Business pension insurance has become "savior" of private equity credit? The risk is surging, and the explosion is only a matter of time.

Some investors believe that private credit is a "storm in a teapot," while others believe that it may trigger a new financial crisis - both views may be valid depending on the time dimension. Since the middle of last year, the private lending niche that once flourished due to enterprises seeking customized fast debt financing and investors chasing high returns has shown signs of distress. This year, investors have accelerated their withdrawals from Business Development Companies (BDCs) and other private credit funds, fearing increased competition, decreasing returns, and the possibility that artificial intelligence may disrupt software companies they fund. Blue Owl Capital (OWL.US) became the latest BDC to report historic withdrawal requests this week and legally restrict redemptions, while Apollo Global, Blackstone (BX.US), KKR (KKR.US), as well as Morgan Stanley, JPMorgan, Goldman Sachs Group, Inc., and other bank private credit departments have taken similar measures. Most institutions emphasize that this is an industry adjustment period rather than a crisis, but multiple pressures have emerged: while BDCs' borrowing costs from banks are rising, their historical double-digit returns on private loans continue to shrink. Artificial Intelligence Risk Private credit emerged after the 2008 financial crisis as an option for private equity buyouts of medium-sized enterprises to replace bank financing - providing simpler terms and higher returns through long-term loans. Although BDCs do not publicly disclose specific risk exposure, valuations, and loss data due to the private nature of their transactions, they collectively hold over $500 billion in private assets. The Alternative Investment Management Association estimates the private credit industry to be worth $3.5 trillion, enough to impact the financial markets. This year, the stock prices of some listed BDCs have plummeted, trading at a discount of about 20% to net assets; shares of American Software, Inc. Class A, closely linked to private credit, have also dropped by one-fifth. Rory Dowie, portfolio manager of London-based Marlborough Asset Management, has reduced holdings of some asset management companies and even sold shares of Swiss private equity firm Partners Group - its chairman Steffen Meister suggested last month that due to economic turbulence driven by artificial intelligence, private credit default rates could double in the coming years. Dowie stated that the symbiotic relationship between the public market and private market in the field of artificial intelligence financing could have a snowball effect. "It's hard to say which link will break first... this will become a self-fulfilling prophecy and could ultimately lead to larger, more systemic problems." Javier Corominas, Global Chief Macro Strategist at Oxford Economics Research Institute, stated in a report this week that an estimated 25% to 35% of private credit investment portfolios are at risk of disruption by artificial intelligence, indicating that the market is in the early stages of a rolling crisis in private credit. "We are still in the early stages of discovering the problem, which may not happen tomorrow, but perhaps in three or six months," said Alberto Gallo, Chief Investment Officer at London's Andromeda Capital Management. "You're holding a box with 100 companies inside, but you know that 10 of them are dead cats. Before you open the box, they're still alive, which underlines the current situation." Insurance Backing? Corominas pointed out that banks have moderate control over the total amount of loans to BDCs, but more concerning is the private credit held by US life insurance and pension companies - holdings in this category have more than doubled in the past decade. Private credit accounts for about 35% of US insurance company total investments, approaching one-quarter of assets for UK insurance companies. More importantly, insurance companies associated with private equity hold about $1 trillion in assets through such relationships, shifting disproportionate private credit loss risks onto US pension funds and retail depositors who purchase their life insurance and pensions. "If private credit losses erode the solvency of insurance companies, the resulting contagion effects will not be similar to the bank run in 2008, but will manifest as a slow, progressive erosion of retirement protection - more difficult to detect in real time, and even harder to reverse," Corominas wrote. Gallo of Andromeda stated that he would not dismiss the private credit predicament as a non-systemic risk simply by comparing it to the subprime crisis of 2008 (driven by the housing leverage expansion propelled by so-called collateralized debt obligations). "It is a different nature of thing, with different channels of transmission," he said, referring to how insurance companies push up leverage in the later stages of private credit. He indicated that in the subprime crisis, contagion spread through banks, with assets being reasonably valued; but this time, contagion spreads through insurance companies, which do not value assets at market prices, and default risks are greater. "Regulatory authorities are always dealing with the previous crisis, but here the situation is quite the opposite, it is a mirror image of the last crisis," he stated.