Mohamed El-Erian thinks a recent development in private credit contains echoes of the financial crisis.
In a LinkedIn post on Thursday, the former PIMCO CEO flagged a Financial Times report that said private credit giant Blue Owl Capital is permanently halting withdrawals in its Capital Corporation II fund, a private debt fund that's open to retail investors.
That move could be seen as a parallel to what happened in the months leading up to the last financial crisis, El-Erian said. In August 2007, BNP Paribas froze three of its funds due to a decline in liquidity in the securitization market, which made it impossible to "value certain assets fairly," it said at the time.
Nearly two decades after the Great Financial Crisis, BNP Paribas's move is regarded by some as the start of the downturn that led to the collapse of Lehman Brothers the following year.
"Is this a 'canary-in-the-coalmine' moment, similar to August 2007?" El-Erian wrote. "There's also the 'elephant in the room' question regarding much larger system risks (nowhere near the magnitude of those which fueled the 2008 Global Financial Crisis, but a significant — and necessary — valuation hit is looming for specific assets)," he added.
Huge volumes of investment capital have poured into the private market in recent years. Assets under management in private credit investments rose to $2.2 trillion last year, an 86% increase from levels five years ago, according to data from the analytics firm Preqin.
But investments in the space carry more risk amid lower liquidity and less transparency. Private firms, for instance, are not required to publicly disclose their earnings and financials, and private assets tend to be more illiquid than investments in public firms or public credit funds.
El-Erian said he believed there was a risk the "investing phenomenon" in the private markets had already "gone too far overall."
The investing approach that some firms in the space take also seems subject to the "'markets for lemons' risk," he added, referring to a situation where firms offering high-quality goods exit the market, as they're unwilling to accept the price buyers will pay to account for the risk of purchasing a low-quality good, or a lemon.
Other Wall Street forecasters have warned of potential issues in private credit following the high-profile collapse of Tricolor Holdings and First Brands last year.
Following those blowups, JPMorgan boss Jamie Dimon now-famously quipped that more "cockroaches" are likely lurking in private credit.
Lloyd Blankfein, the former Goldman Sachs CEO who ran the bank during the GFC, also said he believed credit markets could be the source of the US economy's next big problem.
