Franklin Templeton (BEN) CEO Jenny Johnson said the private lending sector has earned its rightful place on Wall Street.
“Private credit is here to stay,” Johnson told Yahoo Finance during the Semafor World Economic Summit. He linked his argument to the 2008 financial crisis, when stricter capital requirements forced banks to stop lending, prompting private funds to fill the gap.
“It drives me crazy when someone says, ‘Oh, it’s more liquid than you think.’ It’s absolutely illiquid. And if you can’t stand the illiquidity of investing, don’t get into it. Okay?” she said.
Because the underlying loans cannot be sold quickly like a stock, investors cannot get their money back at the request of the private funds. But Johnson noted that investment-grade private loans can earn an additional 150 basis points over traditional bonds. On the high yield side, that spread can jump to 250 or even 400 basis points.
Over 20 years, just an additional 1% return could result in a 20% larger retirement balance. Johnson suggests investors ask themselves whether they could stomach 5% to 10% illiquidity in their portfolios. “If possible, you will be able to get a good premium which can be significant when compounded. Therefore, you should not ignore it,” he said.
Johnson noted that companies like Franklin Templeton are now folding those frozen assets into “liquid vehicles.” This means they mix a small amount of private debt into a traditional fund that people can trade quarterly. It gives retail investors a taste of high-interest private debt and late-stage venture capital without the usual decade-long wait to get their money back.
Johnson also pointed to artificial intelligence and enterprise software as the next frontier, a view contrary to that of Wall Street. Software stocks have been hit by fears that rapid advances in AI will make traditional software obsolete. Part of the concerns around private credit have also been their loans to software companies.
In the context of the Iran war, skeptics also argue that software matters much less than physical security and oil.
Other titans are watching. Goldman Sachs CEO David Solomon said the firm is currently experiencing credit stress in “wholesale” lending to large companies, rather than in its private credit or credit card portfolios.
He warned that the market has gone “a long period of time without what I call a normal credit cycle,” meaning a recession is overdue. Once a true downturn occurs, higher levels of losses are inevitable across diversified portfolios, he said.