What's Going on in Private Credit?
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Howard Marks' episode of The Memo explores the evolution and current state of private credit, tracing its development from the 1970s to today. He outlines key milestones—such as the rise of high-yield bonds, leveraged buyouts, syndicated loans, and the explosion of direct lending—highlighting how each innovation expanded the credit universe. Marks emphasizes that while private credit, particularly direct lending, has grown dramatically, especially in financing software companies, it now faces headwinds from AI-driven disruption, rising interest rates, and overvaluation. He warns that the recent surge in popularity has led to complacency, lowered underwriting standards, and inflated expectations, creating conditions ripe for a correction. Drawing parallels to past financial bubbles—especially the 1929 crash—Marks stresses that investor behavior, driven by envy, optimism, and the illusion of safety, often leads to overextension. He concludes with Oaktree’s disciplined approach: limited exposure to direct lending, conservative underwriting, and a focus on institutional investors, positioning them to benefit from the current market correction. The episode serves as a cautionary tale about the dangers of herd mentality and the enduring importance of humility in investing.
Private credit has grown rapidly due to innovation in financing, but direct lending’s recent popularity has led to overvaluation and weakened underwriting standards.
AI disruption in the software sector is causing market-wide skepticism, even for fundamentally sound companies, highlighting sentiment-driven volatility over credit fundamentals.
Leverage, low interest rates, and lack of liquidity in private credit vehicles amplify risk during downturns, especially when investors can't exit easily.
Historical patterns—like the 1929 crash and 1980s high-yield bubble—repeat themselves: new financial innovations attract enthusiasm, then disillusionment when flaws emerge.
Discipline, conservative structuring, and selective exposure are key to long-term success; Oaktree’s limited direct lending footprint has protected it from recent turbulence.
…and 3 more takeaways available in PodZeus
The Evolution of Credit: From Bonds to Private Lending
“The investment world I first encountered in the summer of 1968, consisting exclusively of stocks and high-grade bonds, seems quaint and provincial in retrospect given the developments just listed.”
The Rise and Risks of Direct Lending
“The massive amounts of capital that have been available for investment in direct lending created a gold rush mentality.”
AI and the Software Debt Crisis
“Artificial intelligence has significantly reduced the need for humans to write code... the market for software company stocks and debt didn't react much in 2024-25. Then, in November 2025, Anthropic released a powerful new model for coding...”
The Psychology of Investment Bubbles
“For that which a man wishes, that he will believe. Most people dream of getting rich in the next big thing.”
Oaktree’s Discipline in a Volatile Market
Marks details Oaktree’s conservative approach to private credit: limited direct lending exposure, high underwriting standards, and a focus on institutional investors. He argues this discipline positions them to thrive in the current correction.
“The enduring lesson is not that booms can be prevented or that busts can be fully averted. It is that we need to remember how easily we forget.”
“The antidote to irrational exuberance is not regulation by itself, nor skepticism, but humility.”
“Artificial intelligence has significantly reduced the need for humans to write code... the market for software company stocks and debt didn't react much in 2024-25. Then, in November 2025, Anthropic released a powerful new model for coding...”
Host
Howard Marks
person
Oaktree Capital Management
organization
1929 Crash
other
Warren Buffett
person
Global Financial Crisis
other
BDCs
organization
Fed Funds Rate
other
S&P 500
other
Andrew Ross Sorkin
person
Michael Milken
person
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