For those of you who are unfamiliar, private credit is basically the practice of loaning money outside the traditional centralized banking system. Companies with low credit rating or a plethora of other risks will get turned down by banks so naturally they turn to private credit firms like Ares and KKR. It's essentially unregulated therefore -> no public filings -> lack of transparency.
For years, this worked fine for big institutional investors. Pension funds, university endowments, insurance companies. They had the sophistication to evaluate risk. They had skin in the game. But over the past year or so, the firms pushing private credit started getting aggressive about retail. Your grandma or your neighbor's 401ks, just imagine. Your own retirement account. And that's when my spidey senses started tingling. SPVs are part and parcel too but that's for another day.
The pitch was simple: you want higher returns? Stocks and bonds aren't cutting it anymore. Private credit offers yields that beat the market. 8-9% fixed income, sometimes even higher. It sounds too good to be true because it probably is. Why is everyone so nonchalant?? Or have I just read one too many Andrew Ross Sorkin and Michael Lewis books to be this jaded and skeptical of highly auspicious environments?
What bothered me the most was that the entire growth of this industry has felt propped up by artificial demand and marketing, not genuine economic fundamentals. Wall Street was pushing it hard because Wall Street wanted to exit + collect fees. 2T in the private credit market right now. And a huge chunk of that growth came from hype, not from actual borrowers getting healthier or credit getting safer. Then there's the leverage problem. Blue Owl, for instance, doesn't just borrow your money, they borrow money themselves to amplify returns. Back-leverage is like prop trading but without any hedge. That should terrify people. And I'm an aggressive, risk-on individual so that's saying something. When things go wrong, they go wrong fast. It's not just the loan that fails. It's the loan plus the borrowed money on top of it, all collapsing at once.
And the borrowers are disproportionately made up of software companies. Risky, overvalued, vulnerable to AI disruption. These aren't stable mid-market producers. These are companies that could get disrupted overnight. The private credit world was lending to them like they were blue chips. I guess at some point they were blue chips. I was younger but I can remember a time when it felt like all the "smart money" gushed into software.
Michael Lewis wrote about this in The Big Short. The mortgage crisis wasn't an accident. It was an architectural, systemic failure driven by greed and euphoria. Wall Street took subprime mortgages and repackaged them into bonds with AAA ratings. Over and over. The rating agencies signed off. Institutions bought them thinking they were buying safety. Retail investors followed. When it all collapsed, the ratings meant nothing. Even the guys at the rating agencies knew the parameters were absolute bullshit.
What bothers me is that private credit has the same DNA. The structure is different, but the logic is identical. Take risky loans. Bundle them. Dress them up with promises of stable yield. Get institutions hooked first. Then open the door to retail. Market it as access. Market it as an opportunity. By the time people realize the risk, the money's already committed. With mortgages, at least the collateral were the brick by brick built homes. With private credit to software companies facing disruption, what's the collateral? A company that could be obsolete in two years. But the marketing doesn't lead with that. It leads with the yield.
Last month, JPMorgan marked down the value of loans held by private credit funds. Blue Owl, Apollo, KKR, Ares, all of them took hits. Blue Owl actually froze redemptions. Blue Owl's fund sold roughly 34% of its portfolio and used the proceeds to repay a credit facility from GS. That's the funny thing about private credit. It promises liquidity, but JUST when you need it, it evaporates. It is so infuriating I want to scream.
So I just realized that the default rate among US corporate borrowers of private credit rose to a record 9.2% in 2025, following a previous record of 8.1% in 2024. Which may seem marginal but you have to remember, it was this way in 2008, too. UBS laid out a worst-case scenario where defaults in the sector could climb to 15 percent. That's a catastrophe waiting to happen. But this time, institutional investors saw this coming. They're prepared this time. They started pulling money out months ago. But at the exact same time, Wall Street was marketing private credit hard to people with 401(k)s. People who don't have time to do deep credit analysis. People who trust the branding and the promises and the name recognition and prestige of these PC firms.
It feels like a classic bait and switch. The smart money is trying to exit. They're pushing for the retail money to enter. And when the defaults spike, regular people are going to hold the bag. The government is going to slap some wrists and bail out. Our deficit balloons.
Why is everyone so chill?