Omg… ANOTHER Black Rock Fund Just Went Under

Ajouté : 2026-05-19

[00:00:00]The Justice Department is now probing valuations at a Black Rockck private credit fund. And that sentence should stop everyone cold. Not because Black Rockck is going to disappear. It's not.

[00:00:10]Or that a probe means that Black Rockck has done something criminally wrong.

[00:00:14]That's not necessarily the case. Nothing has been proven. However, the biggest problem in private credit, the biggest problem in private credit is what they're probing. Valuations. There have been significant questions about valuations. And this just took everything up a whole notch or 10. The question everyone needs to ask is how much are all these loans we've been talking about actually worth? And who gets to decide? And what happens when investors and banks, regulators, and now possibly prosecutors stop taking those marks on faith? That's the real story.

[00:00:51]Not one Black Rockck fund, not one Blue Owl buyback, not one Carile dividend cut, not one so-called problem fund at KKR or Apollo. The story is that the private credit cycle is moving deeper into the part where trust really starts breaking down. And once the issue becomes trust, the problem is no longer just about credit losses. It becomes funding. It becomes collateral. It becomes withdrawals. It becomes banks pulling back and insurance companies reassessing their exposures. it becomes the credit crunch. And we've got yet another cluster of stories on the private credit bus which all point of course in the same direction toward escalation. So we've got the DOJ probing Black Rockck. We've got troubled funds at Apollo and KKR Carile's BDC cutting its dividend. And of course it couldn't be a day that's gone by without another story about Blue. This time management is buying back 85 million in shares.

[00:01:48]This is a pattern. It's a pattern of what stage two actually looks like. Now, the reason the Black Rock story matters so much is because private credit depends on a simple promise. And the promise is don't worry about daily market prices. These loans don't trade every second like stocks. They don't have the same price discovery as treasuries or corporate bonds, maybe leverage loans. That's supposed to be a feature, not a bug. Private credit managers tell investors because these assets are private, because they're held to maturity, they're not being constantly repriced by panicky markets, so investors can earn stable returns without all the volatility. And during the upswing of the cycle, that sounds fantastic. High yields with low volatility and limited defaults, even some diversification driven by direct relationships with borrowers. Senior secured loans that are held to better covenants and less marktomarket noise.

[00:02:42]That was the pitch. But the other side of less marktomarket noise is this. If there is no active market price, the fund manager has to model the value. And once stress begins to rise, that model becomes an entire game. Because if the model says the loan's worth 98 cents on the dollar, the fund's NAV looks fine.

[00:03:02]But if the market would only pay 80, that's a completely different story. And if banks lending against those assets start thinking the real number is also 80 while the fund is still saying 98, that becomes a funding problem like we've talked about. And if investors think the real number is 80 while the fund still says 98, that becomes the redemption problem. And if regulators think the real number is 80 while the fund still says 98, that then becomes an oversight problem. And if the Department of Justice is asking questions about valuations, it is already becoming something else entirely. Again, no wrongdoing has been proven. We're not saying there was fraud, though there had been fraud in the past. We're saying that this is the precise fault line that critics have been warning about for years. One of private credit's key weaknesses is its opacity. And the reason it's a weakness is simply because of, as we know only too well, bubble behavior, garbage lending, therefore the potential for serious losses. And now that opacity is really being tested as we get even more signs pointing to and only ever pointing to more trouble always in that same direction toward escalation. Now what Bloomberg reported for Black Rockck was that the Department of Justice may be investigating valuations and valuation techniques at the same Black Rockck fund that we've been talking about for the last little while here at least a couple of months now. And this is a major development not because Black Rockck is some fringe player. Exactly the opposite. Black Rockck is the biggest asset manager in the world. It's it's as mainstream as mainstream finance gets. And that's what makes this so important. For the last year or so, private credit defenders tried to explain every problem away is just some isolated case. One borrower isolated. One bad loan a one-off. A BDC that's trading at a huge discount, over emotional investors, one fund that's gaining its withdrawals. That's not representative the entire industry. A lender using too much PIK. That's just normal, they've said. But once the concern reaches a Black Rockck fund, the quote isolated argument gets harder to maintain. That doesn't mean Black Rockck did anything wrong. It means the valuation question has moved from critics and short sellers and skeptical investors into the regulatory and potential law enforcement spotlight. And that matters again. I'm going to say it again because valuations are not just some accounting matter. Valuations are the foundation for everything else that follows. They determine reported performance and fees. They are where investors feel comfortable staying in the fund and if new money comes in either from big investors or from banks.

[00:05:30]In private credit the mark is the story and the entire private credit boom was built on the idea that those marks were reliable enough to trust. So the question now is not what if investors stopped trusting them. It's how far has this mistrust already gone to the point that it could see the inside of a courtroom. And remember as I talked about last week this isn't the only legal drama surrounding the bubble. Blue Owl being sued by an investor who is alleging the exact same thing.

[00:05:59]Valuations.

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[00:07:26]This is why a lot of people call it marked to myth because in public markets, there's at least a price.

[00:07:31]There's price discovery and it's public price discovery. You may not like the price, but it's there and it's established by what we reason to believe is a fair market process. I mean, you can say investors are panicking or overreacting, but the price is the price and you can see it like everyone else does. But in private credit, especially for loans that don't trade, the value depends on models, assumptions, comparisons, appraisals, internal processes, black boxes, and in some cases maybe some third party valuations.

[00:07:59]During good times, bubbly times, nobody cares. If the borrower is paying cash, if defaults are low and investors are receiving their distributions, and if the economy behaves somewhat like it might actually be strong and resilient, then everyone is willing to just go along with everything. But during the downside of the cycle, the assumptions matter a whole lot more. Which is I as I pointed out last year why the negative payroll reports were so damaging.

[00:08:24]Damaging to trust about these assumptions, especially if a borrower is no longer paying cash interest and instead interest is being paid in kind.

[00:08:33]Is that loan still worth par? If the company has to extend its maturities because it can't refinance, should the value be close to 100? If the borrower's earnings are weakening with the economy, but the fund says the collateral coverage is still fine, how should investors trust that? And if similar loans in the liquid market are trading at lower valuations, why is the private loan still marked close to full value?

[00:08:57]These are not theoretical questions any longer. They are questions now sitting right at the center of the private credit story. And the Black Rockck probe is important because it validates that concern, not the conclusion. It validates the concern and the concern is are private credit funds marking assets in a way that reflects economic reality or are they marking assets in a way that delays recognition of losses? And that, my friends, is the entire ball game. And if it was only that, I mean, that would be a huge thing anyway. But as I said in the introduction here, we've got a whole raft of stories that coming in on private credits fast and furious all over again. So we got DOJ investing Black Rockck there's problems with Apollo and KKR funds that both of those big asset managers are trying to tackle and again look at the names got KKR Apollo along with Black Rockck these are not tiny managers at the edge of the market these are the core institutions of the private markets machine and this is the part of the cycle where the issue stops being hey did a few bad actors make some bad loans and it starts to become how much of the boom really was built on assumptions that only worked while the money was easy during the boom Private credit managers were raising capital handover fist. Pension funds wanted higher returns. Insurance companies, they craved yield. Wealth managers, they wanted alternative products to sell. The Japanese, the carry traders, rich individuals wanted institutional style income. And banks, banks were pulling back from certain lending markets, especially after the banking crisis in 2023. But that's where private credit stepped in. And so for a time there, everything seemed to line up. But when everyone is trying to deploy too much money into the same kinds of loans, you know where this goes. Underwriting standards inevitably weaken. That's how credit cycles work.

[00:10:45]It's not because everyone wakes up one day and decides to be reckless. It happens gradually. A little more leverage here, a slightly weaker covenant package there, a more generous EBIT adjustment, a maturity extension, perhaps a PIK toggle, a belief that the exit market will always be there and dependable. But then the cycle turns.

[00:11:05]Suddenly the problem funds start to show up. The loans that were supposed to be money good are now complicated to say the least. Borrowers that were supposed to grow into their capital structures don't make it. The exit market everyone was depending upon just isn't there.

[00:11:20]Cash flows that don't cover interest the way everyone had modeled. And the managers who raised all that money during the bubble are now stuck trying to manage the cleanup. And that's what makes the KKR, Apollo, and Black Rockck stories so important. It's about the biggest names having to deal with the after effects of the bubble. And if the biggest names are neck deep in the garbage, it's another key piece of circumstantial evidence is just how much garbage there has to be out there. Now, the easiest place to see this is in the BDC's. We've been tracking this from the very beginning, the business development companies. These are the publicly traded vehicles that private credit funds have been using for part of their portfolio management structures. And because they're publicly traded, it allows us to see a little bit of market-based price disc. It's indirect about the assets and it's about, you know, the stock market and stock investors perceptions about those assets that are in these funds, but it is it is at least something. They can be one of the clearest windows investors have into private credit because unlike fully private funds, these BDCs have share prices and and NAV disclosures, dividend policies, and public filings. And that makes them incredibly useful for understanding or at least partly understanding what might be happening beneath the surface.

[00:12:31]Because if the public BDC's are starting to show stress, and let's face it, they have been for quite some time, you can bet similar stress exists inside less transparent private vehicles. Maybe not in the same exact way, maybe not to the same degree, but the same cycle is hitting the same borrowers, the same industries, the same financing structures, and of course, the same valuation assumptions. So when Bloomberg, for example, reports that Carile's BDC is cutting its dividend and Blue Owls BDC's are buying back shares as loan values are sinking, those are not isolated equity market stories. They are credit cycle stories about valuations and of course confidence. The road to potentially toxic waste. So let's start with carile. Bloomberg reported that a carile BDC cut its dividend even as it flagged get this a better credit market. That headline alone tells you the problem. If the credit market is getting better, why cut the dividend? Now there may be perfectly reasonable fund specific explanations. A BDC dividend depends upon, you know, net investment income, portfolio mixes, realized and unrealized losses, leverage, expenses, and of course, management decisions. But the broader signal, it's kind of hard to ignore here. BDC's are income vehicles. That's the entire appeal. Investors buy them because they want the yield. So when a BDC cuts its dividend, that's not a minor adjustment. It is the fund telling investors the income engine is not producing what it used to or management needs to preserve capital or the portfolio outlook is not as strong as the headline yield once suggested. And that is the trap of the private credit boom. So the dividend cut is not just about one payment. It's about the feedback loop where lower asset values pressure NAV. Lower NAV pressures leverage. Lower leverage pressures income. Lower income pressures the dividend. A dividend cut pressures investor confidence. Lower confidence pressures the share price and a lower share price makes capital raising harder. That's how a credit issue becomes a funding issue. Stage two. And then of course there's our favorite sad bird, the blue owl. What was reported with that one is the blue owl BDC's are buying back their shares in a pretty substantial way. That matters. So, Blue Owl's BDC's bought back $85 million of shares as their loan values are sinking.

[00:14:51]Now, the buybacks can be presented as a sign of confidence. If a BDC shares are trading below net asset value, buying back shares can be accretive to the NAV per share. Management can say, "We believe our shares are undervalued and we're returning capital to shareholders." That's the positive spin.

[00:15:07]But ask the more important question. Why are the shares trading weekly in the first place? Why are loan values sinking? Why does management need to use cash to support the share price? It tells you a lot about investor confidence in the valuations and the fund's prospects. And this is where the private credit cycle gets very interesting. If investors fully trusted the NAV, they would be more willing to buy the stock when it trades below NAV.

[00:15:33]But if investors suspect the NAV itself is too optimistic, then the discount can not just persist, it actually deepens and get worse. A BDC might say it's NAV is one number, but the public market might say, "Yeah, it's a number, but we don't believe it. We think the real value is a lot lower." That is price discovery, even if it's indirect. And price discovery is exactly what private credit has tried to avoid lately, if you haven't noticed. That's why public BDC's matter so much. They reveal the tension between reported marks and market implied marks. The fund may mark a loan at 95. The market may value the BDC as if those loans are worth a lot less. And in some cases like with uh BlackRock, some of those loans go from 100 to zero, which is why the DOJ is getting involved. Now, that doesn't mean the market is always right. Markets overshoot. We know that investors get panicky. Discounts can become excessive.

[00:16:24]But when discounts widen across multiple vehicles and loan marks start falling, it is a signal. The market is no longer simply accepting the private credit story. It is demanding proof. This is why the Black Rockck DOJ probe and the Carile cutting dividend and you know Blue Owl again, Blue O again buying back its shares. This is why these stories matter. They all add up and they all add up in the same direction. They're about credibility. Black Rockck are the valuations right? Blue Owl, if the BDC says NAV is one thing, why does the market seem to doubt it? Carile, if private credit income is so stable, why cut the dividend? KKR, Apollo, Black Rockck. If the biggest firms are dealing with problem funds, how broad is this stress really? Each one is a different piece of the same puzzle. And the puzzle is this. Private credit is moving from trust me to show me. During the boom, investors trusted the marks. Now they want proof. During the bubble, investors trusted the underwriting. Now they want cash interest, real repayments, and actual exits. During the boom, investors trusted the reported NAVs. Now they want to know what those assets would sell for if the fund actually needed liquidity.

[00:17:37]And many of those funds actually do need the liquidity. This is the transition from stage one to stage two to deeper into stage two. Stage one is when a few investors start to pull back. Stage two is when the pullback becomes broad enough that managers, banks, regulators and public markets all start reacting.

[00:17:57]We are seeing that now in very broad fashion. So when Bloomberg says KKR Apollo and Black Rockck are tackling problem funds, that sounds like the cleanup phase. And the cleanup phase is very different from the fundraising phase, the bubble phase. During the bubble phase, everyone talks about opportunity. During the cleanup phase, the stages, everyone talks about portfolio management and risk. During the fundraising phase, the pitch deck shows attractive yields. And during the cleanup phase, the investment committee talks about amendments, extensions, restructurings, NAV protection, and liquidity management. And that's where we're heading. Not every private credit loan is bad. That's not the argument.

[00:18:36]Plenty of borrowers are going to pay and even pay on time. Plenty of funds will be just fine. The point is that the marginal borrower is getting weaker. The marginal lender is getting more cautious. And the marginal investor is now asking the tougher questions. and that is the credit cycle and how the credit cycle has not been repealed. So naturally the question you're going to ask is what should we watch from here?

[00:19:01]Got a lot of signs, a lot of confirmation stage one, forget that we way past stage one. We're into stage two, but how deep into stage two and what should we be watching for as we move deeper into stage two and maybe heading toward stage three? First, we're going to watch the BDC discount. If the BDC's keep trading well below NAV and they have been, that tells you public markets don't fully trust the marks.

[00:19:23]Second, more dividend cuts. Private credit vehicles are income products. If more BDC's cut their dividends, that means the income engine is under pressure. Third, nonacrruals and PIK.

[00:19:35]Watch how income is actually being paid in cash versus being capitalized into loan balances. That's PIK and then some.

[00:19:41]Fourth, even more NAV markdowns, not just one quarter or a couple of funds.

[00:19:46]Watch the trend. Are marks drifting lower slowly or do they gap down like we're seeing with with the questions at Black Rockck? Fifth, bank financing terms. If banks raise haircuts or reduce collateral values, that tightens the entire private credit machine. And unfortunately, we've seen some of this begin to happen. Sixth, and this is a big one. We've talked about this recently. Insurance company behavior.

[00:20:11]Insurers are huge, huge buyers and funders of private credit. If they accelerate their pullback because they've already started pulling back, that is far more important than one hedge fund or one BDC. And finally, number seven, regulatory expansion. Does the Black Rockck valuation probe remain isolated or does scrutiny spread to other managers, other funds, and other valuation practices? And that last one, it's a lot more important than it might seem because once regulators start asking how private credit loans are valued across the industry, every single manager has to think about whether their own marks can withstand scrutiny. Do we start seeing more people become more honest and make bigger adjustments? The Black Rockck story, it's not about claiming wrongdoing. It's about how investors are no longer giving the industry as a whole the benefit of the doubt and maybe being forced to become more open and more honest. So the valuation probe problem funds at KKR and Apollo Carile cutting a BDC dividend blue owl buying back shares as loan values sink. These are not separate stories. They're all different expressions of the same underlying problem. The private credit bubble depended upon trust. Trust in the underwriting in the borrowers over the income. Trust in the marks. And now that trust is being tested. That doesn't mean every fund fails. It doesn't mean every loan is bad. It doesn't mean Black Rockck or Apollo or KKR is going to go under. That's not the point. The point is that credit cycles don't need a Leman moment to cause serious economic damage.

[00:21:44]Sometimes all it takes is investors no longer believing in the marks, banks no longer accepting the collateral, and lenders no longer rolling the loans.

[00:21:51]That's when the credit machine really starts to slow. And once it slows, the damage moves from private funds to public markets, from public markets to companies, and from companies into the real economy. That is why this matters.

[00:22:04]The issue isn't black rockck. It's about the private credit industry as a whole.

[00:22:08]It's about these valuations and assumptions and whether or not they can survive the downturn. And we are a whole lot closer to finding out.

[00:22:20]And we're going to be finding out during a period where stress, especially in the real economy, is only ramping up due to the energy shock. And I went over some of the latest details in the video here linked below. As always, thank you very much for joining me. Huge thank you university members and subscribers. And until next time, take care.