Private credit is facing a reckoning, says CIO of NY Life

The private credit market is set to face a “reckoning moment” and a period of difficulty it hasn’t seen since 2008 amid risks of inflation and recession, according to Jae Yoon, chief investment officer of New York Life Investment Management.

Yoon, who is also responsible for developing the $727 billion money manager’s operations in Asia, made the comments on a panel at the SuperReturn Asia conference in Singapore on Tuesday.

While fiscal stimulus and booming markets had protected players who would’ve been otherwise wiped out, Yoon warned time was potentially running out. “The last time you had a major dispersion between well-managed versus unnecessary risk-takers was 2008,” he said. “We’re about to come to a reckoning moment.”

Yoon’s comments come as private credit faces a cocktail of risks, from an outsized Federal Reserve interest rate cut to excessive competition leading to slashed margins. Patrick Dennis, co-deputy managing partner at Davidson Kempner Capital Management, warned last week that private credit defaults are the biggest market risk the company’s trying to evaluate.

“The recovery rate is coming down, there are too many players and too much money chasing deals and covenants are getting lighter and lighter,” Yoon said, referring to a loosening of restrictions placed on borrowers. “The last 15 years should not be repeated in the next five to 10 years.”

While Yoon emphasized that the risk was not of an “Armageddon” level meltdown, he said the flood of capital had led to too much debt concentration.

“In private credit you have to be extremely careful how you segregate, diversify,” he said, adding that even allocating separate pools of funding to two different players may not give real diversification.