Private Credit Boom Hides Risks as Meta’s $29B Deal Raises Alarms
The collapse of First Brands Group, an auto parts supplier, has sparked concerns about the assumptions made regarding private credit's interest in asset-backed financing (ABF) and broader nonbank lending. Meanwhile, Meta Platforms' data center expansion, financed by private credit, raises questions about risk and transparency in this growing sector.
Meta's $29 billion financing deal with PE firm Blue Owl, led by private credit, is a prime example of this trend. Most of the financing is in debt, with the new debt not appearing on Meta's balance sheet, indicating concern about risk. This off-balance-sheet financing shifts default risk to investors.
Economics professor Viral Acharya warns that private credit defaults could pose systemic financial risk, with banks potentially bearing the brunt. The Bank for International Settlements shares these concerns, questioning whether expected returns match risk-taking and if lending standards may deteriorate. The lack of transparency in private credit, exacerbated by off-balance-sheet financing, can hide potential losses and underlying volatility, as noted by the European Central Bank.
ABF, which relies on a borrower's cash flow from assets rather than operations, presents new opportunities and risks. The latest category of ABF includes data centers and other infrastructure, driven by demand for AI applications and energy transition projects. However, these deals have yet to be tested by high rates or an economic downturn, having been done in a high-growth, low-interest-rate environment.
The expansion of private credit financing, particularly in ABF, raises critical questions about risk, transparency, and systemic stability. As investors seek higher yields and diversification, they must accurately estimate the residual value of such assets in case of defaults. Regulators and industry players must address these concerns to ensure the sustainability of this growing sector.
