Bloomberg News
This article was written by Sonali Basak. It appeared first on the Bloomberg Terminal.
Investors must navigate risks. From political tensions to persistent inflation, uncertainties are brewing in the global economy. At the same time, asset managers are increasingly looking to private markets. Private credit alone has boomed into a roughly $1.6 trillion industry, with questions looming around how to value the assets and whether the industry might be growing too fast.
To get a view of the next big risks to watch out for in the next five to 10 years, we spoke to three industry veterans. Their comments have been edited for length and clarity.
Jonathan Lewinsohn
Co-founder of Diameter Capital Partners LP, a manager in public markets that has branched into private loans
The world is teeming with misinformation. It’s deep fakes. It’s AI. At the same time as this is happening, political identity is paramount. Wall Street is supposed to be an island of objectivity in all of this. If earnings are good, the stocks go up. But Wall Street is more and more adopting private equity, venture capital, private credit. Those things aren’t marked [to market prices]. The next big risk is in this sea of subjectivity. Will investors really know what they own?
On Wall Street, as investors, we often rely on surveys of what people are saying in order to have a sense of leading indicators. The people will feel it first. Yet during the election, it was Republicans who thought inflation was a problem, and Democrats didn’t. Now, magically in January of 2025, it’s flipped, and Democrats think inflation is a problem, and Republicans don’t.
Wall Street is just investors and CEOs who are, in their normal lives, impacted by the same phenomena as everybody else. We all know that from 2022 to 2024, everyone was obsessed with a recession. It made a lot of sense. We all learned in school that if there’s high inflation, interest rates go up, and therefore you have a higher probability of the economy slowing. But over time, the hard data was doing OK—the economy was performing well. The soft data, particularly CEO surveys, didn’t catch up with it.
When I would meet with investment bankers, I asked them the question, “What are the CEOs saying?” They all said, “CEOs tell me that their companies are doing great, but they’re expecting a recession.” We know from a Harvard Business School study that most CEOs are Republicans. At that moment in time, more Republicans thought the economy was going badly than Democrats did.
If private assets are going to eat the world, as they say, you come to a world that is increasingly an echo chamber. Here is an anecdote that can help: In 2022 it was a tough year for credit markets. But I was reading a primer on private credit from, I think, one of the big private credit shops. In big letters it said, “2022 is the year that private credit has arrived.” Every other credit asset class was down, and private credit was up. It was only up because it wasn’t marked to markets. When we know human beings are having trouble with objectivity, marking to markets is an incredible antidote to that.
If our job is to be smart and fast in making investments, it’s getting harder to do that. You have to spend a decent amount of time figuring out, “Hey, is this true? Is this a real video? Does this person know what they’re talking about?” And there’s a cost to that.
Purnima Puri
Governing partner at HPS Investment Partners, a private-credit-focused manager of $150 billion
The big risk is growth, and within growth, there’s potentially a labor shortage. The replacement rate for populations is 2.1 children per woman. In the US the fertility rate is just under 1.7. In other developed countries, it’s drifted down to around 1.3 or 1.4. An aging population coupled with declining fertility rates makes for a shrinking workforce.
Growth is population growth plus productivity, and population growth is organic growth from fertility plus immigration. So, depending on where we land on immigration, this could be an underappreciated risk in the market, in terms of its contribution to how the economy’s grown.
We’ve been running at high productivity growth since the end of 2023. The numbers are close to 2%. That’s more than most other countries. But McKinsey & Co. said that between 2012 and 2023, productivity growth in the US was just under 1%. [Productivity measures economic output per hour worked.] We’re going in the right direction there, but a lot of other variables could upset the mix. Let’s pretend that you get fertility from 1.7 to 2.1 today. It’s going to take 20 years to have an impact.
People are talking about a mosaic of solutions—there’s not just one lever. There are lots of countries that have put incentives in place for fertility and for birth. There are lots of countries that have put incentives in place for childhood education and reskilling. There are lots of countries that are trying to move the retirement age. If we can’t grow, you’re going to have a much more inflated debt to GDP and federal deficit, and that’s not good for the economy. You’ve got a lot of burden that’s being put on another generation, and that’s going to create a lot of social strife.
If you look back over the last several years, we’ve had eight million immigrants come into this country. That’s helped growth. And that’s deflationary. There’s been such a sea change on migration and attitudes toward it. I read recently that 55% of Americans want immigration to be curtailed dramatically. This was compared to about 41% a year ago. I think a lot of people are assuming we’re going to be productive enough.
Joshua Easterly
Co-president, co-chief investing officer and co-founding partner at Sixth Street, which runs investments in equity, credit and real estate
On private credit, an asset class has grown—and there’s a good reason why it has grown. The thing that worries me the most is that we don’t deliver on the promise, because we haven’t developed talent, and talent hasn’t caught up with the asset class.
If you take a step back, people like the asset class because it’s a better model than traditional banking. There’s not an asset-liability mismatch. The challenge is it takes an investor mindset. The banking model was a distribution model. It was the moving business. Banks originated the asset and sold it. In private credit, it’s not only an origination business, it’s a storage business. Your skills need to be broader and more focused on risk management.
A banker thinks about the average outcome. An investor thinks, “What’s the distribution of outcomes?” How big is that left tail of bad outcomes, because that’s what’s really going to impact our investor. Private credit is about loss avoidance. In private equity, you only have to be right about 70% of the time. If you make three times your money on 70% of your investments and lose all your capital on the other 30%, it’s probably a top-quartile fund. In public equities, you’ve got to be right a little over 50% of the time. In venture capital, you’ve got to be right about 20% of the time. Your winners pay for your losers. But in credit, you’ve got to be right about 99% of the time. That takes a different mentality. And so that’s what keeps me up at night. I’m afraid that the asset class has grown to where there is capital flowing to the lowest common denominator, where the culture and the talent are not prepared to deliver on the asset class returns.
Don’t get me down the rabbit hole about valuation marking. Just because an asset class doesn’t trade doesn’t mean the value doesn’t move. With private credit, the challenge is to create liquidity when you make a mistake. There aren’t a lot of people following the asset that can provide you liquidity. You own all your mistakes. You have to make sure [your employees] understand the weight of that. The decisions they make have an impact on teachers, on firemen, on police officers, on savers.