# Is Private Credit a Threat to The Financial System

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 21 Mar 2026, 25 min.

Audio: https://traffic.megaphone.fm/APO9368589310.mp3

While the world is distracted by global conflict, a panic is building in the private credit market. In this video, we go inside the opaque world of Private Credit - examine the "Golden Age" of lending that is rapidly turning into a slow-motion crisis. From the "volatility laundering" tricks used by managers to hide billion-dollar losses to the "Exit Trap" currently catching retail investors in BDCs, we explore how the search for yield led Wall Street directly to your 401(k). We look at why insiders like Boaz Weinstein are calling this a scandal, and what happens to the 48 million Americans whose jobs depend on the fragile financial plumbing when the credit finally contracts. Is this a repeat of 2008, or something much quieter but much harder to escape? Patrick's Books: Statistics For The Trading Floor: https://amzn.to/3eerLA0 Derivatives For The Trading Floor: https://amzn.to/3cjsyPF Corporate Finance: https://amzn.to/3fn3rvC Ways To Support The Channel: Patreon: https://www.patreon.com/PatrickBoyleOnFinance Buy Me a Coffee: https://www.buymeacoffee.com/patrickboyle

## Transcript

[0:00] Last week, Goldman Sachs held a client call to discuss the
[0:03] investment implications of the war in Iran.
[0:06] Kunal Shah, a senior executive and the global head of fixed
[0:10] income, currencies and commodities, responded to a
[0:13] question about the views of Goldman's clients on the
[0:17] conflict by saying that some of the bank's private markets
[0:20] clients were just glad that there's something to talk about
[0:24] that isn't software exposures and private credit.
[0:28] He went on to say this is at least a distraction from that.
[0:33] Now we can't allow ourselves to be distracted around here.
[0:36] So instead of talking about the war in Iran, we have to talk
[0:40] about private credit, the $1.8 trillion world of shadow banking
[0:44] that investors have been increasingly worried about over
[0:48] the last six months or so. If you want to know how worried
[0:51] they are, you just have to look at the stock market.
[0:54] The share price is of the world's biggest alternative.
[0:57] Asset management teachers have been in a free fall since the
[1:01] start of 2026. Blue Owl and Aries Management
[1:05] have seen their stocks plunge by around 40%, while KK or
[1:09] Blackstone and Apollo have all shed more than 25% of their
[1:14] market value. Private credit is essentially
[1:17] direct lending to mid market companies that are often owned
[1:21] by private equity sponsors. It's an asset class predicated
[1:25] on the illiquidity premium investors trade, the ability to
[1:29] exit a position on a whim for a higher yield, and a bespoke
[1:33] contract tailored to the borrower's specific cash flow
[1:37] needs. Private equity firms, who are
[1:39] the big borrowers, tend to use a lot of leverage, meaning that
[1:43] they tend not to be the most creditworthy.
[1:46] This ecosystem grew rapidly after 2008 as traditional banks,
[1:51] strangled by post crisis capital requirements were forced to
[1:54] retreat from riskier lending. For a long time this was
[1:58] heralded as a golden age for credit, with firms like
[2:01] Blackstone and KKR offering returns as high as 13% with
[2:06] almost no reported losses. Some funds even advertised loss
[2:11] rates of less than 110th of 1%, a figure that would make most
[2:15] bank risk officers weep with envy.
[2:18] But as interest rates have risen and many parts of the economy
[2:22] have started to cool, these golden returns are starting to
[2:26] look a lot more like lead. In February, Blue Owl was forced
[2:30] to block withdrawals from one of their funds as investors clamour
[2:34] to get out. The rapid expansion of the
[2:37] private credit market from a niche corner of finance into a
[2:41] $1.8 trillion Bermouth is a direct result of the regulatory
[2:46] clean up that came in the wake of the 2008 financial crisis.
[2:50] As regulators clamped down on bank balance sheets, forcing
[2:54] them to hold significantly more capital against risky loans,
[2:58] traditional banks decided that lending to sub investment grade
[3:02] middle market companies was simply too expensive.
[3:06] This created a massive fact that the private capital industry was
[3:10] more than happy to fill for over a decade.
[3:13] This was a symbiotic relationship driven by a search
[3:16] for yield in an era of rock bottom interest rates.
[3:20] Pension funds and insurance companies were desperate for
[3:23] anything offering a decent return, and they were willing to
[3:27] trade liquidity for the double digit coupons promised by
[3:30] private lenders. This shift was so dramatic that
[3:34] the buy out barons of the 1980s have largely reinvented
[3:38] themselves as alternative credit providers.
[3:41] Bloomberg points out that KKR, the firm famous for the
[3:44] aggressive corporate raids chronicled in the book
[3:47] Barbarians at the Gate, now manages more credit assets than
[3:51] it does equity. To understand why this market is
[3:55] structured the way it is, you have to look at the fundamental
[3:58] flaw in traditional banking. Banking is essentially an
[4:02] exercise in maturity transformation.
[4:05] Banks take short term deposits from people who want their money
[4:08] available at a moment's notice and lend it out to businesses
[4:12] for five or ten years. This works perfectly until the
[4:16] moment everyone wants their money back at the same time, at
[4:20] which point you have a run on the bank.
[4:23] Institutional private credit funds solve this problem by
[4:27] ensuring that there's a maturity match between their assets and
[4:30] liabilities. When a pension plan or a
[4:33] sovereign wealth fund invests in private credit, they agree to
[4:36] have their capital locked away for five years or more.
[4:40] Because the investors can't leave, the fund manager doesn't
[4:44] have to worry about a sudden panic.
[4:46] They can hold their loans to maturity, work through any
[4:50] problems with the borrower, and ignore the daily moods swings of
[4:53] the public markets. For a long time, this was
[4:56] heralded as a more stable way to run a financial system.
[5:00] But as the industry grew, it began to change.
[5:03] And it turns out that even the most stable looking structures
[5:07] can have a serious cockroach problem.
[5:10] Financial problems rarely travel alone.
[5:13] On an analyst call last October, JP Morgan CEO Jamie Dimon noted
[5:18] that in credit markets, bad loans are often like
[5:22] cockroaches. When you see one cockroach, he
[5:24] said there are probably more. He went on to say everyone
[5:28] should be forewarned on this one.
[5:31] The first real sightings of these credit cockroaches
[5:34] appeared late last year with the sudden collapses of First Brands
[5:38] Group and Tricolor. First Brands was an auto parts
[5:42] manufacturer that filed for bankruptcy owing roughly $10
[5:45] billion. It's senior lenders only
[5:48] discovered the full extent of the company's debt during the
[5:52] bankruptcy filing. It turned out that the business
[5:55] had been using its receivables, money it was supposedly owed by
[5:59] customers to borrow from several different lenders at the same
[6:03] time. The private credit industry was
[6:06] quick to defend itself, pointing out that these specific
[6:09] companies had actually borrowed from banks rather than private
[6:13] funds. But for many investors, the vibe
[6:16] shift was undeniable. After a decade of loose lending
[6:20] and fierce competition for deals, they worried that basic
[6:24] underwriting standards had weakened.
[6:26] This leads us to the more recent case in the UK involving a
[6:31] mortgage lender called Market Financial Solutions, or MFSMFS,
[6:36] recently collapsed amid allegations of fraud and the
[6:40] double pledging of collateral. What makes the MFS story so
[6:44] useful for investors is that the warning signs were apparently
[6:48] visible years ago to anyone who bothered to look.
[6:52] One credit fund manager decided not to invest back in 2019
[6:57] because the company was unable to provide simple answers to
[7:00] standard due diligence questions.
[7:03] His real reason for passing, however, was what he called the
[7:06] watch to house ratio. He noticed that the founder of
[7:10] MFS wore a 200,000 LB Richard Miele watch while living in a
[7:15] house estimated to be worth only around twice that amount.
[7:20] If the founders wrist was that leveraged.
[7:23] It suggested that the success being projected was a
[7:26] performance when it was likely being funded by the lenders
[7:30] themselves. Despite these signals, several
[7:33] major institutions including Barclays and Jeffries handed
[7:38] over hundreds of millions of pounds to what is now being
[7:41] described as a refinancing merry go round.
[7:44] The company was allegedly using new loans to pay off old ones,
[7:48] recycling debt to keep their default rates looking
[7:51] artificial, officially low until the money finally ran out.
[7:56] But the real story isn't just about a few colorful frauds.
[8:00] It's about the staggering amount of hidden distress across the
[8:03] entire $1.8 trillion market. A recent study by Goldman Sachs
[8:08] Asset Management looked at 150 European companies that had hit
[8:13] a credit event since 2017. Only four of those 150 companies
[8:18] ever went through a public bankruptcy.
[8:21] The the other 146 were quiet handovers where the lender
[8:26] simply took the keys to the business to avoid the public
[8:30] spotlight. When the industry advertises
[8:33] loss rates of less than 110th of 1%, you have to ask yourself how
[8:38] is that possible in a world where public speculative grade
[8:42] debt is currently defaulting at 4 1/2 percent?
[8:46] The answer is that private credit is often just better at
[8:49] hiding it's bruises. The smart money has clearly
[8:53] noticed this gap between reality and reporting, and they're
[8:56] already heading for the door. But as they exit, they're being
[9:00] replaced by a new group of investors who might not realize
[9:04] exactly what they're buying. As the flood of money from
[9:07] pension funds and sovereign wealth funds began to dry up,
[9:11] the world's biggest alternative asset managers didn't just pack
[9:15] up and go home. Instead, they turned their
[9:17] attention to a much less sophisticated group, retail
[9:21] investors. This transition is often
[9:24] marketed as the democratization of finance, finally allowing the
[9:29] average saver to invest alongside the giants of Wall
[9:32] Street. But insiders like the hedge fund
[9:35] manager Boaz Weinstein describe it in much less noble terms.
[9:40] On the Money Stuff podcast this week, Weinstein noted that these
[9:44] private credit products are sold and not bought.
[9:48] Most individual investors don't call their finance advisors
[9:52] asking for a piece of an opaque middle market software loan.
[9:57] The products are being pushed on them by their financial advisors
[10:01] who get paid a heavy Commission. The reason for the hard sell is
[10:05] simple. The commission's the financial
[10:07] advisor can earn are massive, especially when compared to
[10:11] selling something simple like an ETF.
[10:14] Private credit vehicles often pay financial advisors upfront
[10:18] sales commissions as high as 3 1/2%, and often pay ongoing
[10:23] annual servicing fees too. This creates A glaring conflict
[10:28] of interest. Your advisor isn't necessarily
[10:30] putting you into private credit because it's the best thing for
[10:34] your retirement. They may instead be doing it
[10:36] because it's the best thing for their own bottom line.
[10:39] Weinstein went so far as to call the practice of putting retail
[10:43] clients into the these illiquid products a scandal.
[10:46] To understand how the retail products differ from the
[10:49] institutional funds we talked about earlier, we have to look
[10:53] at a specific type of vehicle called a business development
[10:56] company or BDC. You can think of the BDC as a
[11:00] retail friendly wrapper around the same types of private loans.
[11:05] These come in two main flavors. First, there are publicly traded
[11:09] BDCS, which trade on an exchange like a regular stock.
[11:13] You can buy or sell them whenever you want, but they have
[11:18] a habit of trading at a steep discount to the value of the
[11:21] loans they actually own. For example, FSKKR Capital has
[11:26] recently been trading at a 48% discount to its claimed book
[11:30] value. As Boaz Weinstein pointed out,
[11:33] when you see a public fund trade at $0.60 on the dollar while a
[11:37] private version of the same portfolio has been marketed at
[11:41] 100 cents, it's a fairly safe bet that one of these two prices
[11:45] is a work of fiction. Then there are non traded BDC's
[11:50] which are the ones marketed to individuals through financial
[11:54] advisors. These don't trade on an
[11:57] exchange. Instead, they're marketed as
[11:59] semi liquid, typically offering investors the ability to exit on
[12:03] a quarterly basis. However, this liquidity comes
[12:07] with a significant catch. An industry standard cap that
[12:11] limits total redemptions to just 5% of the funds net asset value
[12:15] each quarter. It's important to understand
[12:19] that this 5% limit applies to the entire fund, not to your
[12:23] individual holding. In a quiet quarter when very few
[12:27] people want out, an individual could potentially cash out their
[12:30] entire stake. But the moment the collective
[12:33] withdrawal requests hit that 5% ceiling, the fund manager pulls
[12:38] down the gate and starts rationing the available cash on
[12:41] a pro rata basis. This means that if everyone
[12:45] tries to leave at once, you only get a small fraction of your
[12:49] money back. As Antoine Gara described it on
[12:52] the Unhedged podcast last week, investors have to get in line
[12:56] for an amuse Bush of liquidity, a small taste of their cash
[13:00] while the rest is stuck behind the gate.
[13:03] The fundamental mistake was believing that you could offer a
[13:07] little liquidity to retail investors in the 1st place.
[13:11] As Robert Armstrong has noted, liquidity is binary.
[13:14] It's either there when you need it or it never existed.
[13:18] Selling an illiquid asset to a retail audience under the guise
[13:22] of semi liquidity was always going to be problematic because
[13:26] you've set up a situation where the gates only stay open when no
[13:30] one's trying to walk through them.
[13:33] This leads to what former Fed President Bill Dudley calls a
[13:37] dangerous adverse feedback loop. Once investors realize that
[13:41] there's a limit on withdrawals, they have a greater incentive to
[13:45] always ask for the maximum amount possible just to get a
[13:48] spot in the queue. To meet these requests, the fund
[13:52] manager is often forced to sell their best, most liquid assets
[13:56] first to minimize realized losses.
[14:00] This leaves the remaining investors stuck with the most
[14:03] problematic holdings, effectively the cockroaches that
[14:06] we talked about earlier. It's a structural design flaw
[14:10] that can turn market jitters into an orderly spiral into the
[14:14] abyss, which really isn't what anyone wants.
[14:18] The industry is currently facing this stress test just as they're
[14:22] on the cusp of their biggest victory yet, moving these
[14:26] products into four O 1K plans. Last year, an executive order
[14:31] was signed to make it easier for alternative assets like private
[14:35] credit to be offered in retirement accounts.
[14:38] I made a video about it at the time.
[14:40] The Department of Labor has in fact begun the formal rulemaking
[14:44] process that will next lead to a public comment period before or
[14:48] finally giving a green light to four O 1K administrators to
[14:52] start investing in these products.
[14:55] Proponents say that this democratization gives average
[14:59] savers access to better returns, though given that the existing
[15:03] investors are currently fighting for an amuse Bush of liquidity,
[15:07] the timing might be considered inauspicious.
[15:11] To understand why fundraising for this asset class has
[15:15] suddenly hit a wall, even as the total market is swelled to a
[15:19] staggering $3 trillion, you have to realize that private credit
[15:23] essentially operates on a different set of physical laws
[15:27] than the rest of the financial world.
[15:29] While the public markets are currently pricing these firms as
[15:32] if a disaster is imminent, the private fund valuations are
[15:37] whispering that everything is perfectly fine.
[15:40] The industry to maintain this illusion of stability through a
[15:44] process the AQR founder Cliff Osnes famously calls volatility
[15:49] laundering. By simply choosing not to mark
[15:52] their assets to the daily market price, managers can create a
[15:56] sense of safety and stability that doesn't actually exist.
[16:00] One fund even boasted a sharp ratio of 11, a number so high
[16:05] that it suggests that the manager has either
[16:08] revolutionized finance or is simply refusing to look at the
[16:11] scoreboard. The reality is that these
[16:15] valuations are often pure guesswork.
[16:18] For example, JP Morgan recently restricted its lending to
[16:22] certain private credit firms after discovering what they
[16:25] claim is a massive valuation gap.
[16:28] They looked at the same software companies that private funds had
[16:31] marked at par or at 100 cents on the dollar, and decided that
[16:35] they were actually worth significantly less.
[16:39] Boas Weinstein noted that some managers are marking risky
[16:43] positions as much as 25 points higher than what more
[16:47] conservative banks are reporting.
[16:49] Then there's the sector labeling trick.
[16:52] A recent investigation by Bloomberg News found that this
[16:55] isn't just a few isolated incidents, it's a systemic
[16:59] practice. By analyzing thousands of
[17:02] filings, Bloomberg identified at least 250 different loans worth
[17:07] more than $9 billion for software companies were being
[17:11] creatively relabeled. A struggling tech firm might
[17:14] suddenly be classified as a food products or logistics business,
[17:19] allowing the fund to hide its true exposure to the tech sector
[17:23] and avoid triggering alarm bells about concentration risk.
[17:27] Lenders also use liability management exercises to keep the
[17:32] wheels turning on bad loans. Instead of admitting that a
[17:36] borrower is in trouble, they might allow them to stop paying
[17:39] cash interest and instead add that unpaid interest to the
[17:43] total loan balance, a practice known as payment in kind or pick
[17:49] debt. It's a system of marked magic
[17:52] where the only thing being managed is the investors
[17:55] perception of risk. But as we're seeing with the
[17:58] orderly spiral in the BDC market, perception eventually
[18:02] has to meet reality. A bigger question looming over
[18:06] all of this is whether the trouble in private credit could
[18:10] precipitate A broader financial crisis.
[18:13] Whenever a market grows this quickly and this quietly, the
[18:17] ghost of 2008 is never far away. Investors are increasingly
[18:22] worried that a major market downturn is finally in the
[18:26] cards. There is, of course, the
[18:28] fixation on software exposures, which, as Kennel Shah noted, has
[18:33] become the industry's favorite thing to worry about.
[18:36] But the list of headwinds is growing longer by the day.
[18:39] Between a slowing U.S. economy, surging oil prices, the
[18:43] escalating war in the Middle East, and the stubborn
[18:46] persistence of inflation, the Goldilocks era for private
[18:50] credit may be over. There's even growing chatter
[18:54] about stagflation, the worst possible outcome for the levered
[18:58] mid market borrowers that make up the backbone of this
[19:01] industry. These businesses are uniquely
[19:04] vulnerable. They're almost entirely funded
[19:07] with floating rate debt, meaning that their interest bills have
[19:10] skyrocketed just as the broader economy is starting started to
[19:13] cool. When you combine high leverage
[19:16] with shrinking margins and a global energy shock, those
[19:20] pristine loan portfolios start to look very fragile.
[19:25] The good news, if you can call it that, is that most experts
[19:29] believe a literal repeat of the global financial crisis is very
[19:33] unlikely. Back in 2008, the entire system
[19:37] was built on a foundation of banks using short term deposits
[19:41] to fund long term toxic subprime loans.
[19:44] Today, banks are better prepared, with significantly
[19:48] more loss absorbing equity on their balance sheets than they
[19:51] had 20 years ago. However, less exposure is not
[19:56] the same as no exposure. Banks still provide significant
[20:00] back leverage to private credit firms, essentially lending them
[20:04] the money that they use to make their own loans.
[20:07] If the underlying borrowers stop paying, that stress eventually
[20:11] travels back up the chain to the banks.
[20:14] The real concern for many regulators today isn't the
[20:17] banks, it's the multi trillion dollar insurance industry.
[20:21] Life insurance, particularly those controlled by private
[20:24] equity firms, have become some of the biggest buyers of private
[20:28] credit. Insurance companies are heavily
[20:31] regulated. They're required to hold a
[20:33] specific amount of capital against their investments to
[20:37] ensure that they can pay out claims.
[20:40] Regulators generally view a direct stake in a risky private
[20:44] credit fund as an equity like risk, which carries a high
[20:48] capital charge of around 30%. To bypass these rules, the
[20:52] industry has developed a magic trick called a rated note
[20:57] feeder. In this structure, a special
[21:00] purpose vehicle sits between the insurer and the credit fund.
[21:03] The vehicle issues bonds or notes, which are then graded by
[21:07] a specialist rating agency. This bit of repackaging allows
[21:12] the insurer to treat a stake in a risky credit fund as if it was
[21:16] a top rated corporate bond. By doing this, they can slash
[21:20] their capital requirements from 30% to as low as 10%.
[21:25] The Financial Times recently described these as black box
[21:29] products. Insurers are being flooded with
[21:31] pitches for these feeders, often from newer, smaller managers who
[21:36] don't yet have an established track record.
[21:39] In many cases, they say the rating agencies are grading what
[21:43] is essentially a blank sheet, rating the manager's reputation
[21:47] rather than the actual loans, because those loans haven't even
[21:51] been made yet. One insurance executive noted
[21:55] that buying these notes is akin to giving a loan to a manager
[21:59] while having no idea what's going on inside the actual
[22:03] portfolio. Insurers are essentially trading
[22:07] visibility and safety for yield, using financial engineering to
[22:11] hide the risk from regulators. This is what Bill Dudley means
[22:16] when he warns about a slow motion crisis.
[22:19] Because these losses are hidden from view and the liabilities
[22:23] are long term, the danger isn't sudden explosion, it's that by
[22:27] the time the situation becomes apparent, it'll be far too late
[22:31] to fix the balance sheet. It's easy to get lost in the
[22:35] financial alchemy of rated note feeders and the volatility
[22:39] laundering of private funds, but we shouldn't lose sight of what
[22:43] is actually at stake here. As former Fed Vice Chair Roger
[22:47] Ferguson recently noted in the FT, private credit has become
[22:52] the essential plumbing for Main Street.
[22:54] These funds are the primary lenders to middle market
[22:57] businesses that employ 48 million Americans and represent
[23:02] roughly 1/3 of US private sector GDP.
[23:06] The real risk to the broad economy is that the people who
[23:10] replace the banks might suddenly stop lending.
[23:13] If retail investors continue to hammer on the exit gates, fund
[23:18] managers will be forced to stop making new loans just to
[23:21] preserve cash for redemptions. For an economy already feeling
[23:26] the strain of war driven energy costs and embedded gas
[23:29] inflation, a sudden contraction in credit could be the catalyst
[23:34] that turns a slowdown into a slump.
[23:37] However, it is worth asking, as Toby Nangle did in the FT this
[23:41] week, who cares if private credit goes kaput?
[23:45] Nangle's point is that while the individual cockroaches are
[23:49] unpleasant, the system itself might be more resilient than we
[23:53] think. Unlike 2008, where a credit
[23:56] collapse threatened to take down every checking account in the
[23:59] country, the losses in private credit are largely contained
[24:04] within the portfolios of sophisticated institutions and
[24:07] wealthy individuals who signed up for the ride.
[24:11] If a fund loses 40% of its value, it's a tragedy for the
[24:15] investor, but as long as it doesn't trigger a run on the
[24:18] banks, it isn't necessarily a systemic catastrophe.
[24:23] The irony of the democratization of finance is that the average
[24:28] saver has been invited to the table just as the exits are
[24:32] being locked. Kunal Shah was right.
[24:35] The war in Iran is a significant distraction.
[24:38] But for the millions of people whose retirement is being moved
[24:41] into these products, the real danger is the crisis.
[24:44] They aren't talking about the one that doesn't end with a
[24:48] bang, but with the slow grinding realization that the golden age
[24:52] of credit is over. The doors have been locked from
[24:55] the outside. Thanks for tuning into this
[24:58] week's podcast. The podcast is entirely
[25:00] supported by viewers like you on Patreon, where you can
[25:03] contribute as little as you feel like to keep the podcast going.
[25:08] If you'd like to support it, I'll leave a link in the show
[25:11] notes. Have a great week and talk to
[25:13] you again soon. Bye.

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