DealBook: Private equity’s private credit problem

Good morning. Andrew here. We’re going deep on the private credit freakout — and why there might be reason to be nervous about another corner of finance.

We’re also focused on oil prices’ bounce-back and what that means for how the Fed thinks about interest rate cuts. More below. (Was this newsletter forwarded to you? Sign up here.)

Many on Wall Street worry that lenders like Blue Owl Capital aren’t the only potential casualties of a private credit bust. Brendan McDermid/Reuters

Private credit isn’t the only pain point

Hand-wringing over private credit has become a parlor game on Wall Street, with major lenders seeing their stocks hit and popular funds suffering significant withdrawals, now including at a fund run by Morgan Stanley. The unease about the $1.7 trillion industry has investors and regulators asking: What happens when private credit breaks?

It’s the right question. But many on Wall Street are quietly reminding one another about who else is at risk.

Private credit lenders won’t lose money before private equity firms do. That’s how the capital stack of companies work: Equity is the first in line for losses. Before lenders like Apollo Global Management, Blue Owl Capital or Ares Management lose a dollar on their loans if a portfolio company fails, the private equity owners will already have been hit.

Consider: In 2024, the roughly $4 billion in equity that Vista Equity Partners had in the education software company Pluralsight was essentially reduced to zero when it handed the company over — to private credit lenders.

Who should we be watching? Perhaps firms like Vista and Thoma Bravo, which helped lead what became a decade-long deal boom for enterprise software companies. Those businesses were loaded up with debt, as investors bet that recurring revenue and sticky customers would make the leverage manageable.

That worked for years, because of rising valuations, cheap money and a seemingly insatiable appetite for the software-as-a-service business model. Until now. Here’s why:

Private credit lenders have meaningful protections, including seniority in the capital structure and loan covenants. (Of note: Thoma Bravo has reportedly started making moves to limit creditor power plays at its investments.)

That said, private equity executives say their portfolios are healthy. Robert Smith, Vista’s founder, wrote to investors last month that a vast majority of companies it owns aren’t being battered by A.I.-powered competitors. “We feel this volatility is being driven primarily by sentiment and uncertainty, not fundamental performance,” he wrote.

And debt investors can have less tolerance for losses than equity counterparts, Gustavo Schwed, a professor of finance at the N.Y.U. Stern School of Business noted. Debt can trade at a discount, while the equity wouldn’t necessarily be impaired right away, he told DealBook.

Note that JPMorgan Chase has reportedly marked down the value of some loans in private credit borrowers’ portfolios, according to The Financial Times.

Those involved have an incentive to stick their heads in the sand. Private equity firms want to avoid panicking their investors. Private credit funds want to avoid taking write-downs. Portfolio companies don’t want to renegotiate their loans.

And most quietly hope that rates ease and exits reopen, allaying fears before they become a crisis.

HERE’S WHAT’S HAPPENING

Washington State lawmakers pass a “millionaires’ tax.” The legislation will impose a 9.9 percent annual tax on personal earnings above $1 million, which is expected to hit about 20,000 households; Gov. Bob Ferguson, a Democrat, is expected to sign it into law. The bill imposes Washington State’s first income tax, but critics argue it will drive wealthy taxpayers out of the state; Jeff Bezos and Howard Schultz are among those who have left.

Anthropic is reportedly discussing a joint venture with private equity giants. The artificial intelligence start-up is negotiating with a group including Blackstone — run by Steve Schwarzman, who’s close to President Trump — and Hellman & Friedman about creating a business to sell its Claude software to the firms’ portfolio companies, The Information reports. The talks suggest that big companies are still willing to work with Anthropic despite its fight with the Pentagon.

President Trump is said to have ordered a renewed defense of law firm punishments. The Justice Department’s move to appeal a court ruling that overturned executive orders that imposed sanctions on four law firms, after initially dropping that plan, came at Trump’s behest, according to The Wall Street Journal. Several White House officials reportedly wanted to drop the matter after a string of defeats in court.

Steve Tisch plans to cede his stake in the New York Giants. Tisch will transfer his ownership interest in the N.F.L. team to his children, after more details of his relationship with Jeffrey Epstein emerged. (He’s still expected to be involved in the team’s operations.) Separately, the chair of the House Oversight Committee suggested that more people who made “significant transactions” with Epstein could be called to testify before lawmakers.

René Redzepi steps down from Noma after accusations of prior abuse. The celebrity chef’s move, along with an apology posted on Instagram, came after The Times reported on accusations about workplace abuse at his restaurant. Protesters have demonstrated outside a Noma pop-up restaurant in Los Angeles, where a meal costs $1,500 a head; sponsors including American Express have pulled out of the event.

A vessel burning. Strikes on oil tankers have added to jitters to the global market. Associated Press

Oil’s wild ride continues

Investors are bracing for another gut-wrenching day. Oil prices are climbing, and stocks and bonds are selling off amid what the International Energy Agency called the biggest-ever disruption in the oil market.

Brent crude, the international benchmark, jumped above $100 per barrel overnight, before drifting slightly lower. This is despite governments around the world agreeing to release a record 400 million barrels from strategic reserves — though that’s roughly equivalent to less than three weeks’ worth of supply that normally transits through the Strait of Hormuz.

The wild swings have traders grappling with how high oil will climb. One worst-case projection: $164.

“I think it’s going to be volatile,” Helima Croft, the global head of commodity strategy at RBC Capital Markets, told DealBook’s Brian O’Keefe. “The key question is, when does the market believe that this is a longer-term outage and not a short-duration event?”

The latest:

Tapping into the emergency reserves has prompted the market to recalculate how long the war might last. Though it was intended to ease the pressure on prices, the size of the stockpile release signals that the war is a bigger problem than traders might have anticipated. “So it can cut both ways,” Croft said.

Potential U.S. Navy escorts for Hormuz traffic remains a big question. Though Trump has floated the idea, the U.S. has been turning down requests to offer escorts, The Wall Street Journal reports.

“We keep hearing that it’s a complex operation, and right now the naval assets are not there to both conduct the military operations and do an escort service,” Croft told DealBook.

“A.I. is not very popular in the U.S. right now.”

— Sam Altman, the C.E.O. of OpenAI. At a BlackRock conference in Washington he cited rising electricity bills — which critics have blamed on A.I. data centers — and layoffs attributed to businesses’ adoption of A.I. A recent NBC News poll showed that 57 percent of American voters believed that the risks of A.I. outweighed its benefits.

Tariff refunds, by the numbers

The Trump administration is not backing down on tariffs, despite a defeat last month at the Supreme Court. Yesterday, the White House announced an investigation into unfair trading practices by 16 of the largest U.S. trading partners, a potential first step to introducing punishing new measures.

The administration faces a different tariff deadline today. Its lawyers are set to update a federal court on its timeline for issuing refunds for its invalidated tariffs, which were justified using a 1977 law known as IEEPA. President Trump has been clear that he opposes returning the money, and the administration is expected to suggest that the process will be so difficult it could take years.

Here’s a by-the-numbers look at the complexity of issuing refunds:

There may be a shortcut. Brandon Lord, the executive director of the trade programs directorate at U.S. Customs and Border Protection, which processes and refunds the tariffs, said the agency could trim four million hours from the processing time once it completes a computer systems upgrade.

More than one trade expert told The Times, however, that Lord’s projected timeline — 45 days — was “aspirational.”

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Andrew Ross Sorkin, Founder/Editor-at-Large, New York @andrewrsorkin

Brian O’Keefe, Managing Editor, New York @brianbokeefe

Bernhard Warner, Senior Editor, Rome @BernhardWarner

Sarah Kessler, Deputy Editor, Chicago @sarahfkessler

Michael J. de la Merced, Reporter, London @m_delamerced

Niko Gallogly, Reporter, New York @nikogallogly

Lauren Hirsch, Reporter, New York @LaurenSHirsch

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