltdown was inevitable; only the timing and specific catalysts remained uncertain. Wars leave deep and lasting scars on economies; isolated financial risks quickly cascade into acute systemic stress.
In this case, long-established risks are multiplying: excessive leverage, strapped borrowers, liquidity mismatches and misplaced confidence. These hazards accumulated during periods of easy money, equity outperformance, light regulation and relative geopolitical stability. Panglossian assumptions about markets’ sanity were a factor too.
The unravelling is well under way, building on the sell-off from early February for such private-credit clients as software and data providers, whose core products now face fierce competition from Anthropic’s newly launched AI tools for managing workflows. Before then, starting in September, the largest private-market players – Apollo, Blackstone, Ares, KKR and Blue Owl – have seen over US$265 billion in market capitalisation wiped out.
That has tied their hands to rescue deals poised to become distressed if the war drags on. Meanwhile, investors are challenging whether lenders’ valuations are priced to market reality.
Bankruptcies of private-credit borrowers like subprime auto lender Tricolor Holdings and auto parts company First Brands show the scale, breadth and velocity of problems. The US private-credit default rate continues to rise, according to Fitch Ratings. Pacific Investment Management Co, managing over US$2 trillion in assets, recently warned of rising strains after years of sloppy underwriting. Record redemption requests are forcing firms to cap outflows.
