The private credit world is roiled right now as Paresh Raja, owner of Market Financial Solutions, is alleged to have used money borrowed by his firm to fund a lavish lifestyle, including the purchase of six Ferraris, three Rolls-Royces, three Aston Martins, and two Mercedes.
Raja is alleged to have misapproriated $1.7 billion that MFS had borrowed to fund bridging loans for U.K. landlords and investors buying properties. Margot Patrick explains in The Wall Street Journal:
The MFS bankruptcy showed how cracks are appearing in the previously red-hot private credit market, where often lower-quality borrowers can tap private lenders such as investment funds instead of going to a bank. Mainstream banks still lend into the market but in less-direct ways that can obscure their exposure, such as by financing an investment fund making loans to companies.
Barclays recently wrote off around $310 million of its $680 million exposure to MFS, while HSBC took a $400 million charge last week over loans it made to Apollo’s Atlas SP Partners unit to buy into the deals. Atlas has said it has around $540 million in exposure. A spokesman for HSBC declined to comment, and Barclays and Atlas didn’t immediately respond to requests for comment.
Action Line: If big banks like Barclays and HSBC can be taken in by hard-to-analyze private credit schemes, imagine how difficult due diligence will be for 401(k) investors. Read more about the problems with private equity and credit in 401(k) accounts here. And click here to subscribe to my free monthly Survive & Thrive letter.
