Following a $400 million loss due to the collapse of UK mortgage lender Market Financial Solutions (MFS), HSBC Holdings PLC has suspended its plan to invest $4 billion into its own private credit fund. HSBC originally announced this investment initiative in June of last year. Previously, HSBC Chairman Brendan Nelson informed shareholders that, after incurring the $400 million loss, the bank had "largely completed" a review of its lending policies and business processes. According to reports citing two sources familiar with the decision-making process, no funds have been transferred yet, and there are currently no immediate plans to proceed with the investments.
HSBC's recently released first-quarter financial results showed that, impacted by both the fraud loss stemming from MFS's collapse and conflicts in the Middle East, the bank's pre-tax profit for the quarter fell to $9.4 billion, slightly below market expectations of $9.6 billion. Expected credit losses surged sharply to $1.3 billion, an increase of $400 million compared to the same period last year. In addition to the $400 million fraud loss related to MFS, the bank set aside an extra $300 million in provisions due to the Middle East conflicts.
Reports indicate that although HSBC did not lend directly to MFS, it still reported approximately $400 million in "fraud-related" losses in its quarterly results. The issue lies within the financing chain. HSBC provided back-end leveraged financing to Atlas SP, a fund under Apollo Global Management. Atlas, in turn, lent to MFS through a Special Purpose Vehicle (SPV). Reports also noted that within the related SPV, HSBC funded 80% of the loan value, whereas the industry norm is typically around 60% to 70%.
On the surface, this appears to be an isolated case involving a UK lending company. What is truly noteworthy is the risk transmission path: layers of borrower, private credit firm, SPV, bank financing, and recovery arrangements stacked upon each other, ultimately causing a bank that was not the direct lender to bear the loss. This is precisely the most easily overlooked aspect when private credit is treated as a "safe bond substitute." Risk does not necessarily remain confined within a single loan contract, nor is it borne solely by the ultimate borrower and direct lender. It can propagate outward through funds, SPVs, repurchase financing, and back-end leverage. What investors see are smoothed net asset values and stable distributions, while the underlying structure may be a complex chain of credit transmission.
The boom is over! The private credit market is mired in a crisis of trust. HSBC's latest move to suspend its $4 billion investment into its own private credit fund is the latest sign of mounting pressure in the global private credit market. In recent years, private credit firms have generated astonishingly high returns for investors. Now, this hot streak has come to an end. The latest financial reports across the industry show that yields are entering a new phase of normalization towards more modest levels.
Apollo Global Management indicated that the gross return of its direct lending fund, which includes investment-grade corporate loans, was only 0.5%, significantly lower than the 2.6% recorded in the same period last year. Previously, Blackstone and Blue Owl Capital also reported that their current-period returns had declined compared to the previous year.
Simultaneously, investor concerns about the sector are intensifying due to several bankruptcies, external criticism over the industry's lack of transparency, and fears of "AI disruption" impacting the underlying assets—the software industry represents the largest exposure for private credit. In September last year, auto lender Tricolor and auto parts manufacturer First Brands both filed for bankruptcy. Creditors later discovered that both companies had engaged in fraudulent activities, pledging the same batch of accounts receivable multiple times to different lenders. In February of this year, MFS was also exposed for fraud, with loans nominally valued at £1.16 billion backed by collateral assets worth only approximately £230 million.
Furthermore, the "AI job displacement" trend has severely impacted the global software services sector, further fueling investor unease about the quality of private assets. Redemption requests have been flooding in to major private equity firms. Given the inherent lack of liquidity in these assets, large-scale redemptions could force institutions to sell assets at discounted prices during market turmoil. Affluent individual investors, worried about the overall health of the funds, have been rushing to redeem their capital. Many funds open to individual investors impose quarterly redemption limits to prevent a run, which ironically heightens investor anxiety.
Jamie Dimon, CEO of JPMorgan Chase, last year likened the chaos in the private credit market to "credit cockroaches," a term that gained global popularity. This year, he again expressed concerns about "bad actors" in the private credit space, stating that some companies are "doing dumb things." Howard Marks, co-founder of Oaktree Capital Management, also noted that due to the market's massive expansion over the past decade, professionalism in private credit has significantly diminished. Cracks have appeared in some areas, and some may be underestimating their severity.
However, some asset management firms and analysts believe the current concerns are exaggerated. Bruce Flatt, CEO of Brookfield Asset Management, previously stated, "We need to calm down and look at this objectively. It's not that serious. This is absolutely not the 2008 financial crisis; it has nothing to do with the financial crisis." The executive editor of financial information service Debtwire pointed out that the inherent opacity of the private credit market often creates an information vacuum, which observers tend to fill with worst-case scenarios. The editor noted that the current scale of the private credit market is far smaller than the pre-2008 real estate market. However, the "irrational exuberance" in this field over the past five years and the complex financial structures built around the industry share similarities with the pre-2008 real estate market.
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