A 50-year sketch of private credit market

From an interview/podcast - Howard Marks - (a rough sketch, only for directional understanding)

“When I started, it was actually the beginning. In 1976, I think it was impossible for a company without an investment-grade rating to issue a bond.   

And in 77, 78 is when it became possible. A few people had the idea that regardless of the rating, if the bond paid enough interest to compensate for the risk, it might be a good investment. So at the time, it was a small universe.

I think when I started, picked it up in third quarter of 78, I think there was two and a half billion dollars of bonds outstanding. That was the whole thing. They were not great companies.

They were more levered than an investment-grade company would be. But you might find some recurring aspect to the cash flows, which makes them creditworthy. And you're right, there's been changes.

The biggest change was the blossoming of the LBO business, which really came on big in 84.5. The LBO business leveraged buyouts could be done if you had 50 million of capital. You could buy a billion-dollar company.

You could borrow 95% of the money. That meant that lesser companies could buy bigger companies, or individuals could buy billion-dollar companies. It put a lot of companies in play.

That really blossomed in the mid-80s. In 1991, we had our first crisis. And many of the prominent LBOs of the 80s went under.

Macy's Federated National Gypsum, US. Gypsum, RJ Arnabisco was the biggest of the buyouts. It almost went under, but not quite.

So that changed things. It made it hard to get the capital for buyouts. The leveraged buyout business actually had to reinvent itself.

And you don't hear the term LBO business anymore. Now you hear private equity. Well, why did they change the name?

Because nobody would do it if you called it leveraged buyouts because the results had been so bad. The other thing is now you couldn't get 95% financing. You could only get 75% financing.

So a guy with 50 million could not buy a billion dollar company, only a 200 million dollar company. That was a big change. So the multi-billion dollar companies were not longer in play.

And the industry practiced buy and build, roll ups. In[…]”

In the mid to late 90s, we had the inception of the senior loan business. First, it was banks making loans.

Then it was high yield bonds being issued. Then people began to issue senior loans, which took the place of the banks to some extent. Unlike high yield bonds, those were floating rate.

And had pretty good covenants like any good banker would request. So we had the inception of the leverage loan market. Then we had the tech bubble burst in 2001 and 2002.

First three-year decline in the S&P since the Great Depression. People lost interest in the stock market pretty much. The Fed took rates down to fight the swoon, and people lost interest in the bond market.

Well, if you don't want stocks and you don't want bonds, what do you want? Well, let's have something else. Well, what can we call it?

Let's call it alternatives. So you had the growth of the alternative investment business, and they tried hedge funds, but when the hedge funds got too big, they stopped performing, most of them, and then people fastened on private equity. Around 05 or 06, that's when private equity funds first started.

They crossed the $10 billion line, and people were eager to do those. I would say from 06 or 05 to 22, private equity was really knighted as what I call the silver bullet, the can't miss strategy. Then we had the global financial crisis in 08 or 09.

The banks were chastened, lost some of their capital, were more tightly regulated, were discouraged from risk taking, and that led in 2011 or 2012 to the creation of the private credit market, which is now over a trillion and a half. In 07, I think it was a quarter of a trillion, so it's up more than 6X in 17 years. But this is the equivalent of senior loans, but issued privately without the benefit of registration, SEC, oversight, et cetera, and that leads us to where we are now.”

From Capital Allocators – Inside the Institutional Investment Industry: Howard Marks – Navigating Private Credit, 7 Apr 2025