Carlyle CEO on Private Credit's Trillion-Dollar Rise

In Brief:

Private markets have exploded into a $13 trillion powerhouse as traditional banking retreats, with private credit alone tripling from $517 billion in 2015 to over $1.7 trillion today. Harvey Schwartz, CEO of Carlyle Group—one of the world's largest private equity firms managing over $450 billion—warns we're in the early days of this financial transformation, with regulators increasingly concerned about systemic risks in this largely untested shadow banking system. In a Bloomberg Originals interview with Sonali Basak at a New Jersey diner near his hometown, Schwartz revealed his unconventional path from a troubled childhood with mentally ill parents to nearly becoming Goldman Sachs CEO before taking the helm at Carlyle in 2023.

Big Picture Drivers:

• Banking Retreat: Post-2008 regulations forced traditional banks to reduce risky lending, creating massive opportunities for private lenders

• Market Evolution: Public companies declined by half since 2000 as businesses prefer staying private with more flexible capital structures

• Capital Demand: Infrastructure, energy, and defense needs are driving unprecedented demand for private capital globally

• Regulatory Gaps: Shadow banking system operates with less oversight than traditional banks, raising systemic risk concerns

Key Topics Covered:

• Personal Journey: Schwartz's path from failing high school to Goldman Sachs leadership through multiple career pivots

• Industry Transformation: How private markets moved from boutique operations to the center of global finance

• Risk Assessment: Potential vulnerabilities in private credit during economic downturns and interest rate increases

• Future Growth: Plans to democratize private market access beyond wealthy investors through ETFs and 401(k)s

Key Insights:

• Systemic Risk: Private credit hasn't faced a major stress test at current scale, with regulators worried about interconnected risks between banks and private lenders that may only emerge during crises.

• Market Structure: The decline in public companies reflects efficiency advantages of private capital rather than public market dysfunction, fundamentally reshaping how businesses access funding.

• Access Evolution: Private markets are moving toward broader retail access through ETFs and retirement plans, potentially exposing millions of average investors to higher-risk investments previously limited to institutions.

• Economic Sensitivity: Private credit investments will be "exquisitely sensitive" to economic downturns, with default rates expected to rise regardless of recession conditions.

• Industry Consolidation: Private markets are becoming more concentrated among fewer major players, creating potential systemic vulnerabilities similar to traditional banking.

• Growth Trajectory: Despite current scale, private capital remains in early development stages with massive expansion expected as global capital needs accelerate.

Memorable Quotes:

• "What's happened over the last 25 years, public market capital has declined as the alternative of choice" - Harvey Schwartz, explaining the fundamental shift toward private markets

• "Private capital has just been a much more efficient alternative for people who need capital" - Harvey Schwartz, defending the industry's rapid growth

• "We haven't seen a big accident yet in private credit" - Harvey Schwartz, acknowledging the untested nature of the current system at scale

• "Do I think we could have a bad credit cycle? Sure. The question is, is it systemic in that it actually triggers a broader crisis?" - Harvey Schwartz, addressing regulatory concerns about market stability

• "If we look back again to 2000 to today, it's early days for private capital" - Harvey Schwartz, predicting continued explosive growth in the sector

The Wrap:

Schwartz's leadership of Carlyle comes at a pivotal moment when private credit is reshaping global finance but facing its first major stress test. The industry's push toward retail access could democratize private markets or expose millions to risks they don't fully understand, making regulatory oversight and market stability crucial considerations as this shadow banking system continues its explosive growth from what Schwartz insists are still the early days of a fundamental transformation in how capital flows through the global economy.