The private credit segment in the United States is estimated at US$3 trillion, according to Morgan Stanley. This industry, which is larger than the GDP of 97% of countries, lacks official data. And this absence of measurement stems from a market characteristic.

“Out there, when people talk about private credit , they mean truly private. This market, which has grown significantly, doesn't go through the regulator. It's an over-the-counter market, without registration or supervision,” says Alexandre Muller , partner and manager responsible for private credit funds at JGP , to NeoFeed .

In recent months, American private credit has been questioned precisely because of its opacity. Asset managers such as Blue Owl, KKR, Apollo, and Blackstone have witnessed a rush of redemption requests from retail investors frightened by their billion-dollar investments in technology companies threatened by the rise of artificial intelligence.

Since these asset managers buy over-the-counter and place these private securities in funds listed on the stock exchange, there's a restriction that only 5% of the vehicle's assets can be redeemed per quarter. And when the volume of requests exceeds this limit, the investor moves on to the next window.

The instrument they use is the Business Development Companies (BDC), which at first glance seems controversial, but plays a relevant role in financing companies in the growth phase.

“The BDC itself is not a strange instrument. It is interesting, and Brazil should look at it to solve the problem of tax-exempt [funds]. The BDC is like a real estate fund, a vehicle listed on the stock exchange, which can only finance small and medium-sized companies in the US. It's the right way to resolve this confusion we have with the government constantly wanting to interfere with LCI, LCA, etc.,” says Muller.

The major concern, however, is that this problem will spread from Wall Street into a systemic crisis in the financial sector, especially since American banks have lent approximately $300 billion to private credit funds, according to Moody's.

This caused the KBW Nasdaq Bank index, which tracks the performance of major banks and financial institutions with shares on American stock exchanges, to accumulate a drop of just over 16% this year, at its worst point in mid-March. But, by Thursday, April 9th, the indicator had recovered and practically returned to stability (a drop of -0.34%).

The JGP specialist sees no risk of a new subprime crisis. “Certainly not. First, because there isn't the leverage component that existed in subprime mortgages. Second, it's not something that affects the banks' balance sheets. There's not the slightest chance of any kind of bailout with taxpayer money. It's a situation in a specific asset class.”

In this interview, Muller analyzes private credit in the American market, explains the differences compared to this industry in Brazil, and what he expects from the elections for local assets.

Below are the main excerpts:

What is the differentiating factor of these private credit funds that are being heavily questioned?
They have two merits. They are better at customizing capital solutions at the point of sale for the company. It's more or less the same here in Brazil: if you have a farm and you go to a large bank saying you want to implement a reforestation project and finance part of it with carbon credits, you probably won't get it. There, it's financing for machinery, discounting receivables, or working capital. This carbon credit business isn't readily available. Abroad, these funds customize these capital solutions more at the point of sale.

Give an example.
Blackstone and Blue Owl recently launched a fund solely to finance the expansion of Meta's data centers. Long-term money tied to the asset.

Why are they different from banks?
There is a regulatory benefit vis-à-vis banks, the ability to access long-term liabilities, and fundraising scale in a low-interest-rate environment. It was the fastest-growing asset class in the United States within the asset management industry over the last 10-15 years.

Who are the investors?
As this group grew, many launched shares on the stock exchange at very high multiples, implying the premise that they would continue to grow significantly. To maintain this growth rate, they moved away from more traditional channels [insurance companies and institutional investors] and began to expand into the retail market. And to expand into the retail market, they used different instruments, especially BDCs (Bank Deposit Certificates).

"The BDC itself is not a strange instrument. It is interesting, and Brazil should look into resolving this problem of tax-exempt [funds]."

What makes a Business Development Company different?
The BDC itself isn't a strange instrument. It's interesting, and Brazil should look into it to resolve this problem of tax-exempt funds. The BDC is like a real estate fund, a vehicle listed on the stock exchange, but it can only finance small and medium-sized businesses in the US. It's the right way to resolve this confusion we have with the government constantly wanting to interfere with LCI and LCA.

In other words, there is a specific instrument for the exempt party.
The solution would be to do what was done in the US. Everyone is protected – agriculture, infrastructure, real estate – but if the economic group raising this debt has net assets exceeding R$1 billion, it cannot benefit. The benefit goes to the small business owner who needs it, as the United States did with BDCs (Bank Deposit Certificates). They have a tax incentive for retail investors, but restricted to this segment of small and medium-sized enterprises.

And where is the controversy?
They used a structure called "semi-liquid vehicles." BDC has shares that trade on the stock exchange, like a unit in a real estate fund. If the investor needs to sell, they go there and sell on the stock exchange, everything is fine. But, at the same time, they can request redemption of the vehicle, limited, almost always, to 5% of the vehicle's assets per quarter. It's a kind of hybrid business: you can request redemption and also trade on the stock exchange.

And what are the fears regarding this industry?
There's a great fear that these companies will be disrupted by artificial intelligence. The fear is default in this segment. Here's the dynamic: the fund's account is marked close to 100, the secondary market is marked close to 70, and the client has the right to request redemption from their equity account limited to 5% per quarter. Because of this price difference, everyone is requesting redemption. But they can only pay 5% per quarter. However, the origin of this problem is also the lack of valuation because the extent of the shortfall is unknown.

Why don't they mark these instruments to market?
There is no such thing as a trustee or administrator like in real estate funds in Brazil. Here, if a credit fund runs into problems, the administrator has to step in and revalue that asset, bringing its net asset value closer to the fair value of the portfolio. This doesn't happen abroad; they don't do this valuation independently like we do here. The result is that today, the shares of these credit vehicles are trading at roughly 70% of their face value in the secondary market.

If these funds financed the software industry, how big is the hole?
The most aggressive number that came out and generated debate was from UBS, estimating that default rates in American private credit could reach 15% lifetime . Afterwards, many people countered, saying that the number is poorly calculated, poorly substantiated, and that it will be much lower. Most have been talking about numbers around 7% to 8% lifetime default rates in these BDCs, considering that the average exposure for software-as-a-service companies – the most exposed sector – is around 20%. If they lose 40% of that exposure due to defaults, that would give an average of 8%.

It seems tall.
At the same time, the trading price of BDCs today is around 70% of their net asset value. This already reflects a 30% loss, against an expectation of 7% to 8% – or 15% for the most extreme person who kicked and got hit. That's more or less what's happening.

"There is no leverage component like there was in subprime mortgages. There is absolutely no chance of any kind of bailout using taxpayer money. It's a situation within a specific asset class. "

Could this cause a disaster like the subprime mortgage crisis?
Certainly not, because there isn't the leverage component that existed in subprime mortgages. Second, it's not something that affects the banks' balance sheets. The regulator is watching and saying: "figure it out, it has nothing to do with me. There will be 7% default, there will be 15% default, it's part of the game. You created this vehicle, you have to take responsibility." It doesn't involve depositors' money, it has no influence on the banking market. There's not the slightest chance of any kind of bailout with taxpayer money. It's a situation in a specific asset class.

Did the asset managers have to adapt?
Yes, mainly through the creation of vertically integrated models. Asset management in the past consisted largely of investment professionals who waited for opportunities in the public market and raised money fund by fund. There have been two major changes. First, the vertical integration of origination platforms. Today, these private credit companies originate a large portion of their investment opportunities.

And the second change?
This has happened in some firms, with the vertical integration of asset management and insurance. It's the model of Apollo, Blue Owl, and KKR. JP Morgan also has these insurance units coupled with its asset management unit. These companies then have a fundraising channel via the sale of annuities abroad, which is a kind of defined benefit plan. This has become a fundraising channel different from the traditional method of launching funds.

Anything similar here?
The market is also starting to look at this in Brazil. We've created origination platforms. At JGP, we have seven proprietary origination platforms. We don't have an insurance company yet, but it's something that needs to be considered, looking at market trends.

What is the difference between private credit in the US and in Brazil?
Outside of Brazil, when they talk about private credit, they mean truly private. Here, we say private credit, but practically our entire private credit universe is regulated. There, they have two markets. One market that goes through the regulator, which they call public credit – an offer of a bond , for example. And you have this enormous market that has grown a lot, which is private credit, which doesn't go through the regulator. It's directly with the vehicle, it's over the counter, without registration, without supervision.

What is your view on private credit in Brazil?
I even thought we would have a more peaceful end to the cycle than we are having. Until December, for better or worse, things were more controlled. We were already entering the new year discussing whether the Selic rate would start to fall in June, January, or March. People were predicting an initial cut of 50 basis points [bps, equivalent to 0.5 percentage points]. And some were even reaching 400 bps [4 percentage points], showing that the Selic rate could reach 11%. I thought we would already have some relief in credit channels due to the monetary policy cycle.

"What the market is pricing in today is zero chance of any more structural reforms through a change in economic policy. If a new agenda actually emerges from some alternative candidate, that could be an upside."

What has changed since the beginning of the year?
First, there was the war, which triggered a readjustment of risk premiums across all financial assets – stocks, yield curves, NTN (Brazilian Treasury bond) curves, private credit both abroad and here. This is normal; it's a globally impactful event transmitted through oil prices. This was something new. The second issue was that sentiment worsened due to the repercussions of major restructuring cases, particularly Raízen – the largest out-of-court restructuring in Brazilian history.

But Raízen's problem was well known.
Even though everyone already knew in December that Raízen had a complex problem to solve, the event itself resonated with people's feelings. And then came slightly smaller cases, like Pão de Açúcar and Oncoclínicas. All cases where the complexity was already somewhat known in December. Nobody was extremely shocked by any of them, but the feeling worsened because of how it resonated. And we have to recognize that this feeling is justified. You can't create a parallel reality in your head. People are more sensitive.

What does this mean from now on?
The market is more cautious. The late cycle will be more difficult than we had anticipated. People are positioning themselves in higher-quality credit, seeking more protection, at a time when sentiment has worsened and uncertainty caused by the war has increased.

Is there something you're evaluating that the market isn't talking about?
For me, the election is an upside . What the market is pricing in today is zero chance of any more structural reforms through a change in economic policy. You look at the future interest rate curve, there's nothing there. You have liquidity around 2.5% to 3% for this channel for another four years. If a new agenda really comes from some alternative candidate, that could be an upside .