One interesting knock on from the hyperscaler growth we've seen is that the Mag7 have issued so much debt that they are crowding out other companies who would otherwise have no trouble issuing debt.
The private equity and private credit crowd is one of these groups that are currently running into this issue.
There is no way a growing company($15M to $500M in yearly sales is the sweet spot for these private credit companies) can compete with Google on debt terms so they have to raise their rates to compete suddenly, not because of all rates rising but strictly because we've just seen a huge debt issuance from some very solid credit companies.
We haven't seen a shock like this in 20+ years I've followed the credit market where a small group of companies issue so much high quality debt in such a short period of time, note there is also a lot of less high quality debt issued in this same time:)
So much has been issued that credit funds have run out of appetite to acquire Lowe middle market debt at their current spreads. This is just the way markets work so no one is crying in the casino but it is a big shock to the credit markets.
heck there was concern that the US government may have trouble issuing 5-10Y debt at rates they are used to because of the amount of GOOG, META,etc debt that is available at better terms.
Its a wrinkle to the markets that no one really predicted as a knock on effect of AI's growth.
This is all the back drop for BDC(Business Development Companies) and other private credit issuers who normally loan money for 5-7 year terms.
Those cheap 2021 loans to these small private companies are now coming due into this market with the additional head wind that the largest single sector that issued debt was venture backed software companies, who now face the head winds of the macro factors described above and the additional factor of AI commoditizing alot of hte software that these companies are building.
Private credit and equity are going to have a rough couple of years.
Things to watch out for are lack of IPO's and exist from venture/PE backed companies and a proliferation of continuation funds that kick the can down the road.
On the plus side, its a great time to be a credit trader, but not necessarily a credit issuer:)
And it is bleeding over into equities as well. Between the SPCX and Anthropic IPO, and META approving an ATM offering, feels like we are seeing a really big strain on liquidity across the board.
Yes. And bear in mind than default create inflation naturally. When it's productive companies that default, the effect is increased. If PE can't roll their debt, i fear it will increase the dollar inflation really fast, which will have second order effect.
Also since idiots predicted hyperinflation 5-4 years ago and other idiots believed them, we're still before the 'bust' of precious metal prices (We're at the point where people invest in opening new gold/silver mines), which means it will be harded to edge against inflation than it used to be.
For a while (2018-2022) it was hot to buy up software companies that dominated a single niche and jack up prices. The bet was that since software is such a 0-1 business that they would have great moats and have strong pricing power. My father-in-law is blind and used to use JAWS until it got bought up by a private equity firm (Vispero) which tried to dominate the software accessibility market and jacked up the prices to annual subscriptions. He's a electrical engineer so he was comfortable switching to free software NVDA, but a lot of people paid up.
Now with LLM's that business model is in shambles and the finance side of it is less attractive with interest rates so high. I suspect that this is actually driving the software engineer hiring slow-down, because these companies were actually doing most of the employing of software engineers, much more than the big tech companies.
One interesting knock on from the hyperscaler growth we've seen is that the Mag7 have issued so much debt that they are crowding out other companies who would otherwise have no trouble issuing debt.
The private equity and private credit crowd is one of these groups that are currently running into this issue.
There is no way a growing company($15M to $500M in yearly sales is the sweet spot for these private credit companies) can compete with Google on debt terms so they have to raise their rates to compete suddenly, not because of all rates rising but strictly because we've just seen a huge debt issuance from some very solid credit companies.
We haven't seen a shock like this in 20+ years I've followed the credit market where a small group of companies issue so much high quality debt in such a short period of time, note there is also a lot of less high quality debt issued in this same time:)
So much has been issued that credit funds have run out of appetite to acquire Lowe middle market debt at their current spreads. This is just the way markets work so no one is crying in the casino but it is a big shock to the credit markets.
heck there was concern that the US government may have trouble issuing 5-10Y debt at rates they are used to because of the amount of GOOG, META,etc debt that is available at better terms.
Its a wrinkle to the markets that no one really predicted as a knock on effect of AI's growth.
This is all the back drop for BDC(Business Development Companies) and other private credit issuers who normally loan money for 5-7 year terms.
Those cheap 2021 loans to these small private companies are now coming due into this market with the additional head wind that the largest single sector that issued debt was venture backed software companies, who now face the head winds of the macro factors described above and the additional factor of AI commoditizing alot of hte software that these companies are building.
Private credit and equity are going to have a rough couple of years.
Things to watch out for are lack of IPO's and exist from venture/PE backed companies and a proliferation of continuation funds that kick the can down the road.
On the plus side, its a great time to be a credit trader, but not necessarily a credit issuer:)
And it is bleeding over into equities as well. Between the SPCX and Anthropic IPO, and META approving an ATM offering, feels like we are seeing a really big strain on liquidity across the board.
Yes. And bear in mind than default create inflation naturally. When it's productive companies that default, the effect is increased. If PE can't roll their debt, i fear it will increase the dollar inflation really fast, which will have second order effect.
Also since idiots predicted hyperinflation 5-4 years ago and other idiots believed them, we're still before the 'bust' of precious metal prices (We're at the point where people invest in opening new gold/silver mines), which means it will be harded to edge against inflation than it used to be.
For a while (2018-2022) it was hot to buy up software companies that dominated a single niche and jack up prices. The bet was that since software is such a 0-1 business that they would have great moats and have strong pricing power. My father-in-law is blind and used to use JAWS until it got bought up by a private equity firm (Vispero) which tried to dominate the software accessibility market and jacked up the prices to annual subscriptions. He's a electrical engineer so he was comfortable switching to free software NVDA, but a lot of people paid up.
Now with LLM's that business model is in shambles and the finance side of it is less attractive with interest rates so high. I suspect that this is actually driving the software engineer hiring slow-down, because these companies were actually doing most of the employing of software engineers, much more than the big tech companies.
As I understand it, there's also a 'write-down wall' looming over many companies and assets in private equity portfolios.
Those holdings are carried in the books at valuations that arguably could be justified in the past but are no longer realistic.
Private equity firms are basically sitting on them, unable to sell them or list them at current valuations.
https://archive.is/lokbc
central bank introduced ZIRP what kills USA long term
it is like watching fall of Rome but on TV
sadly rest of the world will be impacted by this too and a lot