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Section 1 Introduction: Chronicles of Credit Innovation. The article I will cover today is " Memo What Watches Go on Inf Credit," written by Howard Marks of Oaktree Capital on April 9, 2026. This is what is happening to private credit in Korean . In this memo, Max reviews the historical development of the credit market, diagnoses the current state of the private lending market, and conveys warnings and lessons to investors.
Howard Marks has taken on private credit head-on this time . In fact, this topic has been the hottest subject in the investment industry over the past few months. The fact that Marx himself is organizing the historical context implies just how important the current situation is . Let's listen to what is being said .
Section 2. The Evolution of Credit . An Oaktree colleague asked about the developments that led the credit field to its current position . I organized the following bath . In the 1970s, the acceptance of non-investment grade bonds began. In the 1980s, there was the popularization of buyouts, or LBOs, and an increase in corporate leverage .
In the 1990s, widespread syndicated loans and trench-structured securitization emerged. In the 2000s, an upward trend toward investment in Korea emerged, along with subprime mortgage loans and mortgage-backed securities. In the 2010s, private lending, or direct lending, expanded, and in the 2020s, private lending products began to be marketed even to individual investors and retirement pension investors.
This chronicle is truly impressive. It compresses 50 years of financial innovation into a single sheet. In the 1970s, a single idea that seems obvious now—that even risky companies could issue bonds if they were offered sufficient interest rates—gained birth to a $1.5 trillion bond market . And the key point is that each step became the foundation for the next step .
The investment world I first encountered in the summer of 1968 consisted only of stocks and blue-chip bonds, which feels modest and local now considering the developments listed above. Before 1977 and 1978, it was virtually impossible for companies without an investment- grade credit rating, that is, a Triple B or higher, to publicly issue bonds.
The speculative-grade debt that existed was mainly that of so-called fallen angels—companies that were previously investment-grade but were downgraded due to problems. Michael Milke is credited with implementing the idea in the late 1970s that non-investment-grade companies should be able to issue bonds if interest rates are high enough to compensate for the risk of default .
This kind of risk-to-return thinking enabled today's approximately $1.5 trillion U.S. Hyde bond market and most of the other developments discussed here . There is something I need to briefly address here. The reason Milken's idea was so revolutionary is that, until then, financial markets had operated on the principle of trading only safe things.
The very idea of quantifying risk and pricing it accordingly was a paradigm shift. And this was the seed that made LBOs, CLOs, and even loans all possible . Although a small number of small-scale borrowing purchases took place in the mid-1970s, the popularization of Hyde bonds in the 1980s enabled LBO funds, small businesses, and corporate raiders to borrow enough funds to acquire companies much larger than was previously possible.
This led to a massive expansion of LBOs and gave birth to the private equity industry of the 1990s, which changed its name to private equity. The idea of pooling borrowing instruments and selling tranches with varying seniority and risk-dependent interest rates originated with the creation of mortgage-backed securities in the 1970s and is most commonly associated with Louis Ranieri of Salomon Brothers.
This expanded in the 1980s and 90s. The concept of trenching is also a really ingenious form of financial engineering. It involves tiering risk within the same asset pool and selling it to other investors, which later developed into CIRs and led to sublime mortgage securities, becoming the seed of the 2008 financial crisis .
It is as if innovation and disaster stemmed from the same root . Before 1990, banks were competing, and some of the loans were to non-investment-grade companies, which were syndicated to a small number of fellow banks. However, subsequently, extensive syndicated loans, leveraged loans, or senior loans were developed by Wall Street.
These were sold in bulk to institutional investors and have grown into a market worth approximately $1.5 trillion in the United States today . A significant increase in this type of financing capability has fostered the growth of private equity funds . After the collapse of the dot-com bubble in the late 1990s caused the first three consecutive years of decline in the SP index since the Great Depression, investors lost interest in the stock market and remained so for 10 years.
As central banks lowered interest rates to combat economic and market downturns, investors sought returns beyond what could be obtained from bonds. As both stocks and bonds lost popularity, investors sought a new solution. They turned their attention to hedge funds and private equity funds, which had weathered the storm relatively well, and the name Daehan Investment was born.
This trend is really important . The very concept of Daehan Investment was born from failures in stocks and bonds . It wasn't that investors actively chose it, but rather that they were pushed into it because existing options were blocked . And with the initial creation of the $10 billion Fund No. 3, the game of scale began.
Section 3. Structure, Credit, and the Global Financial Crisis. At the same time, corporate debt began to be securitized using structures and credit instruments such as COs, or Collateralized Loan Debt Securities . The banks that created these products utilized internal leverage through tranching to find active buyers for both the high-ranking ninth-grade class and the overcollateralized senior class .
Strong demand for CLOs and the profits obtainable from their formation created demand for securities-backed loans, which led to an increase in the issuance of broad-spectrum syndicated loans. Many of the same banks packaged extended sublime mortgage loans to suspicious borrowers into mortgage-backed securities ( RMBS).
Surprisingly, bankers were able to secure thousands of Triple A ratings from RBS backed by fraudulent loans . When serious flaws in these loans and structures were revealed, the result was the global financial crisis of 2008–2009. What is truly chilling about this part is the reversal of the relationship where demand created the supply of loans.
Originally, it was securitization done because there were good loans, but since something was needed to securitize, they started printing loans . The same logic applies to subprime mortgages. When demand creates supply, quality inevitably declines. Please keep this pattern in mind. Because the same thing appears later in private loans as well.
The rise of Section 4 loans. The global financial crisis made banks poorer, more modest, and more regulated, and as a result, there was not enough bank lending to meet the needs of the rapidly growing private equity industry . Investment management firms began filling this gap through non-bank loans, or Type 3 credit.
The fastest- growing component was private lending, or direct lending. This refers to private loans to portfolio companies of private equity firms in the mid-market that hold non-investment grade ratings . There is one thing that needs to be addressed here . Private credit and direct lending are not synonyms.
The latter is a subset of the former. Many articles these days mentioning private credit are actually about direct lending. I try to consciously maintain this distinction here, but most commentators do not. This distinction may seem trivial, but it is actually very important. When people talk about the third credit crisis in the market right now, the real problem isn't the entire third credit crisis, but rather the direct lending within it, specifically the part concentrated in certain sectors .
There is a reason why Max Guy emphasizes this distinction. Because when fear spreads, people condemn the whole without distinguishing between details. Most recently, it has become a trend to market investment products held in private loans to individual investors and retirement accounts . This increased the capital available for private lending and caused a rapid increase in the assets under management of the asset managers that absorbed it .
This is a danger signal. When an illiquid asset class designed for institutional investors starts being sold to retail investors, it usually means the latter part of the cycle. Individual investors have completely different expectations regarding liquidity . Section 5. General Patterns of Bubbles. Extreme surges in popularity for new forms of investment, commonly referred to as bubbles, invariably share certain common characteristics.
The key element is novelty. If something is new, its supporters can promote its advantages to easily stimulate the interest of buyers, and since it has never been verified, its flaws have not yet been revealed. This causes the investment trend to grow into a bubble. There is usually a handful of truth.
Nifty was a great company, the internet and digital communications actually changed the world, and mortgages are generally safe investments. These truths eventually provided the foundation for what grew into an extremely destructive bubble. There is something Max points out really sharply here. The point is that there is always truth at the foundation of a bubble.
If it's a pure scam, it won't last long. It is a fact that the internet changed the world. The problem is the moment you mistake the truth for being infinitely expandable . The same goes for private loans . Filling the gap in bank loans was the real value. But whether that is a $2 trillion truth is another matter.
Initial investments often yield rewards. This is because first-time entrants enter at a price that has not yet risen due to rising popularity . The success of early investors makes those outside envious and persuades them to join the party . As Charles Kindleberger wrote in Panic and Disintegration, nothing disturbs one's well-being and judgment as much as a friend becoming rich .
Envy is probably the most powerful force in the world. The possibility of success ignites the investor's hope . Possibility is confused with probability, and then transforms into certainty. The level of the meeting and risk avoidance fly out the window. This quote by Kindleburger really hits the nail on the head.
It is a sentence that perfectly explains how FOMO, the fear of missing out, works. And the part where Marx said that possibility is confused with probability and transforms into certainty. This is the cognitive mechanism of all bubbles. The key question that aggressive investors rarely ask is what price is safe to participate.
Envy, excitement, the dream of becoming rich, and the fear of missing out are the fatal flaws of prudence and a reluctance to jump on the bandwagon . Most investment trends become excessive as latecomers swallow promises, apply low standards, and drive up prices . For me, the most important investment maxim is that a fool does last what a wise man does first .
Warren Buffett expressed this even more vividly. First, the innovator, next the idler, next the fool. Flaws, potential pitfalls, and unfulfillable promises that investors willingly overlook when everything is going well invariably lead to disillusionment and losses when the optimism surrounding the new thing turns out to be excessive or the price paid was simply too high .
When Mark Twain said that history does not repeat itself but that metaphors are formed, he must have had this kind of repeating pattern in mind . I consider this one of the eternal truths in investing. Patterns applicable to Section 6 loans. I believe it is fair to say that various aspects of this process have occurred in private lending over the past 15 years .
A new form of financing has been developed. As banks hesitated to lend, the demand for funds from private equity firms exceeded the supply. This allowed early private lenders to demand robust loan documents containing high interest rates and strong protection clauses. The low interest rates of the 1930s made the high expected returns of private loans look very attractive, especially in that they allowed for leverage of returns through low-cost borrowing .
Institutional investors took note of the appeal of early loans and joined the party. Let's look at the key mechanism here . The reason early private loans generated good returns was structural. Because borrowers gained the upper hand in the void left by the banks . It was an environment that was oppressive to borrowers, with high interest rates and strong protective clauses .
The problem is that this initial appeal was confused with its research characteristics. That appeal would undoubtedly have been reinforced by the fact that private loans do not exhibit much price volatility . This is because there is no market for market valuation. This may have led its proponents to say that it would provide high risk-adjusted returns, but that was not correct.
What could have been reasonably expected was a high volatility-adjusted return, or the Sharpe ratio, but I strongly argue that risk and volatility are not the same thing. Private loans carry no less credit risk than liquid credit products such as Hyde bonds or broad syndicated loans. It is just that it is not easily reflected in the price.
This part is really important. This is one of the core arguments that Marx has repeated for decades. Just because volatility is lower does not mean the risk is low. Office loans appear smooth because they have no market price, but that does not mean the credit risk of the underlying asset has disappeared.
If you confuse this, you will underestimate the risk and eventually take on more leverage . Hundreds of investment firms provided services in private lending, and the majority of them were firms that had never been vetted during difficult times, having entered the third credit market after the end of the global financial crisis .
Nevertheless, they were given enough money to manage. The arrival of many new managers and large-scale capital growth has forced lenders to compete for private loans, accepting lower yields, narrower yield spreads, and reduced stability . Some fund managers were undoubtedly motivated to lower their standards to invest large amounts of capital .
The key point is the expression that they are asset management companies that have never been verified in 17 years . Private equity firms that started operations after 2009 have never experienced a true economic downturn. $2 trillion in funds were injected in a state where it was impossible to distinguish whether success was due to skill or environment .
The generally favorable economic and investment environment that persisted for 17 years following the end of the GFC successfully facilitated the sale of office loans despite signs of weakening underwriting standards, and this trend became increasingly pronounced. The sum of all these factors facilitated the sale of office loan products to individual and retirement pension investors starved for returns in a low-interest rate environment.
The massive capital available for investment in office loans created a gold rush mentality. Over the past 15 years, approximately $2 trillion in private loans have been made. The entire private credit sector was only about $1.5 billion 20 years ago . Therefore, I imagine that some private equity firms accepted too much money and invested too quickly, applying too low standards and setting the stage for adjustment.
It has grown more than 13-fold in 15 years, from $150 billion to $2 trillion . At this rate of growth, a decline in quality is structurally inevitable. It’s not like the number of good loan opportunities has increased to 13. Section 7. Private Loans and Software. Before the mid-2000s, investors in high-yield bonds and leveraged loans were generally reluctant to lend money to technology companies .
Technology companies were fundamentally considered too risky to be creditworthy. And since leverage could not be applied, it was not a target for purchase by the Ho Fund either. However, as investment in private equity grew strongly, private equity firms needed companies to acquire, which led them to expand the range of companies they considered.
They concluded that companies with a market-leading position in essential software and low likelihood of being replaced will enjoy recurring subscription-based cash flow and benefit from a sustainable moat surrounding their business. Private equity funds began acquiring software companies, and credit investors began lending money for that purpose .
If we follow the chain of logic here... Since private equity funds are overflowing with money, they need companies to acquire, so they expanded into tech companies, which were originally a forbidden zone . The logic regarding recurring revenue and moats in software companies actually had some validity.
However, even here, a handful of truth has been distorted into a basis for excessive expansion. In my experience, the limiting factor in the credit market is not the borrower's need for capital, but the lender's willingness to supply. To quote Kevin Costner's character from the movie Dream, if you provide the capital, they will borrow and use it.
Therefore, the composition of the credit market was significantly influenced by the growth of private equity, the surge in capital available for private lending, and the mutual agreement that software companies are good investment targets . In recent years, sponsors have increasingly turned to private loans as an alternative to broad syndicated loans .
Private lending allowed companies to raise the necessary capital at once from a small number of large lenders, avoiding lengthy roadshows, extensive financial disclosures, and dealing with numerous counterparties that would have to be dealt with in the event of a problem. Private lenders have also shown a willingness to support higher debt levels in syndicates that exceed what the market can accept .
They also showed a willingness to lend more funds to companies that are not yet profitable, based on their annual recurring revenue, i.e., AR-based AR loan models . Let me briefly explain the concept of AR loans . It is lending money to companies that are not yet profitable based on their revenue . This is something unimaginable in traditional credit analysis .
This is a prime example of how relaxed credit market standards have become; due to the fact that loans were more attractive than bonds and private placements more attractive than public offerings to sponsors, the proportion of software debt in the domestic non-investment grade credit market was approximately as follows .
It is 4 to 5% in Hyde bonds, 10 to 15% in broad syndicated loans, and 20 to 30% in private loans . In addition, due to the same factors, the proportion of software debt on target companies is higher in broad syndicated loans than in high-yield bonds, and even higher in private loans. As a result of all this, a significant portion of private loans were made to software companies.
These companies were often acquired at high EBITA multiples of about 20 times and had high leverage ratios. However, software company debt is suddenly appearing in the news . The key point is the figure that software debt accounts for 20 to 30 percent of private loans . That is a tremendous concentration compared to the 4 to 5% of Hyde bonds .
And if these companies were acquired with high leverage of 20 times EBIT, they will have the most vulnerable structure when the AI shock hits . Section A. The AI Shock and the Software Debt Crisis. Over the past year or two, artificial intelligence has significantly reduced the need for humans to write code .
Coders have generally been reduced to a role of instructing AI models on what to do. The software company stock and debt markets did not react significantly in 2024 and 2025. However, in November 2025, Antropic released a powerful new model for coding, followed by the release of 11 plugins that automate tasks across various fields in late January .
It appears that a cognitive turning point was reached in early February . Investors finally took notice of the accumulated negative factors, and Saho Credit has since faced close scrutiny and volatility. What is really interesting here is that entropic is mentioned directly. To think that a specific AI company was identified as a turning point for the entire credit market in a Howard Lux memo .
And it is important to note that the AI threat did not appear suddenly, but has been accumulating . The market has merely reached a turning point in perception. Concerns over software debt caused investors in semi-liquid public offering products to request redemptions. The redemption restriction caused investors to question the stability of the investment.
The process of some investors exiting at the stated net asset value may have led remaining investors to question whether the NAV from which people exited was overvalued. When the fund proposed redemption, investors may have reasonably concluded that they should request the redemption of more shares next time .
Do you see the self-reinforcing downward spiral? When a redemption request comes in, a restriction is placed, and when a restriction is placed, more redemption requests come in . Section 9. No. 3 Credit and Public Offering Investors. Today, two different things are happening at Credit No. 3 . There is an development regarding the borrower's fundamentals and the solidity of the underlying assets, followed by the investor's reaction.
Oaktree stated in an export memo that while these software companies are generally operating well, concerns have been growing in the market that they are at risk of significant disruption caused by AI, and that this is affecting stock values and reducing borrowers' equity cushions. Today, investors do not distinguish between potential winners and losers in the software space, and the entire sector is under pressure.
Confusion and headlines are largely driven by capital flows and sentiment, not the result of credit deterioration. This distinction is really important for investors. Selling the entire sector without distinguishing between winners and losers is a typical fear reaction. Conversely, that also means there could be an opportunity here.
Investors are hardly the systematic, cool-headed scales based on information described by Benjamin Graham and David Dodd in Security Analysis, especially in the short term. In reality, situations fluctuate between quite good and not-so-good, but in the investor's mind, it goes from perfect to desperate.
Investors initially get hooked on something new, blindly accepting the promise and becoming overconfident. Then, when disappointment and disillusionment take hold, the bravado and confidence that originally supported the investment evaporate. It is an eternal theme that Marx repeats . The market moves between quite good and not-so- good, but investor sentiment is perfect, oscillating between despair .
Uncertainty regarding the impact of AI on the software industry, liquidity limitations of private assets , and pricing accuracy of private debt funds has existed for years. However, simply put, people may not have asked enough questions or paid enough attention when it would have been good to . As usual, true believers earn the most money in the government, and skeptics lose the least when they collapse .
However, the key to the investment success we pursue is always maintaining a healthy balance between faith and doubt. As Charlie Munger quoted the ancient philosopher Demosthenes, people believe what they want. It is safest to stick to proven investments and leave more innovative developments to experts .
However, few people can resist the easy-profit shillings that accompany most unverified trends . This will be so forever . Demosthenes' quote summarizes everything. People believe what they want . This single sentence encapsulates the entire psychology of bubbles. Section 10. Lessons of 1929. The best investment book I have read in recent years is Andrew Ross Sorkin's 1929.
This book describes the prelude and aftermath of the Great Depression through the profiles of the key figures of that time. My conclusion is that three things, in particular, were the main causes of the grand scheme . First, selling shares to a heavy consumer without considering suitability. Second, providing excessive leverage to the buyer.
Third, there is a discrepancy between the illiquidity of the purchased assets and the phased nature of the loan. Marx did not bring 1929 to show a historical symphony. I want to show that unsuitable sales, excessive leverage, and liquidity mismatches—these three things are exactly being reproduced in public offering private loan products right now .
Individual investors were drawn into the stock market after years of continuous growth. Major stock indices had already risen by about 400% between 1921 and 1928 . Brokerage firms provided margin replacement of up to 90% of the purchase price . Sorki delivers a powerful finish . Ultimately, the story of 1929 is not about interest rates or regulations, but about human nature.
People will find new ways to believe that good times can last forever . The enduring lesson is that we must remember how easily it exists. The antidote to irrational enthusiasm is not regulation or skepticism, but humility. The higher our conviction soars, the longer and harder we fall. The conclusion that the antidote is humility.
This is the fundamental insight Max reached during his 48-year investment career . Section 11. The Manager's Dilemma and Oaktree's Choice. The biggest problem for conscientious fund managers arises when too much capital floods into their market and investors are too eager to invest in it. This is roughly when Citibank CEO Chuck Prince said that as long as the music is playing, you have to get up and dance.
What kind of choice is it for the fund manager? As enthusiastic investors join in lowering standards or stand by idly, other asset managers build up their assets under management. I would never like to present Oaktree as the exclusive investment virtue. However, excellent investment comes from making better decisions than others.
The saying that you have to dance as long as Chuck Prince's music is playing. It is one of the most famous quotes in financial history. If you maintain your education, you lose customers in the short term, and if you lower your standards, you lose capital in the long term . First, we have been investing in Hyde bonds and syndicated loans for decades, but we have not gone overboard in private credit.
In response to the question asking to talk about private credit, my response was to talk about credit. Second, when private lending began in the early 2010s, we thought the returns were relatively high but absolutely low . Private credit accounts for well less than half of Oaktree's credit assets under management, and private loans account for less than 15% of total assets under management .
Third, because we expanded our assets much less, we felt less pressure to compromise on standards. Software exposure is significantly lower compared to peers, and mainly linear exposure is short, while PIK is very low. Loans account for less than 15% of the total Oaktree. It is an extremely conservative allocation compared to the industry average.
And this conservative stance is now shining . Fourth, 80% of Oaktree's private credit investments were made on behalf of institutional clients . While leading public private lending firms hold $40 billion to $50 billion, we hold just slightly over $10 billion. The newly heightened skepticism among investors is likely to present much better investment opportunities in the future.
Maintaining discipline and resisting the latest trends is not a path to short-term maximization, but it is essential to the investment excellence we pursue. $ 10 billion compared to $40 billion to $50 billion. It may have seemed shabby in the past, but now it holds a completely different meaning . Section 12.
The Future of Private Lending and Private Equity. Private equity funds were born in the 1970s and were further amplified by the emergence of private lending in the 2010s. A significant portion of the profits came from the interest rate environment in which private equity funds grew. In December 2022, I wrote a memo called C-Change .
I had a bank loan with an interest rate of 22.25% in 1980, and in 2020, I was able to borrow at 2.25% . The 2,000 basis point decline in interest rates over those 40 years is considered the most influential event in the financial world over the past half-century . Falling interest rates make assets more valuable and reduce borrowing costs.
Those who purchased assets with borrowed money receive a bonus among them. That is exactly what the Office Fund does . 22.25 40-year decline in interest rates from 25% to 2.25%. This was the hidden tailwind for Fund No. 3. The decline in interest rates was a bonus for the strategy of buying assets using leverage.
However, in early 2022, the federal funds rate rose from 0 to 5.25%. Brusca said. Over the past few years, many private equity firms have been left with capital structures that did not anticipate a 400 basis point rise in interest rates . Higher interest costs reduced the profitability of many portfolio companies.
Sale prices have decreased, and sales have slowed down. The applicability to LP has decreased. According to MSCI, the annual return of the U.S. Office Fund Index from 2022 to the third quarter of 2025 was 5.8%, and the SMP 500 was 11.6%. PE yield is half of SMP 500. With a return of half while reducing the liquidity discount—far from a liquidity premium—these figures raise questions about the very reason for the existence of PE.
Going forward, the performance of portfolio companies will largely depend on the capabilities of the Ho Fund company. Lenders that conduct skilled due diligence, maintain high standards, and make good credit decisions will succeed. Note that Hyde bonds and broad syndicated loans performed well during the period including the global financial crisis .
Ultimately, the key is selectivity. It is not that private lending as a whole will fail, but rather that a massive performance gap will widen between borrowers who adhered to the standards and those who lowered them . Section 13 Conclusion. I will conclude with what Bob O'Leary recently wrote to me.
There are interesting similarities between today's cred market and the late 1980s and early 1990s . At that time, there was a new financial innovation called the High Heel Bond, which many investors coveted excessively. The market was suddenly shocked by the war in the Middle East. If you replace Direct Landing with Hydro and add an element of technical creative destruction, it is the same dynamic.
Ultimately, Hyde was fine. It was even excellent. The same would likely be true for private loans. However, you may have to go through a credit cycle to reach a better place . Bob O'Leary's analogy is the perfect conclusion. Just as Hyde was fine in the end, private loans will be fine too. However, in that process, one must go through the credit cycle.
And the only ones who survive that cycle are disciplined fund managers and investors who do not lose their humility . This is the core message of Howard Marks' memo and what is happening to Samoc Credit .
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