Jeffrey Gundlach Says Private Credit's 'Troubled Assets' Trade Is Full Of Contradictions

Jeffrey Gundlach cast doubt on the private credit industry's latest trading activity this week, questioning whether managers dumping "troubled assets" are really uncovering bargains — or simply reshuffling risk.

Responding to a Bloomberg story, the DoubleLine Capital CEO questioned how private credit managers are "increasingly trading in and out of loans to offload troubled assets and pursue bargains.”

He wrote: "Bloomberg: ‘Private credit managers are increasingly turning to trading in and out of loans to dump troubled assets and hunt for bargains.' But ‘troubled assets' have recently been touted as ‘the opportunity.' And what ‘bargains' are out there that are not ‘troubled?'"

Apollo Global (NYSE:APO) and KKR & Co. (NYSE:KKR) are two prime examples of companies that have been in the news recently for buying and selling loans related to private credit.

Earlier this month, Apollo executives held discussions regarding the potential sale of its $3 billion MidCap Financial Investment (MFIC) fund, a publicly listed business development company (BDC) focused on private credit. 

Apollo purchased MidCap in 2013 to boost its direct lending platform. The fund is expected to attract interest from rival BDCs, with a potential deal structure in which the acquirer offers shares of its own fund as consideration.

The fund’s default rate climbed to 5.3% in the first quarter, up from 3.9% at the end of December, while management has spent part of the year buying back shares as they traded well below net asset value.

KKR Losses, Software Slump Raise Pressure on PE

KKR recently committed $300 million of its own capital to a private credit fund it manages with Future Standard, as the strategy faces pressure from rising loan defaults, which contributed to a $560 million loss in the first quarter. 

The software-as-a-subscription model that powered a multi-decade bull market depended on two assumptions: growing seat counts and annual price increases. AI threatens both. Software multiples have been halved. For the first time in decades, price-to-earnings ratios for software stocks sit below the broader market multiple.

Private equity poured trillions into software companies between 2018 and 2022. Every single one of those deals is now underwater "and probably by a lot," Steve Eisman said.

Eisman is the fund manager who called the subprime crash before anyone wanted to hear it.

Blackstone, KKR and Carlyle Group (NYSE:CG) were all down 25% or more in Q1. Oaktree's Howard Marks warned that private credit underwriting standards were "too low and setting the scene for a correction.

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