Now more people are talking about Private Credit. Surely the many headlines coming day after day about funds denying their investors’ requests to cash out resonate more with a larger audience, hence deserve more visibility in media hungry to attract engagement and maximize advertising revenues compared to all the warnings a few people like myself, last time with “PRIVATE CREDIT: PEOPLE CAN SMELL THE SMOKE, BUT CANNOT SPOT THE FIRE YET“, made about it over many years when people did not care too much. However, this massive problem, not surprisingly, is still being downplayed and sugar-coated. My goal today is to provide you with a better understanding of the real scale of this monster, what the hell Private Credit really is, what the real nature of the problems impacting the market is, and how to put yourself in a safe place to avoid the incoming greater financial crisis when the 10-meter tsunami waves ultimately hit the shores.
What is “Private Credit” and how big is it?
Private credit is essentially a form of lending that happens outside of the traditional banking system. Think of it like this: when a business needs to borrow money, it normally goes to a bank. But today, there is a massive pool of money from large investors, like insurance companies, pension funds, and HNWI family offices, that acts as a “shadow bank.” These groups lend money directly to companies without going through a bank’s strict regulatory process. In terms of size, this market has exploded over the past decade and is now estimated to be worth well over USD 3 trillion globally (“Private credit is beginning to look like the bond market, and that comes with red flags“), making it one of the biggest and fastest-growing corners of the financial world, larger than some well-known markets like high-yield corporate bonds. To give you an idea, at its peak in 2005-2006, the subprime mortgages market’s total size reached USD 1.3 trillion.
Within “Private Credit,” there are 5 categories of investments:
- Direct lending: funds lend directly to medium-sized companies, usually taking the safest spot in the company’s debt pile, which aims to deliver steady income with less risk.
- Junior capital: this sits lower in the repayment order, offering higher returns to compensate for the higher risk; it includes mezzanine debt, second-lien loans, and preferred equity.
- Distressed debt: involves buying the loans of companies in trouble, then working to turn the business around; it’s a specialized field that tends to boom during economic downturns when opportunities arise.
- Special situations: in this category, we find anything “out of the ordinary,” like financing a merger, a spinoff, or a complex corporate event, where custom lending solutions are needed.
- Asset-based finance: this is a form of lending secured by tangible assets, such as real estate, aircraft, equipment, or even pools of receivables like credit card payments, car loans, or buy now pay later loans, using those assets as the primary source of repayment.
What is the real nature of the Private Credit problems?
It might sound simplistic to you, but these are the 5 main problems of Private Credit:
- Liquidity: once the capital is deployed into funds that then lend that money, investors are locked in, and they need to wait for the loans’ repayment to withdraw their capital.
- Leverage: many private credit funds borrowed from banks, the reason why regulators are now starting to freak out, in order to boost their promised returns, even to senior tranches.
- Lack of a secondary market: This means there’s no transparent way to sell loans under stress, which can freeze the system and trigger panic withdrawals, as it is already happening with Ares being the latest fund on a now large list of funds dealing with the problem (“Ares Limits Private Credit Fund Withdrawals as Redemptions Surge“).
- High risk concentration: Private Credit funds often bet big on a few companies or sectors, so a handful of defaults can ripple through the tightly interconnected network of investors and lenders.
- Asset quality: Private Credit funds mostly lent to companies or against asset collateral banks would not touch even with a 10-foot pole. From already highly levered companies to companies running questionable businesses (for example, First Brands or Tricolor), from subprime credit card loans to even more subprime buy now pay later credit used to fund even essential purchases like food (“Homegrown fast food chain introduces ‘eat now, pay later’ payment method“).
While on one side the change in regulation after the 2008 disaster was meant to avoid a subprime crisis from happening again, paradoxically, the very same regulation had several important loopholes that not only have been massively exploited, but made the problem even bigger and harder to monitor since it shifted the risks into the obscure “shadow banking” system.
The first huge loophole exploited is the shift from a mark-to-market accounting of all banks’ assets to the possibility of NOT marking to market assets if the bank planned to hold them till maturity. Hilarious – a problem I warned about for the first time more than 2 years ago in “2024 THE YEAR WHEN HIDE TILL MATURITY ENDS,” albeit I wrongly assumed that, after the 2023 US regional banking crisis and Credit Suisse implosion, the regulators would have closed this loophole.
The second huge loophole was to allow banks to lend to other financial institutions with limited amounts of capital without properly specifying the quality of the collateral necessary to consider those loans properly secured. As a consequence, lending to “shadow banks” exploded, effectively becoming indirect lending to companies that the very same banks would not have considered otherwise. Furthermore, banks successfully lobbied to keep this loophole in place, avoiding having these assets properly considered under their annual stress tests even after Central Banks, starting from the Fed, became aware of the massive risk hidden in this corner of their books. This is the reason why last year I warned how “2025 FED STRESS TEST REVEALS HOW TODAY’S FED IS COMPLICIT IN HIDING BANKS’ PROBLEMS.”
The last huge problem was virtually no oversight and capital requirement needs for the whole Private Credit market, which not only allowed all those funds to lend 100% of their funds without putting any reserve aside, but even allowed them to leverage those loans through collateral pledges to banks.
How to put yourself in a safe place?
The whole scale of the Private Credit risk is not only still broadly unknown, but it is even very hard to track, as the ECB found out in 2024, when it wrote the “Complex exposures to private equity and credit funds require sophisticated risk management” report on the matter, and still did nothing about it! Fast forward to today, hilariously, now that the problems are spreading, the very same ECB is freaking out: “ECB to Start Fresh Checks on Banks’ Private Credit Exposures.”
This example should give you a good idea of how the system is totally unprepared to deal with the Private Credit implosion.
How to protect yourself from the incoming financial mayhem that sooner or later will inevitably explode because the Private Credit implosion will trigger the Greater Financial Crisis?
- Build your cash cushion so you are never a forced seller when the broader market falls into trouble before Central Banks around the globe coordinate again to bail everyone out and reinflate financial asset values back up again.
- Check your exposure to private credit funds, BDCs, and any “alternative” investments that promise high yields with limited liquidity.
- Understand that high yields exist for a reason: they compensate you for illiquidity and risk. If a fund is offering 10% with quarterly withdrawals, that math works until it doesn’t.
- Own safe and hard assets directly outside the banking system, such as physical gold and silver (that will also protect you from the massive future monetary debasement and inflation consequences of another historical wave of money printing ahead of us).
Conclusion
The private credit market has ballooned into a USD 3+ trillion systemic risk that dwarfs the 2008 subprime crisis. This toxic mix of illiquidity, excessive leverage, poor asset quality, and regulatory blindness has created a shadow banking monster that even central banks don’t fully understand. The warning signs are already here: funds blocking redemptions and regulators scrambling to assess exposures they ignored for years. When this unravels, the contagion will spread rapidly through bank exposures to these shadow lenders.