The crisis in the private credit sector is deepening, prompting Goldman Sachs to attempt to calm its clients by stating that one of its largest retail-focused private credit funds has relatively low redemption rates and limited exposure to the software industry.
On Friday, the U.S. bank stock sector experienced its sharpest decline of the year, with the KBW Bank Index falling as much as 6% intraday, marking its largest single-day drop since the trade turbulence of last April. Risks in the private credit arena have intensified, with liquidity issues emerging in several funds.
Amid the escalating crisis, Goldman Sachs detailed in a letter to investors on Thursday that its Goldman Sachs Private Credit Corp. has an exposure to enterprise software of approximately 15.5%, which is on the lower end compared to its peers. The fund's redemption rate in the fourth quarter was 3.5%, below the industry average. These points were further elaborated during a conference call on Friday. Vivek Bantwal, Co-Head of Global Private Credit at Goldman Sachs Asset Management, stated that diversified funding sources allow for consistent capital deployment throughout market cycles.
He also acknowledged that focusing exclusively on retail channels would have enabled faster scaling of the business.
These communications are aimed at restoring market confidence, as the U.S. credit market has deteriorated sharply since February. Particularly in recent days, a noticeable decoupling has occurred between credit risk and equity risk.
The yield spread on corporate bonds from the technology sector relative to the overall investment-grade market is at its widest level since 2007.
Last month, a tech-focused fund managed by Blue Owl Capital faced investor redemptions amounting to roughly 15.4% of its net asset value, sparking broad concerns about the $1.8 trillion industry.
Goldman Sachs emphasized its underwriting standards in the letter, asserting that it has not lowered its credit thresholds in pursuit of asset growth. The firm indicated that its portfolio of borrowers relies less on Annual Recurring Revenue (ARR) valuation metrics and Payment-in-Kind (PIK) interest arrangements—which allow borrowers to pay interest with additional debt—compared to most industry peers. This stance aligns with comments from Bruce Richards, Chairman of Marathon Asset Management, who stated in a Bloomberg Television interview this week that ARR leads to excessively high valuation multiples for related companies. Goldman's communication demonstrates a proactive effort to avoid these risks in its asset selection.
The risk of AI disruption facing enterprise software borrowers is another key area of market scrutiny for private credit funds. Goldman's letter acknowledged that it does not take the risk of AI disruption lightly.
However, it also noted the firm's belief that certain companies will emerge successfully from the AI-driven industry transformation, with a focus on those with products "embedded in core business processes" and those that "possess proprietary data."
Comments