Wary private credit investors are asking more questions about 'cockroaches'

Private credit investors are wary and now ask more questions about potential “cockroaches” ever since two high-profile bankruptcies in the US raised questions about the health of the $1.7 trillion industry, the chief executive of Golub Capital has said.

Private lending has faced intense scrutiny in recent months, with top US financiers raising concerns about potential erosion in lending standards. However, Lawrence Golub said the industry, especially the secured direct lending segment of the market, is being unfairly targeted.

“We talk a lot more about cockroaches than we used to. Of course, potential investors, seeing all this rowdy press, it's their responsibility to ask about it,” Mr Golub told The National on the sidelines of Abu Dhabi Finance week.

“They should [ask] and I don't mind. I think it's good. I think it helped me in conversations with investors and has given me the opportunity to talk to them about the importance of protection costs and protecting collateral.”

The collapse of automotive parts company First Brands Group and subprime lender Tricolor Holdings in the US has brought the broader private credit industry under the microscope, after JP Morgan Chase chief executive Jamie Dimon said, “When you see one cockroach, there are probably more.”

The failure of two firms shocked Wall Street and Mr Dimon's comments triggered a global debate on systemic risks in the market, which is expected to grow to $2.7 trillion by 2029, according to Fitch Ratings estimates.

The exponential growth of private credit since the 2008 financial crisis has also raised the question of whether private lending is adding new layers of complexity to the financial system and the broader economy.

In a report last month, Moody’s said that private credit providers are increasingly blurring the lines between syndicated and direct lending markets through their co-lending arrangements with conventional banks. This, the ratings agency said, is opening doors for contagion.

Lawrence Golub, chief executive of Golub Capital. Antonie Robertson/The National

Mr Dimon walked back his “cockroach” comment in an interview with The National in Riyadh in October saying it was “blown out of proportion”.

“There have been credit issues in the wider market and a couple of those were frauds,” Mr Dimon said at the time. “I would never blame that on private credit.”

Systemic risk

Opinions, however, remain divided and the IMF's managing director Kristalina Georgieva in October said she is worried about the risks building up in non-bank lending markets.

The fund is concerned as “what we have seen is a very significant shift of financing from the banking se