Yeah, I'm going down a bit of a rabbit hole this morning. Turns out Wells Fargo's $59.7bn of private-credit lending is equal to 44% of its CE Tier 1 capital [1]. Meanwhile, Deutsche Bank got back to being Deutsche Bank while I was not looking [2].
I'm re-running some of the Fed's stress tests and, somehow, still find myself flabbergasted that DB is at the top of my risk list. Despite only having $12bn of exposure, if they see a 60% loss on that risk alone (assuming 60% recovery and 1.5x leverage), they breach their 4.5% capital requirement. That's the lowest threshold I'm finding across all of the banks the Fed stress tests.
Now 50% loss means wipe out. But given the size of the portfolio, there is also the concentration risk. A single private-credit firm going bust shouldn't take out a bank. But that seems–seems!–to be what I'm seeing.
It's never the time to short a company, even a really bad one. You have only 100% upside, infinite downside, and you have to time it perfectly. A short can be a part of a combination strategy where you go long on one company and short on a related one, but you still have to be really careful.
If DB stock increases 50% before it crashes, would you be forced to sell at the top and lose all your money?
This is sensible advice for most people. I see some thoughtful quibbles but I wish you weren't down voted. If you are a normal retail investor, please listen to pocksuppet.
pocksuppet’s advice is I think more of a reaction to a specific way that you could take a short position, and in 2026 I think you want to assume that people who know what “short” means, also know what options are.
The advice is good in a kind of stopped clock sense.
I'm old, so I am a stopped clock. However, I have invested my whole life including good times and bad. I believe that for a retail trader -- someone who doesn't get paid to trade other people's money-- options are bad. OK yes there are special cases like when your job requires you to hold a lot of one stock etc. I'm not going to make the case why here I am sure it has been argued to death.
I do remember smart friends getting interested in options at different times in the last thirty years because they make higher returns. Then they have a period where make lower returns, or have a real problem. I don't think its worth the attention and the trading cost for most people, even people who understand what a short is. You can't argue with a person who has been doing really well with them for five years but it always seems like people stop.
My take on why options are bad—options are bad most people because most people don’t get use from hedging, don’t have enough information about the timeline of price movements, and all you’re left with is a form of gambling. A form of gambling that’s pervasive enough to worry me. People on Reddit trying to get rich with SPY options (how could you possibly know where SPY is moving?)
Short positions are also bad, because there’s an ongoing cost to carrying a short position, and that cost is likely to cannibalize your expected gains.
Lots of good reasons around to avoid short positions and options like they’re the plague. I don’t like the “unlimited downside” reason because it’s solvable.
To people who are making lots of money in stocks or options… my question is always, “do you have high returns, or do you just have high volatility?” Because it’s easy to look at high short-term returns and believe that you’ve somehow beaten the market, when you’re really just holding a high volatility position that got lucky.
> I do remember smart friends getting interested in options at different times in the last thirty years because they make higher returns. Then they have a period where make lower returns, or have a real problem.
Volatility. Never trade options if you don’t understand volatility.
“Shorting” a company does not just mean short selling stock. Instead, it means having a short position, which you can use without unlimited downside.
The easy way is to buy puts. Maybe your next question is, “who is selling puts?” And that’s a good question, but you don’t really care, because you can buy your puts on the open market and when you do that, you get protection from credit risk.
There are other reasons why this isn’t a good idea but “unlimited downside” is not one of them.
> “Shorting” a company does not just mean short selling stock. Instead, it means having a short position, which you can use without unlimited downside.
If you are an equity index holder anyway, simply by not holding any exposure in an otherwise "market" portfolio is a "short" relative to benchmark.
ie if I "buy" the SP500 constituents according to weight but with TSLA zero'd out my portfolio is essentially the same as long SP500 and short weigtht*TSLA.
Normally you buy into something like SP500 via something like an ETF, something with a very low fee because it’s managed entirely automatically via simple algorithms.
How can you invest in SP500 minus TSLA without racking up exorbitant fees?
Unless such a fund already exists, you’d be managing it yourself and pretty much wiping out any gains any time you rebalanced.
> How can you invest in SP500 minus TSLA without racking up exorbitant fees?
Various options…
1. Direct indexing (requires minimum amount of assets),
2. Certain actively-managed ETFs like GGRW, which is not exactly SP500 minus TSLA but it’s not too far off
3. Buying passively-managed ETFs in sectors that don’t include TSLA,
4. TSLQ, maybe. You get fees and other problems. I wouldn’t.
Direct indexing costs more than ETFs in terms of fees, but there’s apparently some kind of tax loss harvesting that you can do with direct indexing to offset the fees, and some people say you can come out ahead. I don’t understand how tax loss harvesting works at a satisfactory level (I’ve read articles and watched videos, but I think I would need to take an accounting class and really sit down with a spreadsheet before I could say that I understand how direct indexing and tax loss harvesting work together.)
And puts are highly manipulated by MMs so you have to really study the chain and how it behaves before you have a chance to buy the contracts at a fair price. MMs will flood the market with contracts and devalue yours even when the price is moving in your direction. I highly suggest people think twice about trading options, they are best used as hedges for large positions during particularly vulnerable periods.
I’m not convinced. If you think you know what the fair price is for a put, then you can bid that price. If you don’t think you know what the fair price is, then you shouldn’t be trading options.
There are reasons for not trading options, but the main reason is “you know less about price movement than you think you do”.
Realistically, if you don't have the volume to be a market maker, there's no point bidding anything except the current market price. Either the price is higher than your bid, and your order won't fill (so why place it?) or the price is lower than your bid, and you should expect the market knows something you don't.
> Either the price is higher than your bid, and your order won't fill (so why place it?) or the price is lower than your bid, and you should expect the market knows something you don't.
There is no risk-free way to trade. You can place a market order and guarantee execution, bearing the risk that you get a bad price. You can place a limit order, and guarantee price, bearing the risk that your trade doesn’t execute.
It sounds like you’re starting with the assumption that you don’t know whether the options are undervalued or overvalued, and if you start with that assumption, yes, the correct answer is don’t buy or sell the option (barring some other reason to buy or sell). Duh. But the reason the market “knows something you don’t” is because it’s full of people doing research. Sometimes, the person doing the research is you, and you have an idea of where the price will go. That’s what an edge is. When you have an edge, you can make money, but maybe not very much and not very reliably.
Where it gets ridiculous is when people speculate with SPY options or dumb shit like that. The reason why speculating with SPY is so ridiculous is because it’s just so unlikely that you could get an edge with SPY. But in general? Yes, it’s possible to get an edge.
Trades always execute at exactly the market price. A limit order says that if the market price reaches your limit price, execute the trade. At that moment, your limit price will equal the market price.
It would be more helpful to say don't buy options once the trade is obvious. As soon as something has hit the FOMO phase and IV skyrockets and all strikes cost the same, that's a sign you're too late and might want to bet against your thesis or use a different instrument. The financial shoggoths do a reasonably good job ensuring there's no free money. However they're obligated to trade regardless of conditions and sometimes that's their weakness.
Infinite downside is theoretical. The bigger problem that I learned a long time ago is that the leadership of every company is fighting against the stock going down. So if you're long a company then your interests are aligned. If you're short you really need to have conviction that it's a winning bet because everything else is fighting you. Also, it's a short term play - the short eventually needs to be unwound. So you're not just making a bet you're making one that's losing you money over time.
What you are saying suggests that there's a single number (that can be positive or negative) that characterises your net short or long position.
That's silly.
You can build pretty much any kind of shareprice-to-payoff function with enough options and other instruments. And that's one dimension (a line) more than just a single number. You can get arbitrarily more complicated, if you want to.
If you think they are going belly up this year it is far cheaper and safer to buy a put. You risk losing the money you spend for it up front but your losses are capped. Right now the 25 strike for a DB Jan 15 2027 put is 2.50/2.85 bid/ask. DB is sitting at $29.44 as of yesterday's close. That's $285 bucks up front that gets into the money if DB falls beneath 22.15 by Jan 15th 2027. But if it moves down sharply in the near future you could just turn around and sell that put for a profit long before expiration.
This is not financial advice, it is gambling advice.
DB's fall has been glorious. I shorted them back in January when I learned they were delivering 1.3% of their market cap in gold to the COMEX. No bank gives up that much of a hard asset unless something is wrong. Things are also looking bleak for Scotia Capital, BofA, Barclays, and UBS. JPMorgan seems to be doing fine. However Citigroup appears to be making out like a bandit. https://www.cmegroup.com/delivery_reports/MetalsIssuesAndSto...
What do their gold deliveries have anything to do with their financial situation? That'll just be settling GC contracts, and there will be clients on the other side.
With the current concentration of wealth and banking, it almost seems like there is an incentive for banks to ruin themselves when they end up in a little trouble.
If the bank has trouble, shareholders/executives lose - if the banking system has trouble... then QE will solve the bank trouble.
IMHO, if QE solves the trouble, the Fed or treasury should be taking a bigger bite of ownership from the bailed out companies in exchange specifically to disincentivize taking risks with a bailout backstop.
That all relies on the assumption of petro-dollar, something that could have been taken for granted during the last 50 years but could easily change within weeks now.
No it doesn’t, the petro-dollar isn’t a real thing. Forcing USD denomination for a transaction doesn’t help USD because there is a buyer of USD and an equally sized seller of USD.
However, there does seem to be an outsized effort applied to defending this not-real thing. A leader who defies the petrodollar has a good chance of getting killed or kidnapped. In a way, the same principle makes any god real: he doesn't have to exist, as long as people who will beat up non-believers do.
Total USD reserve involved in that transaction is not zero. They have to already hold dollars to do the transaction at all, which means a benefit has already been provided to the US. The transaction doesn't change the US's position, but enabling the transaction to occur does.
Petrodollar hypothesis is debunked. The total volume of petrodollar trade approximates minutes in stock markets. This simply isn’t a real factor anymore; a lot of people think it is because there are writings from the 70s that are compelling.
As you said, trade volume doesn't drive valuation, it's reserve size.
Which goes up with inflation btw, so you can export inflation. Actors who maintain reserves of your currency will have to keep buying more from you, providing you with benefits.
Are you saying that they're using their private-credit portfolio as a Tier 1 capitalization to meet their regulatory demands (not sure if the ~10-15 something% rule has come back yet?)
> they're using their private-credit portfolio as a Tier 1 capitalization
Banks' private-credit lending constitutes part of their risk-weighted assets. So yes, it's part of their CET1 [1], which is part of Tier 1 capital, and since it's equity measured it incorporates fucking everything.
4.5% is the U.S. minimum. Regulators start throwing their toys out of the pram when a bank breaches 7%. To be clear, I'm not seeing anyone in the near future breaching those limits. Deutsche Bank, the stupidest of the lot, seems to have let DB USA stuff most of the risk in its German AG.
So, if I’m following: Banks are lending to private equity firms to fund purchases of businesses.
Many of these businesses are SaaS which means their valuations are tumbling.
It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and take operational control? Will the banks renegotiate terms such that the private equity owners are incentivized
to continue as stewards? Or, will they prefer to force a business sale immediately?
> Banks are lending to private equity firms to fund purchases of businesses.
Yes some businesses are SaaS but here's the real problem: Many businesses' sole purpose is _leveraged buy-outs_ which really is the devil in disguise.
It goes like this: A VC specialising in veterinary clinics finds a nice, privately owned town clinic with regular customers and "fair" prices, approach the owners saying "we love the clinic you've built! We'll buy your clinic for $2,500,000! You've really earned your exit!".
So now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books_. So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly, ~~burn out personnel~~ slim operations accordingly, and any surplus that doesn't go to interest and amortization goes straight to the VC.
> now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books
This mostly correctly describes a leveraged buyout (LBO). LBOs are done by LBO shops, a type of private equity (PE) firm. Not VCs. (VCS do venture capital, a different type of PE.) And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent.
Private credit, on the other hand, involves e.g. Blue Owl borrowing from a bank to lend to software businesses, usually without any taking control or equity. It’s fundamentally different from both LBOs and VC or any private equity inasmuch as it doesn’t have anything to do with the equity, just the debt. (Though some private credit firms will turn around and lend into a merger or LBO. And I’m sure some of them get equity kickers. But in that capacity they’re competing with banks. Not PE. Certainly not VC, though growth capital muddles the line between what is VC and other kinds of PE or even project financing.)
> And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent.
Doesn't the LBO shop still need to pay off the debt, technically speaking? AFAIU the company's assets (hospital in OP's example) are used as collateral in a credit agreement between the LBO shop (as the hospital's new shareholder) and the bank. But unless I'm mistaken, this is not exactly the same as the debt being on the hospital's books and the hospital having a credit agreement with the bank. (For an increase in debt on the liabilities side of the balance sheet there would have to be an equal increase of assets on the other side. The hospital didn't receive the cash, though, nor does the hospital suddenly own itself.)
LBO firm will create a new company called Acquisition Co. ("AcqCo") and put $500K of cash into it (equity). The Blue Owl will lend $2M to AcqCo (debt). AcqCo uses the $2.5M to buy the vet clinic. AcqCo will use cash flow from vet clinic to pay Blue Owl loan interest. If AI makes vet clinic lose revenue because customers treat Fluffy's ear infection at home, then Blue Owl and LBO firm are in trouble.
So the debt isn't "pushed" and it's not risk-free as the original comment said... also not Venture Capital. Lots wrong in that comment.
It's not risk free for the companies involved. Limited liability protects private assets which is the original motivator behind all of this. And yes, there could be alot of book cooking going on to extracting liquidity. Over here, we call them locusts, not PE and externalizing risk is kind of their job.
This is the general leap, wealthy dynasties do. They scale up from a regular (family) business that provides services (eg. the clinic) to eventually transition into investors with lesser or indirect motivation of providing services/goods.
Sure, it should say PE not VC. But it was pretty accurate. The PE firm won't be on the hook for much of the debt. The nano-debate over the word "push" is probably obscuring more than it's revealing.
If you work in a PE shop you’d know it’s not riskfree and that the PE firm also puts their own money up plus money raised through LPs (hence “leveraged”)
The lender generally has a positive EV, but variability is high. The interest rates on leveraged buyouts are high, and the lender has priority over everything but taxes. If the company can stay afloat for a while, the lender probably got made whole and then some, even if the full loan never got paid back.
It’s the same as buying a house. I want to buy a house for $1.2m. I put down $200k and borrow $1m. The bank determines the value of the house. My equity absorbs a 20% drop in prices, so the bank is fairly protected. Businesses are different because they really can go to $0. Banks will need more collateral and/or make many different types of loans to dilute the risk.
Any one loan may be risky, but in aggregate the rates compensate for it.
They pay you 0-4% for the money in your checking account and lend it at 1-3% points higher. As long as they have a big enough uncorrelated portfolio, they make easy money.
And if the whole portfolio tanks all at once, the whole industry gets bailed out.
The latter. Big Banks lend to private equity because the profit is good and they are large enough to absorb the variability.
The public hates it because they see highly visible bankruptcies. They don't see the success stories, or the businesses successfully carved up for more value than the sum of their parts
> Why does Blue Owl borrow from a bank to lend? Why would it need investors if it borrows from a bank?
Leverage. They raise money in their public funds. And then they borrow, typically around 50% of their capital, to amplify returns.
Note: “Private credit lenders won’t lose money before private equity firms do. That’s how the capital stack of companies work: Equity is the first in line for losses. Before lenders like Apollo Global Management, Blue Owl Capital or Ares Management lose a dollar on their loans if a portfolio company fails, the private equity owners will already have been hit” [1]. Leveraging the senior debt is actually less risky than leveraging the underlying equity. (Though obviously they compound when done together.)
For the gp: the other side of the risk/reward coin is that private credit has limited upside. They're going to get the margin between the private 6/7/8/9/10% loan and their funding source + admin. Whereas PE can go “to the moon” if things work out.
I think the free market response is that another vet with fair prices will show up, but A) that's a waste of everyones time and very inefficient and B) a real grass roots business takes time and passion, somebody to start it, buy in from the community etc.
That work had already been done. To throw it all away for VC or PE to squeeze the life out of it and by extension the community, that's just sad, and a net negative for society. I don't really care about who to blame, the PE or the business owner who sold, the process is destructive.
The business owner is in a job that takes a huge amount of their life, with a suicide rate four times higher than average.
People accuse veterinarians of being in it for the money, the same day another owner decides to euthanize their dog because they don't want it anymore. While an angry owner on social media is rallying pitchforks over something that the vet can't even respond to due to privacy standards.
I have no sympathy for PE that's wandering around our lives, destroying the actual purpose of businesses to extract profit from everyone they can.
Waste and inefficiency is real. As unpalatable as it is, cleaning up the mess of decay often requires brutal methods. That begs the question, is waste and inefficiency socially undesirable? Maybe not. Maybe not on certain scales or in isolation. But waste compounds.
A certain amount of inefficiency or slack is necessary buffer in any system to reduce brittleness. When a problem occurs, a system that is running with 50% slack can recover more easily than a system with 5% slack.
See Germany's rail network, where almost every time-slot is occupied by a train, and then one train is delayed, and the system collapses with nobody getting to their destination on time for the rest of the day, until the overnight buffer.
In queuing problems, queue length (which means latency) is inversely proportional to slack time. If a network link is running a 90% capacity, on average there are 10 packets queued up and a packet that arrives will have to wait for 10 packet transmission times. At 99%, 100. At 99.99%, 10000. And if you try to use exactly 100% of your network link, the expected queue length is infinity, and the expected latency is infinity, which will not occur in practice because sometimes it will exceed available memory and packets will be dropped, even though utilization never exceeded 99.9999...%.
> So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly...
From a financial engineering perspective this is wrong.
Both equity and debt have costs of capital. Debtholders expect interest, capital holders expect RoE. The money going to debt interest is money that would previously have gone to equity, but now does not because the equity is replaced with debt.
Crucially, the costs of debt is lower than the cost of equity because of the interest tax shield. Therefore, the vet clinic now requires less revenue to maintain or even increase its return to equity.
Technically true, but RoE expectations from a PE firm are typically a lot higher than from the original owners of a small business.
And the LBO model is much less resilient to economic headwind. Let's assume a 25% EBITDA margin business, with most costs fixed (like the clinic example). Unfortunately revenue drops 20% because of external factors. It would maybe have a tiny profit left, tax would also be tiny and there is no interest to pay. The shareholders receive near zero, absorbing most of the problem for a year waiting for times to get better.
Now the same business, same reported EBITDA, but paying a large interest sum every year to the bank. If revenue drops 20% they can't pay their interest, and banks don't just wait for next year. Now the business has the restructure, agree with the banks what that looks like, or face a bankruptcy risk.
While the new PE shareholder has a better RoE due to leverage in the upside scenario, the business (and the PE) could be completely cooked in a downside scenario. For the PE this is a calculated risk, they optimise the overall portfolio. But for the employees and customers this isn't a great scenario.
> the vet clinic now requires less revenue to maintain or even increase its return to equity
The small-town vet would have probably accepted a lower RoE. More critically, they’d have been more willing to absorb shocks to said RoE than a lender will to their debt payments.
Small businesses are notoriously bad about calculating RoE; bookstores that own a building that would rent for way more than they ever make in a month, etc.
The free market solution to this seems to be making it easy / easier for competitors to arise. Then, when private equity does this, the customers, and workers, just hop ship to a competitor that's better managed and the original clinic goes under.
I don't expect this happens in reality though. In general the things that happen in a healthy free market are NOT happening in our society.
This completely discounts the work involved to find service providers you trust. I spent a long time finding a Doctor I trust, finding a Vet I trust, etc. I don't want a "free market" solution where I need to switch providers every 6 months because some rich dude is being a dick.
This is the problem with so many market focused solutions. They discount the burden put on the consumer.
Participating in a market is work, the only way a market (or life in general) works is if you hold your counterparties accountable.
> I don't want a "free market" solution where I need to switch providers every 6 months because some rich dude is being a dick.
Nature does not have a mandate that good quality services and products be available at low prices at all times. The rich dude being a “dick” was a tired vet owner who wanted to sell their equity, just like anyone else who sells their SP500 shares or their house.
The only thing that can be done is encourage government policies to ensure more sellers exist.
If the market is healthy, there will already be two or three providers in town instead of one that has any sort of monopoly, and the LBO won't be lucrative to begin with.
In a perfect world we'd have antitrust enforcement all the way from the top of government down to the municipality, so that this kind of behavior could be curbed. But I bet few cities bother to try at all.
You’re confused because you are treating free-market and capitalism as the same thing.
Capitalism is about who owns the assets, free markets are about how they are transferred. They don’t require each other. State owned enterprises can participate in the free market, an example are municipal utility companies. Private enterprises can operate without a free market, an example would be Lockheed Martin, whose defense business is mostly cost plus contracts.
The US hobbled the free market with deregulation since the 1980s. We encourage monopolies with strange reactionary legal precedent, use tax and other policy to establish price floors on residential units and health procedures.
The behavior that these firms are able to carry on with in veterinary, dental, dermatology, hvac and plumbing is anti-competitive and predatory.
Fewer businesses. But that aside when people say regulations are costly without providing specifics typically they are upset they can't rip off the public, pollute the environment or perform other acts to the disadvantage of the population.
They're not so silly as to have any personal or professional liability, they probably spin up a special purpose vehicle or llc to hold the bag if it all goes south
It’s analogous to a mortgage in a non-recourse state. If the borrower defaults the bank (or non-bank lender) gets the leveraged company, but can’t usually go upstream.
Ohhhh a live one! Sir do I have a wonderful bridge in Brooklyn to sell you! :)
Fun fact: banks fund this sort of nonsense constantly. I've asked about this before: why they do it. They must be making money I just don't know how. The LBO guys pay themselves massive management fees and dump the debt on the company so they walk away scott free.
My wild guess was the banks offload the eventual IPO onto investors and so make their money on the IPO fees and funneling their own clients the dead-man-walking shares. But I honestly don't know.
> wild guess was the banks offload the eventual IPO onto investors and so make their money on the IPO fees and funneling their own clients the dead-man-walking shares
The banks get paid back their debt when the next PE fund buys the company or the company pays it off. Unless an IPO is being done to pay off debt, which it never is, the mechanism you describe doesn’t occur.
The list of companies imploded by LBO/PE is quite high though. Why do banks keep lining up to fund such deals? They must be making money somehow. These companies aren't worth much in liquidation. Are they able to extract enough value during the dead-man-walking period to make it worthwhile? Especially for retail or similar deals where the bank isn't going to foreclose on a bunch of real estate or assets worth selling.
I was not saying this is how they make money - I was saying I honestly don't know. If you do know please share. I would love to understand why the banks are so keen to fund what looks to my eyes like super shady vulture capitalism. We start with a profitable company and end with a smoking husk. The Wall Street guys are doing it to steal as much value as they can before it all blows up. Someone is eating the eventual loss. Who? Or are you saying the majority of these deals don't end up with the company being eviscerated?
The usual arrangement for an LBO is to saddle the bought company, the vet in this example, with the debt,or spin off a secondary company from the vet with the poorest assets and most to all of the debt. It's all a scummy business.
This is exactly what happened at a SaaS company I previously worked at. It was an awesome company with ~1500 employees, turning a small profit. Private Equity comes along, buys it with ~$2B in debt. Sticks the SaaS company with a $100M+ annual interest payment. Round after round after round of layoffs ensued. Then interest rates went up... and it got even worse.
I think they are under 500 employees now. They basically laid off almost all of engineering and hired 100 new contractors in India to completely rebuild the entire platform in Node.js, as if the language it was written in was the problem. So glad to be far from that dumpster fire.
Really disappointing to see a great company gutted by some private equity people who almost certainly got their bonuses before the shit hit the fan.
I don't understand: Who's lending the $2B in situations like this? Wouldn't they be worried that the above situation (company gutted, then going down the drain) is going to play out and they won't get their $2B back? Or is that the root problem with this whole YC submission: banks are being hit by defaults because of this exact problem?
It's from the rapid exploitation of an asset. If I have a cow, I can milk the cow or kill the cow. If a cow costs $1, maybe I can get $5 worth of milk over the cow's lifespan, or I can kill the cow immediately and get $2 of meat. The man with $100 who buys all the cows in town and kills all of them doubles his money in a short timespan, but now there's a shortage of both meat and milk next season.
That is the exact problem. The people who put up the $2B thought they were safe - after all they were putting up money to buy a successful profitable business.
Problem is they didn’t really understand the business and trusted the PE guys to keep running it well…
This was driven home to me at SaaS company with > $80M ARR when the new CEO was parachuted in by the PE owner said in an all-hands "and we're close to cashflow positive when we account for our interest payments..." How can a software company generating this much subscription revenue NOT be making money? When it's servicing the > $500M the PE firm used to buy it. The rest of the playbook was boringly predictable: cut costs, sign multi-year enterprise deals, sell before the current fund's horizon and hope the music doesn't end.
As a result I prefer the naked greed of VCs where everybody - VC, owners, employees - knows the plan is IPO because at least it's transparent compared to the dirty lies a lot of PE pushes.
It's the destructiveness that gets me. It's a perfectly good company, employees are happy, consumers are happy, profit is being made, it's sustaining itself... Then they come and just literally destroy all that.
This can't be good for society. I wonder why it's just not criminalized somehow.
> It's a perfectly good company [...] I wonder why it's just not criminalized somehow.
Not-an-expert here, but I think part of the problem is that it's hard to draw a nice legally-enforceable line that would distinguish when it's a "perfectly good" company versus one crying out for intervention.
For example, suppose a company is floundering because of executive mismanagement, outrageous compensation to the C-suite, etc. In that case, someone could LBO in, fix things up, and then sell the revitalized thing later and make a modest profit while improving the world.
The way I see it, it's literally simply the PE paying the existing owner for the privilege of squeezing the value out of the business and its customers in the short term (or in the ideal/theoretical case, running it more sustainably and making higher profits). Management's job becomes to extract high profit in the short term, not to keep the company running profitably.
So, logically, selling to PEs/operators who are known to do this is basically the owners selling out and taking the cash. The consequences are clear to anyone who's been watching.
I saw another model where the PE buys a hospital. They sell the land under the hospital, everyone gets a cut, then they spin out the hospital. Now the hospital has to pay rent on the land it sits on.
It seems like almost every decision made is for short term gain, at the cost of long term viability.
An acquisition like that would have non-compete restrictions. And often the previous owners don't get 100% cash, they would receive part as shares in the new holding company.
Yeah, they thought about it well on how to shackle, extract and leave a husk behind. What about the clinic's long term success? Not in their plans, they just want to extract cash from the customers as fast as they can. I'm sure that if people organized well enough and change their mindset they'd find workarounds to these financial engineering scums.
About eight years ago I had a chat with a physician in Texas, who had a several year old private clinic that he was planning to sell within a year to an investment firm, and it wasn't the first time he had done this. I expect all those urgent health care clinics that show up follow a similar path.
I mean, just getting new management, improving efficiency and raising prices of any business is… normal business?
Whether a PE firm decides to buy it and do the same isn’t some nefarious act or special in any way, it’s just new owners.
Let’s say your neighbor has a lawn mowing business but wants to retire, says they’ll sell for $50,000. You think great! You could run the business better, plus the old man hasn’t raised prices since 1990! But you don’t have $50k, only $30k, so you borrow $20k from your brother. Congrats, you just did a leveraged buyout.
And no, it’s not risk free revenue (I think you mean profit?) because it clearly might go under and PE firms need to pony up some of their own cash too plus money raised through LPs.
If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank.
(Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is being described doesn't even work on its own terms. Needless to say, LBOs are not "risk free".)
Nope. The clinic is the collateral to the bank. VC stand to loose nothing.
It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.
This can be done in about 6mo to 1 year process with some companies. The initial out of pocket expense is small and paid back very quickly.
I also forgot. Sometimes they will take the newly owned company and merge it. During that process they extract more money and load more debt onto the remaining entities, again making the VC money.
In some cases they can even get huge tax benefits by loading the company with debt which offsets the tax bill of the final entity.
When these transactions are done, within the span of a day multiple companies are created and merged and absolved.
> The clinic is the collateral to the bank. VC stand to loose nothing
This is actually a case where using the correct terminology clarifies.
VCs don’t do LBOs. Private equity firms do. When their deals go bust they lose the equity they invested. That equity is the first layer to take a loss. When that happens, the lenders—whether they be banks or private credit firms—take over the company, often converting some of their previous debt into equity.
There is a lot of risk in LBOs. It’s why they have such a mixed record.
PE includes buy-out (leveraged and not) and VC transactions. PE is typically any medium to long term equity investment not traded publicly on an exchange. Even this is cloudy now that the PE firms themselves are going public.
LBOs are also not a black and white classification, at least not the way they were in the Gordon Gecko 80's, with varying levels of target-borne debt financing specific to the deal. So while I agree "VCs don't do LBOs", PE does both LBOs and VC deals, with the PE firms doing their own style of fund and deals.
> this is cloudy now that the PE firms themselves are going public
The public or private status of the manager has no relation to private equity being cloudy. Out of all of the delineations, PE is a pretty sharp one. VC is PE. Private credit is not. It’s private debt. Not equity.
> It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.
This was the missing bit for me. Thanks for taking the time to explain!
The PE sales pitch is often that the target company can benefit from expertise management and/or there is value locked in it that can be captured. Both of these claims are... marginal? Studies around the "expert management" claim tend to show this is not true, based on pre/post returns, but it's hard to account for the long term, because PE also tends to focus on sales with very specific characteristics & time horizons (and associated cost savings) that benefit a 5-7 year fund that sells the portfolio company (wait for it) around years 3-5.
Which is a long-winded way of saying the bag holders are anyone invested in the long-term success of the company: 1. employees, 2. customers, 3. owners (i.e. the next PE fund) when the music stops, i.e. what we saw when interest rates went up impacting debt financing, and (real or not) AI-eats-SaaS impacted valuations. I'll add 4. "the public" if the company is big enough, with various levels of goverment and employment, taxes, etc. lost but I think it's more the smaller organizations in aggregate that hurt at this level than any specific company.
So yes, PE funds are probably overvalued right now and there are a lot of PE funds getting rich off management fees while not providing promised returns...but this comment is so wrong I don't know where to begin.
First, VC stands for venture capital, which is a subset of private equity that does zero LBOs and doesn't even acquire any businesses. VC funds buy equity in startups, and take on zero debt to do so. You have your boogiemen totally confused.
Second, the entire point of a PE fund that uses a leveraged buyout strategy is that they need to sell the acquired firm at a profit to make any returns to the fund. LBO funds don't 'cashflow' businesses, and saddling a business with a bunch of debt is antithetical to that purpose anyways.
Third, this is not "risk free revenue." It's a high risk strategy to use the debt to increase the value of the business by improving operations enough that you can sell it for a profit to the fund. If you saddle a company with debt and DON'T increase the value of the business beyond the debt you took on, the PE fund will not be in business for fund 2.
The risk-free revenue while the fund is alive comes from the management fees that investors in the fund pay (usually 2%, which is way too high IMO, but has nothing to do with the debt or the acquired businesses).
Please do not write confident sounding comments about things you don't understand, it spread misinformation and makes the internet a worse place.
It is absolutely possible (and even likely!) that a bad PE fund was the cause of the issue you're talking about. But there is also a media hysteria around PE, and a lack of understanding among the general public of what it is.
It's just as likely the business that was acquired was already failing or unsustainable to begin with (hence why the owner wanted out at low multiples). LBO funds don't acquire promising businesses at 5-10X revenue like tech companies do, they usually buy businesses at low multiples that are past their prime or failing in an attempt to revitalize them (with debt, since you can't raise capital by selling equity in a failing business).
Obviously this will not always work out great, given the trajectory of target companies was already not great to begin with. Momentum is the strongest factor in all markets.
The problem is, Private Equity has become a conspiratorial catchall boogieman and scapegoat for every problem under the sun, so it's hard for me to assess without further details of the situation.
Nit: beta is the strongest factor in all markets. Which is actually relevant for the success for PE funds in general, as a rising tide lifts all boats and people taking on debt to finance equity generally post outsized returns in bull markets.
Anyway, the rest of the stuff you're saying I agree with.
Yes, beta is the overwhelming source of returns. I was referring to factors in the sense of the University of Chicago research on market inefficiencies (where momentum is the strongest factor for inefficiency).
If you buy a “factor-weighted” etf the idea is it’s tilting you into those “factors” away from pure beta like buying whole market.
PE you could argue is largely just leverage plus an illiquidity factor play, since if PE just returned beta (which these days it might!) you’d be smarter to buy the S&P500 with equivalent leverage and not pay crazy fees.
Background: I work for a PE-owned company and I have friends in PE (associates up to MDs).
On your second point: LBOs aren't the only tool in the toolkit, and it's not as popular as it was decades ago, so I would lean towards the parent simply conflating "buying an ownership stake in a business in some capacity using other people's money" with the strict definition. Regardless, yes PE firms need to figure out how to get 20%+ IRR throughout a short timeframe (usually a 5 year holding/funding cycle) -- however this is through any means necessary. Philosophically, it's about increasing efficiency of operations and growing the business. In practice, it's financial engineering because PE firms do not have the operational skills to make any value-added changes to firms besides driving costs down.
Saddling a business with debt is reductionist. I've seen absolutely nonsensical financial structures that make no sense for a layman, but in practice end up "using the business' finances to 'own' (beneficially) the business" (see: at the most vanilla, the strategy of seller financing in SMBs). No this is not technically "putting debt on the books" but it is in all practical respects a novation/loan transfer that can leave the purchased co financially responsible for servicing any debt that was used in its purchase.
On your third point: what I wrote above can be used as context. It's not risk free revenue, frankly it's very risky unless you're in an inflationary environment where your assets will grow regardless of your business operations solely because the overarching economy is growing and you're riding a tailwind. However, it again boils down to financial engineering. It's not as simple as assets - liabilities = equity. The calculations used to determine valuations are so ridiculously convoluted. The amount of work that goes into financially analyzing businesses and finding "loop holes" that can justify higher prices is the core business model. The debt factors into it, but there's ways to maneuver around it through various avenues.
For example:
* debt-to-equity conversions (reclassification of debt as equity)
* refinancing
* sale-leaseback (selling company's assets to a 3rd party and using that money to pay down the debt, then leasing the equipment back)
* creative interpretations of what is actually debt (e.g. reclassifying real debt as a working capital adjustment or a "debt-like")
* dividend recapitalization (a nasty trick of loading the company with debt, paying that out as a dividend to the holdco, then selling the company at lower enterprise value. They still extracted value for their LPs/investors, despite the exit being lower)
* separating the debt from the operating company into a different holding company that services the debt
Why can't they find something more interesting to do with their lives? They are wealthy enough to do anything and they choose to keep hoarding more and more.
This is just wrong. VC is not PE. The Vet example is really a bad trope. For every bad deal there are many others you never hear about. PE firms are not making money by simply buying everything up. The business still has to maintain and grow.
VC is most definitely a form of Private Equity, though it's not the limited-partnership deal model that we often see in SaaS, or Vet Clinics, or Housing, etc. Yes, they need to grow but PE firms don't invest directly. They have funds with relatively short time horizons that want 2 things: 1. cashflow during the fund lifetime and 2. equity growth so they can sell the assets in the fund prior to the end. PE firms will sometime flip portfolio companies to their next fund but this is frowned upon because the investors are sophisticated and recognize the valuation conflict of interest. The PE business depends on repeat business for selling their funds; the best are always over subscribed and never go shopping for investors, while the rest are marginal forever.
Did not read all of it. Yes, it is a form of private equity. Of course. You missed the context. The post kept saying VC is buying a vet shop. In that context they meant private equity. VC is not the same as what they meant to say, PE.
I absolutely believe you on the facts, and it all sounds very disgusting, but here's what I don't understand: customers and staff alike no longer like the clinic. Won't that be a huge boon to competitors, essentially ruining the VC's investment?
I get that it's not so clean cut with something as equipment- and licensing heavy as the veterinarian sector. But I've heard the same story exemplified with pizza parlors instead. Won't all the good staff take all the loyal customers and go elsewhere very easily in that case?
Private equity is a huge inflation driver. I'm thrifty, and for years I enjoyed a $10/mo phone provider, ~$12.39 with taxes. I even evangelized this carrier with some young parents who were struggling to get financial traction while paying off student loans.
Our affordable plan came to an end when the rates tripled! Turns out a private equity firm bought the company, jacked the rates on every customer, and sold it off again. This was not a fundamental cost being passed on in slightly increased fees -- it was private equity extracting millions from the people who can afford it the least. Across my financially optimized life, I see this happening repeatedly.
Personally, I can afford a more expensive cell phone bill. But I would imagine that many who have a $10/mo plan do not have many other options. I would like to punish the banks who are funding attacks on consumers. If by no other means, then by letting them fail.
It’s not private equity’s fault, it’s the continued imposition of increasing taxes and government-mandated fees:
“The wireless market has become increasingly competitive. The result has been steady declines in the average price for wireless services. Over the last decade, the average monthly revenue per wireless line has fallen from $47.00 per month to $34.56 per month. Unfortunately, this price reduction for consumers has been partially offset by higher taxes.” - Tax Foundation (2023)
Taxes coincidentally causing a 3x price change right when private equity buys a company is quite unlikely. Especially since I doubt every other company has tripled their prices.
Every other carrier hasn't tripled their prices - this one unnamed and unsourced company did. You can get a $10 or $15 cellphone plan right now, so his claim is false, or that PE company has magical powers to completely outprice the otherwise competitive mobile phone market.
However, "Taxes, fees, and government surcharges make up a record-high 27.60 percent of the average wireless services bill... Since 2012, the average charge from wireless providers decreased by 29 percent, from $47.00 per line per month to $33.36 per line. However, during this same time, wireless taxes, fees, and government surcharges increased from 17.18 percent to 27.60 percent of the average bill, resulting in consumer benefits from lower wireless prices being offset by higher taxes and fees".
> Banks are lending to private equity firms to fund purchases of businesses
Not quite. Private credit is to debt what private equity is to equity. (Technically, any non-bank originated debt that isn't publicly traded is private credit. Conventionally, it's restricted to corporate borrowers.)
So bank exposure to private credit generally means banks lending to non-banks who then lend to corporate borrowers.
You'll find plenty of talking heads on YouTube right noe claiming exactly this. Time will tell if private equity is actually wound up as tight as housing was in the GFC.
I don't think you're wrong if the following holds true: Before the housing bubble burst, banks lent funds to countless borrowers who couldn't, ultimately, afford their mortgage payments (because the banks didn't do their due diligence when underwriting the loans). This was widespread across pretty much every bank and mortgage banker. Not sure of the actual percentage of borrowers who, when all was said and done, had no business getting a mortgage for a house or condo, but suffice it to say it was well into the double digits percentage-wise (there's much more to this than simply banks and borrowers with Wall St. playing a major role in the collapse, but just keeping things simple).
In this private credit situation the analog for the banks are these private credit funds that have raised the capital they've lent from institutions and high-net-worth individuals (as opposed to banks, which have funds from consumer deposits). The analog to the individual mortgage borrowers from 2008 are actual companies.
To connect the dots, if the private credit funds were like the banks pre-2008, where due diligence was an afterthought, then this could turn out to be similar. So the real question is: are the borrowers (businesses in this case) swimming naked? Or do you believe the private credit funds when they say they actually conducted a good amount of due diligence when extending their loans? Once you know the percent of the companies that are naked you can evaluate whether this could/would end up similar to 2008. Nobody knows that yet, even, I suspect, the private credit funds themselves.
Yes, instead of banks lending sub prime mortgages directly, it's as if they are lending to private equity groups who are then lending rather undiscerningly. Within the last week, we now have Blackstone, Blackrock, Owl, and Morgan Stanely limiting withdrawals on private credit funds. Not a good look...
Even the best due diligence can't do anything if a crisis (not necessarily banking-related, a Middle East might just do the trick) starts manifesting itself and now many of those businesses have issues in paying down the debt they owe.
Late to reply here, but, yes, agree generally, though I don't think what these private credit companies are being accused of falls into that category (i.e., I think they're being accused of playing fast and loose with their due diligence, which was baked into their competitive advantage over the banks themselves. The competitive advantage being "we'll close quickly" without all the fuss a bank would require).
I've had quite a few conversations with someone who claims to be in the know about this situation (though, really, I don't think they're any more in the know than anyone!) and they swear up and down it's all a misunderstanding, which, cynic though I may be, immediately makes me think the accusations are at least somewhat true.
"I did my due diligence but didn't anticipate these risks". Doesn't sound like due diligence to me. Not having a plan to unwind your position if SHTF doesn't sound like due diligence to me. You can argue it any way you like but it boils down to "The money was good and I didn't think the worst was gonna happen".
I agree with this and tend to think due diligence needs to not only account for the regular course of business, but also for the exceptional circumstance. You'll never be able to accuse someone of not thinking of the exceptional UPSIDE circumstance, of course. The problem is the complete ignorance of the exceptional downside. That said, your parent is right that you can't really do due diligence on "war in Iran." Instead you something like "ok, if there's a shock to the system and 20% of our loans default what does that mean for our business?"
My comment was mostly against the idea that due diligence is a silver bullet, it isn’t. Of course that it can “catch” the most egregious cases, like outright fraud, but, again, no due diligence process can read the future.
> This is just another form of that "shadow banking" system isn't it?
Private-credit lenders are literally shadow banks [1]. But I'd be cautious about linking any shadow banking with crisis. Tons of useful finance occurs outside banks (and governments). One could argue a classic VC buying convertible debt met the definition.
That said, the parallel to 2008 is this sector of shadow banking has a unique set of transmission channels to our banks. The unexpected one being purely psychological–when a bank-affiliated shadow bank gates redemptions, investors are punishing the bank per se.
> So bank exposure to private credit generally means banks lending to non-banks who then lend to corporate borrowers.
Isn't this similar in spirit to the infamous (according to Western media) Chinese shadow banking market? There are articles [1] more than 10 years old talking about the collapse of China because of that practice, but it looks like the US is all too happy to do a very similar thing. I also wonder how big of a market we're talking here, as I was too lazy to check. A few hundred billions? $1 trillion? $2 trillion? More?
In at least the US and EU but probably elsewhere, the asset categories of banks are tightly regulated as well. They can have transient ownership of anything but there are hard limits on what portion of their assets can be indefinitely tied up in nonbanking businesses that they are operating on their own behalf.
Wouldn't they still owe interest to the banks on the money they borrowed, as well as the money they borrowed? I mean if all the money I make goes to the bank to pay off my mortgage my solution is not quitting my job, even though life is not very good under that situation.
Imagine you got a loan to buy a bunch of laundry machines to run a laundromat. But your laundromat earns $8,000 a month, and the loan payment is $10,000.
You can decide to sink $2,000 of your personal money into the laundromat every month, or you can give up.
> The default rate among U.S. corporate borrowers of private credit rose to a record 9.2% in 2025
Emphasis added. Headline makes it sound like retail credit, not corporate specifically.
*Edit: Not misleading, just an unfamiliar term/usage from my perspective. I'm not a finance guy so didn't know the difference and assumed others wouldn't either. Mea culpa.
TBH "private credit" (meaning exactly what this article is talking about) is such a big thing in the finance industry that probably most finance industry people can't even fathom that the title is misleading to non-finance-industry people.
I'm not saying they are right. But it's like if you posted an article called "Python Is Eating the World" on a non-tech side and people got mad because they thought the article was about a wildlife emergency. Fair for them to be confused, but maybe not fair to accuse the title of being misleading (at least not intentionally).
Ha, yes I didn't even consider it meant anything other than corporate private credit. Otherwise we'd be talking about presumably mortgages or "consumer debt". Right?
It's some sort of Gell-Mann-Amnesia-like effect. I am accustomed to seeing thoughtful, informed discussion about technical topics on HN, so then it's jarring when something like this hits the front page and nobody seems to have any idea what they're talking about.
It's opposite Gell-Mann-Amnesia: I am a SWE and I come here because I find it one of the best places to keep abreast of the broader software world, not just the little corner of it that I'm currently working in. So in the things that I know well, I trust it. My wife is a medical professional, and so I know just enough to see that most medical conversations here are complete and utter nonsense.
So the mental model I have of the average HN contributor is basically that they are all SWE's- they know software engineering extremely well, and the farther you get from that the less valuable the conversation will be, and the more likely it will be someone trying to reason from first principles for 30 seconds about something that intelligent hard working people devote their careers to.
I’m coming at this loaded with jargon, so excuse my blind spot, but why would the term private credit bring to mind anything to do with retail specifically?
(The term private credit in American—and, I believe, European—finance refers to “debt financing provided by non-bank lenders directly to companies or projects through privately negotiated agreements” [1].)
>, by why would the term private credit bring to mind anything to do with retail specifically?
If a layman is unfamiliar that "private credit" is about business debts, and therefore only has intuition via previous exposure to "private X" to guess what it might mean, it's not unreasonable to assume it's about consumer loans.
"private insurance" can be about retail consumer purchased health insurance outside of employer-sponsored group health plans
"private banking" is retail banking (for UHNW individuals)
But "private credit" ... doesn't fit the pattern above because "private" is an overloaded word.
No 'private' meaning that the transaction is between the lender and the borrower without a public rating agency involved (Moody's, etc...). This used to be for niche things like a data center where a rating agency might have trouble figuring out reasonable rating. Then the data center company would go to somebody like Apollo who could do custom analysis on the risk.
But now those private loans are being syndicated to affluent investors who probably don't understand that while some of this debt is solid, alot of it is not. And without a rating agency involved nobody knows how much risk is in there.
It surprises me that most people would read "private credit" to mean "retail credit" by default, but I also come to this loaded with jargon so I guess would defer to others on this. But to be clear, the title is not misleading to anyone who has any familiarity with the financial markets.
With the caveats that banks can originate private credit as long as it is separate from their reserve system credit (and consequently does not increase the money supply when originated)
I think you’re mistaken. We’ve been in a private credit bubble for a couple years at least, it’s in the finance/economic news every week and I’ve even started to hear regular NPR doing primers on it for normies. The term for “retail credit” is consumer debt or consumer debt. We don’t call it retail debt because the retailer is not actually a counterparty.
Out of curiosity where do you primarily get your news?
I think (but I don't move in such circles) that originally there was "redpilled" to refer to people playing "The Game" (pickup artists). Original reference is to The Matrix, of course.
That's exactly where my mind went as soon as I read the title. HN rules say to "use the original title, unless it is misleading". I think the original title meets the misleading bar but I can't speak for other readers.
"Private credit" is a finance term of art. It could be misleading if you don't have context for the correct definition, but that's true of many posts on this site.
That’s not what it means though. It’s done through a partnership. Or not, if we count Business Development Companies as “private credit” - but then they are not usually private corporations either.
Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.[a]
You can always tell when there is a problem. When things are fine the companies keep the profits to themselves. When things start to get dicey - foist it off onto retail investers.
Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI
It's why as a retail investor, never buy things that would otherwise have not been available to you (but was to those "elite"/institutional investors previously).
Think pre-IPO buy-in. Investors in the know and other well connected institutional investors get first dibs on all of the good ones. The bad ones are pawned off to retail investors. It's no different with private credit and private equity. These sorts of deals have good ones and bad ones - the good ones will have been taken by the time it flows down to retail.
Google and Apple didn't go through ten funding rounds like today's startups do. Apple had one angel and three rounds, Google had one angel and literally just an A round after that; then retail investors could capture all the upside. Now there's way more time for private investors to pick the bones clean before it gets dumped on the public.
I think you're both right. Those were great opportunities, but the proportion of such opportunities which are made available to retail traders has greatly diminished over time.
There's a great chart out there somewhere (I couldn't find it) which breaks down the impact of private equity on the availability of such opportunities in public markets. It showed a dozen or so companies (like Google, Apple, Uber, Stripe, etc) and broke down their market cap gains into two parts, "pre IPO" and "post IPO" gains. Of course, the pre-IPO gains were only available to private equity (or, at best, accredited investors), whereas the post-IPO gains were available to retail traders as well.
"Older" companies like GOOG & AAPL were much more likely to have experienced that vast majority of gains after their IPOs, meaning retail investors could have made big money by betting on them early. Meanwhile newer companies (like Facebook, Uber, Stripe, etc) were much more likely to have yielded the vast majority of their gains before their IPOs, meaning retail investors didn't have the opportunity to benefit from big returns.
I suspect that the reason those "newer" companies were able to have the majority of their gains reaped pre-IPO was that during that time period, it was easy to acquire capital from investors without resorting to public market IPOs, where as the era of google and apple have not got the same level of private investment.
And i think it has to do with low interest rates. During the google early years, it is difficult to obtain low-cost loans (for private investors that is). Therefore, public markets look like an easier path for companies to raise money.
The "newer" companies in your list are mostly post-GFC, during a period of ultra-low interest rate. This makes money easy for private investors to obtain, and so companies have an easier time getting funding from those private sources. The IPO is realistically not a funding mechanism, but an exit mechanism for those early private investors.
Survivorship bias and the corporate finance world of today is completely unrecognizable from the world of Google and Apple. Just look at the resulting performance of the SPAC craze
Even for good assets there's a price you shouldn't pay. People are joking(?) about triple-layer SPVs where you can get pre-IPO exposure but at higher-than-IPO price.
> Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets
Thanks for the reminder! I need to switch my plan away from a TDF to avoid this.
Funny enough Chinese State owned banks have been doing much the same for quite some time. No one ever defaults, loans are extended as long as it takes. Presumably the threat of being called into the next party meeting to explain yourself is sufficient motivation for the people running the business to pivot as many times as it takes until they find a way to make money. Worst case the state swaps someone else into leadership.
I say this to say... who knows? I guess if you shuffle deck chairs fast enough everything works out fine (?)
The larger you are, the larger the rounding errors are, the more money that can disappear due to a failure and explained away or extended or written off or whatever euphemism you want to pick. But the sum of rounding errors is less likely to itself be a rounding error. It works until it doesn't, and Evergrande collapsing with $300 billion in Chinese real estate debt will be a case study for years to come.
Isn't the real underlying risk here concentration, as opposed to diversification?
If you have unlimited capital and time horizon, because you're a nation with the power to tax and print money, then you can keep this game going for a long time.
The only thing that mandates it stops are if (a) too many of your loans are correlated with the same thing that crashes (e.g. energy, tulips, AI, etc) or (b) too many of your loans are tied together in a single entity (either because it combined multiple smaller entities or because it tied itself into all their financial arrangements).
So unlike money-market funds, these private-credit funds can gate withdrawals and extend and pretend by turning cash coupons into PIKs. So I don't actually see credit concerns directly driving liquidity issues for the banks that didn't hold the risk on their balance sheet glares Germanically.
Instead, I think the contagion risk is psychological. Which is an unsatisfying answer. But if there are massive losses on e.g. DBIP and DB USA halts withdrawals, then the 2% stock loss Morgan Stanley suffered when it capped withdrawals [1] could become a bigger issue.
I believe the gated feature can be waived though it causes a precarious situation. It ends up with same psychology of a bank run -- people (institutions) concerned because they can't access funds or they think that the queue to exit a failing fund is too long - filled each quarter (i.e. by the time they redeem NAV has collapsed).
As Buffett said, "only when the tide goes out do you learn who has been swimming naked" - luckily, skimming the news, there's no obvious huge exogenous macroeconomic shocks on the horizon that could cause "the tide to go out" so to speak, so everything should be ok for now.
My understanding is that many private credit funds have been very lax about conducting basic due diligence on the creditworthiness of borrowers.
For example, take First Brands, a multi-billion-dollar company which filed for bankruptcy last year. First Brands had pledged the same assets as collateral for loans from multiple private-credit funds. Those loans were being carried at a fantasy NAV of 100 cents per dollar, until suddenly they were not. Did none of these lenders submit UCC filings so other lenders could check which assets had already been pledged as collateral? Did none of these lenders ever check to see which assets had already been pledged? Did all these lenders make loans based on blind trust?
Failing to check and verify that assets have not been pledged as collateral to other lenders is an amateur mistake. It's reckless, really. The equivalent in home-mortgage lending would for a mortgage lender never even bothering to check that a homeowner isn't getting multiple first-lien mortgages simultaneously on the same home, then forgetting to put the first lien on the property title.
My take is that for many private credit funds, NAVs are basically fantasy.
Do you know if First Brand's actions are considered fraud? Or was this entirely on the lenders to make sure they were in the clear regarding the collateral? Doesn't excuse the lack of diligence, but curious if there was some assumption of good faith that may have played a role in what diligence was or was not done.
If lenders are in fact not performing due diligence and passing off good credit as bad...sounds suspiciously like a 2008-like era where noone cared about the credit worthiness but just wanted to generate lines of credit.
Remember, the lesson was that Daddy Government won’t let you fail. Barring any federal regulations, there’s no reason for financial entities to not repeat the exact “mistakes” that caused the 2008 (2007) Great Recession.
The lesson isn’t being ignored- it’s being used as justification.
Once you get outside of things that are highly standardized (like home loans to individuals) you quickly find out that no matter how regulated, finance is done on a handshake.
Reason this number caught my eye: last year the Fed's stress tests found "loss rates from [non-bank financial institution] exposures (i.e., the percentage of loans that are uncollectible) were estimated at 7%, under a severe recession in scenario one" [1].
That's the scenario in which unemployment goes to 10%, home prices crash by 33%, the stock market halves and Treasuries trade at zero percent yield [2].
The categorization the Fed uses for NBFI is broader than private credit. E.g. if a hedge fund gives a loan to a private company, that's not private credit because hedge funds seem to have their own category. And lending backed by securities is also in a different category, it seems.
So I guess the Fed expects these other kinds of lending to be safer than private credit?
What's odd is according to the article, this index estimated an ~8% default rate in 2024. So maybe the stress test was measuring something different? It's weird to think the stress test would find a lower loss rate during a severe recession than in the most recent year with data available.
The regulators were modeling a scenario where private credit was dragged down by a problem elsewhere in the economy, not one where the rest of the economy was dragged down by private credit. Everyone understands that center of a financial implosion is always worse than its effects on the broader economy, but regulators aren't tasked with stopping the explosion at ground zero, they are tasked with stopping contagion dominoes from falling, so that's what they model.
> maybe the stress test was measuring something different?
The Fed is measuring the loss on bank loans to the private-credit lenders. A 10% portfolio loss shouldn't result in those lenders defaulting to their banks.
By my rough estimate, one can halve the portfolio loss rate to get the NBFI-to-bank loss rate. So a 10% portfolio loss means we're around a 5% expected long-run loss to the banks. Which is still weirdly high, so I feel like I must be missing something...
Unless I'm misunderstanding something, this isn't that big of a number in the larger scale of US banking; According to the numbers in the article that's only about 2.5% of all bank lending (300B/1.2T, with the 1.2T being ~10%)
> this isn't that big of a number in the larger scale of US banking
It's not. It's just that we're seeing potentially 10% losses on the portfolio level [1], which could imply up to–up to!–5% losses to the banks' loans to those lenders.
Again, tens of billions of dollars of losses are totally absorbable. But Morgan Stanley's stock price took a hit when it gated one of these funds [2]. And some banks (Deutsche Bank, somehow, fucking again, Deutsche Bank) have small ($12n) but concentrated portfolios where a single wipeout could materially impair their ~$80bn of risk-weighted assets.
> Again, tens of billions of dollars of losses are totally absorbable.
They are, in isolation. The _problem_ is that PE doesn't generally trade assets in public, which means that valuation only really come when you're either wanting to buy, wanting to sell, wanting to re-loan or in deep shit.
But! banking can absorb a few billion right? yes, so long as people are not asking questions about other assets.
Because PE assets are not publicly traded (hence private in private equity) the value of assets are calculated at much lower rates than on a public market. This means that the assets that PE holds could be wildly over or under valued. The way we assess the value of PE holdings is thier looking at the Net Asset Value calculations (which might be done twice a year) or infer the value based on public information.
Now we are told that markets are rational and great at working the value of things. This dear reader is bollocks. Because PE is a black box, if a class of asset that they hold (ie SaaS buisnesses, or high street stores, or coffee trading etc) looks like its not doing well, people will start to write down the value of people holding loans given to PE, or shares in PE.
This creates contagion, because one PE company is in distress, the market goes "oh shit, the whole thing is on fire" and you get bank runs (because where is the money coming from to loan to PE? thats right banks, eventually)
Washington Mutual had $307 billion in assets, and one credit downgrade and a bank run of $16 billion in September 2008 was enough to get them shut down.
These private credit numbers are estimates provided by Moody's, who were famously clueless about the scale of mortgage bond risk even as they stamped them all with a AAA rating.
Someone else owns all the other credit. This is the 1st domino.
The liquidity challenges of a $1.2T shock to the economy is meaningful, because it has knock on effects on equity as well.
When private credit (which is propping up private valuation) falls, private equity also falls and then everyone realizes that everyone else has been swimming naked.
Yeah but don’t major problems usually take the form of debt chains being forcibly unwound? Like default happens somewhere, expected money doesn’t land, that next entity who was receiving the debt money that defaulted defaults on something because now they can’t pay, expected debt payment money from them doesn’t land, that next entity etc.
So I think it’s not about how much of the debt is this, it would be about how intertwined it is with other things.
I’m not claiming it’s major btw, I’m just clarifying that in my understanding it could be a small percent but still end up causing default cascades, or it could be a large percent and not, depending on the debt graph.
Update: original comment should be. 300B/1.2T*(10% of bank funds) = 2.5%. If I'm reading comment correct. Also I believe the whole private credit ecosystem is about 1T.
In a catastrophic scenario: if the whole asset class went to 0 (on the banks asset sheet they would lose 2.5% - absorbable pain assuming its not leveraged through creative financial mechanisms).
I would wager that risk is more concentrated on certain institutions instead of across the board so acute pain likely.
I've been told by the head of compliance of the largest European banking group that 2.5% is exactly the threshold at which they begin to be very worried/ at systemic risk
Apparently they operate on very low level of tolerable risk (way lower than I thought)
>2.5% is likely still survivable, but i think risk departments + regulators are all a lot less risk tolerant after seeing how quickly things went south in 2008 and worries about an out of control spiral
For those that want a broader context on private credit, the Bank for International Settlements has been publishing some great material on the topic, including the connections between private credit and other corners of the financial system. Some examples follow.
My normal bank was acquired by Wells Fargo in 2008 and they also owned my mortgage.
When I went to pay off my mortgage in 2012 they required a cashier's check for the final payment of around $80.
I asked if we could do it electronically like all of the previous payments and they said no.
So I walked into my local bank asking for a cashier's check of that amount and the bank teller told me that most people would accept a personal check for that little. I said yeah but YOU don't. She looked at me funny.
So she asked who to make the cashier's check out to. I said "Wells Fargo" and she looked at me funny again and said "Wells Fargo is us, the check comes FROM Wells Fargo. Who do I put on the TO line" and I said "Wells Fargo"
She again looked at me funny and I explained that I am paying off my mortgage. Wells Fargo is where I have my bank account and my mortgage. She said "Can't we just do it electronically?" to which I said "You would think but apparently your employer can't handle that and told me to get a cashier's check and FedEx overnight to them."
Actually I believe they're just actually complying with new laws to disclose their balance sheets for these types of loans. Many other banks like JP Morgan have much higher amounts of these loans on their balance sheets, but refuse to report and are exploiting certain loopholes.
The requirement to disclose has only existed for a year I believe, but many are kicking the can or claiming that it would cause them issues.
Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.
The concern here seems to be that the credit risk on the underlying borrowers is being transferred to banks through the loans made by the banks to the private credit firms. But the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers (the same regulations and constraints that led them not to lend to the underlying borrowers in the first place). When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans.
> secured loans which will be less risky than the underlying loans
So, it's sort of like bundled mortgage securities, where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting.
Presumably, since banks (by definition, an intermediary) are involved, those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? Also, I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans?
Clearly, like with housing, there's no chance of correlated defaults in a bucket of bad business loans that's structured this way!
In case you didn't quite catch the sarcasm, replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression, or replace it with "bucket shops" (which would sell you buckets of intermingled stocks) and it would describe every US financial crisis of the 1800s.
> where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting
Yes. This is mathematically sound.
> those are then recursively repackaged until they have an A+ rating, or some such nonsense, right?
AAA-rated CLOs performed with the credit one would expect from that rating.
The problem, in 2008, wasn't that the AAA-rated stuff was crap. It was that it was ambiguous and illiquid.
> I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans
Defining independence in financial assets like this is futile.
> there's no chance of correlated defaults in a bucket of bad business loans that's structured this way
Software companies being ravaged by AI fears.
> replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression
It also describes a lot of successful finance that doesn't reach the mainstream because it's phenomenally boring.
Generally speaking, the SEC exists to regulate communications about the underlying realities driving security values.
Any mechanism involving “the bank invested (lent) my deposits to organizations that avoid SEC scrutiny, and used an instrument that spreads culpability for fraud across many unrelated and unwitting organizations” will eventually lead to investment bubbles and fraud.
If I knew (and chose to have) 5% of my savings in private debt funds, where the holdings were public and had reporting duties, that’d be fine.
Instead, that money is being lent behind closed doors. If the loans pay out, then the ultra wealthy make money. If they default, they’ll be bailed out to prevent contagion. (And they still make money, since the lent money went somewhere before the loan default.)
This has happened at least a dozen times in the US, including in living memory.
Also, my example is not sound. Here is a counter example with a basket of investments with different risk profiles: I hold A directly. I hold A’, which is a leveraged fund that only holds A. I also hold B which is a business whose only customer is A. I hold C, which has a contract with A and is securing the loan with future revenue from the contract. Finally, I hold D which is A’s primary customer and a majority shareholder of C.
Note that my example describes actual privately held companies that are probably the ones providing the private debt in the article.
I don't think that's a true etymology of "bucket shop," which per my recollection of Livermore was just an off-track-betting parlor for ticker symbols, but where nobody actually bought the shares (bundled or otherwise). Strictly a retail swindle, having nothing directly to do with the risk/maturity bundling work you are criticizing above.
> No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks.
How is this inconsistent with what I said? I was just making the point that the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap.
> the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap
That may have been true once. It's rarely true now. Banks and shadow banks compete for the same borrowers.
Private credit is cracking and lending standards are tightening behind the scenes. If you’re not building cash reserves right now you’re going to wish you had. The distressed opportunities ahead go to whoever kept dry powder while everyone else was chasing growth.
If your business is light on free cash flow (ie everyone in AI at the moment) buckle up as there are storm clouds ahead. If you’re running a business that relies on external cash (VCs, loans/bonds, etc) to keep things going things will get very ugly.
Well it only took 5 years of destroying responsible savers with every policy imaginable to make sure they get crushed by those who availed themselves of the negative real rate loan inflation machine. How many people are left remaining that were dumb enough to take that strategy and are still standing? If you were operating on a cash basis for the last 5 years you were mostly wiped out by people leveraged to the 9s on debts and meanwhile your buying power was erased.
Interest rates on things like CDs and low-risk bonds have been decent for a while now. It’s not been painful to sit on cash reserves provided you were smart about where the cash was parked.
It’s not an either/or, it’s just a question of who was participating in the boom while preparing for storms ahead vs those all in on the boom.
What implodes in the period ahead are things that are massively over leveraged and can’t absorb a hit without doubling down again with more funding/loans and such. These are the folks and companies that get wiped out.
Interest rates on things like CDs and low-risk bonds have been decent for a while now. It’s not been painful to sit on cash reserves provided you were smart about where the cash was parked.
Just make sure you can unpark it, else you're SVB.
You're not wrong it's always good to have cash but certain allocations could have done 50%-100% return on investment while a CD brought ~5.5% for a while. Look at S&P since 2021. Knowing when to transition from cash, liquidity, other instruments is what kills/allows people to survive. We can't all do the same thing, it's almost as if it's economic ecological evolution, random death.
In actuality, the CPI is lower than inflation because technological advancement, automation, and economies of scale (due to globalization etc) are driving consumer prices low. In other words, if factories are still producing things like they were 20 years ago, the CPI would have been much higher, and that higher number is closer to what should have been the inflation number.
> if factories are still producing things like they were 20 years ago, the CPI would have been much higher, and that higher number is closer to what should have been the inflation number
This is an impossible counterfactual to test. In reality, tracking value across time requires adjusting for immeasurable preferences. This is why inflation is really only a useful measure for personal purposes across periods of years. It’s only macro economically interesting across a generation and close to meaningless longer than a human lifespan.
I think it's so obvious that no testing is needed, but generally I don't disagree with your take.
The thing is one really needs to understand what "real yields" mean when investing in bonds, i.e. it means your purchasing power with respect to cheap commodities tracked by the CPI is preserved, but it doesn't necessarily mean "value" (whatever that means in the abstract) is retained.
> it means your purchasing power with respect to cheap commodities tracked by the CPI is preserved
CPI isn't a measure of commodities. And "CPI" is a bit of shorthand, given there are pretty much as many measures of consumer and producer prices as there are economists.
> it doesn't necessarily mean "value" (whatever that means in the abstract) is retained
This is what any measure of inflation ultimately seeks to measure. Purchasing power is intrinsically tied to the basket of goods and services its measuring. That basket varies across people and time as preferences vary.
A better measure is what % of the total money supply you have.
I.e. you started out with 2e-20 % of the total money, and after 5 years you now have 1e-20 % of the total money, then whatever happened to CPI, you've been diluted and you would probably have been better off investing in something else other than cash.
That makes sense in theory, but in reality what "total money supply" is is a complete can of worms and basically impossible to measure
Decent is fine if you're about to retire and want to avoid risk but I wouldn't recommend parking your wealth in CDs/bonds if your retirement is still 15+ years out, personally. The government has to print money to bail itself out which means things are going to inflate quite a bit, just look at what gold has done in anticipation of this.
Banks bailed out the hedge funds in '98, then the taxpayer bailed out the banks in '08, then the government bailed out the taxpayer in '20... now monetary policy from the fed has to prevent the government from defaulting.
This is not my field of expertise, but I modeled keeping cash reserves to buy distressed assets. Unless I was able to perfectly predict the crash, the outcome was still better to not time the market.
> If you’re running a business that relies on external cash (VCs, loans/bonds, etc) to keep things going things will get very ugly.
Honestly thrilled to hear it. The AI bubble needs to burst so we can find out what's actually useful, start requiring real business models again, and get rid of all the noise and waste.
The problem is all these over-leveraged sectors will drag everybody else. And guess who will be bailed out? Heads they win, tails everybody but them loses.
> The problem is all these over-leveraged sectors will drag everybody else
Well, the good news is that's what good public policy is for, to blunt the impact of the damage with strong anti-trust enforcement and careful cash injections to weak-but-critical areas of the economy to help stabilize in rough times.
Now, hang on for just one moment while I crawl out from under this rock and take a look at who we have entrusted to set our public policy.
The problem is, what assets remain of a company that doesn't own anything material? OpenAI, Anthropic - they don't own datacenters that could be auctioned off. All they own is training data and trained weights, and both are relatively worthless.
The game that all the AI companies are playing is to be the last dog standing at all costs, because that kind of dominance is a money printer.
"Most of the private credit loans were floating rate and tied to the federal funds rate, which has persisted at a high level over the past three years. Fitch pointed to this as a catalyst for last year's defaults."
I wanted to dismiss that and say ... but it's not really historically high. I suppose it really is not IF you look WAY back. It actually has persisted at a relatively high level if you look back to 2009, which is more than a short time now.
I guess it is fair to say the federal funds rate has persisted at a high level over the past three years now isn't it?
Also interesting to note, "Fitch recorded NO defaults in the software sector last year. The rating agency noted it categorizes software issuers into their main target market sectors when applicable."
The problem of the current situation is that even 5% is considered as a high interest for many people, if not most of them. Inflation already pushes up the base price, and if the interest rate keeps on 5% and above many people simply won't consume, which will further pull down the economy.
For example, we decided to keep our vehicle for another 4-5 years instead of buying a new one. The same Hyundai vehicle of the same model, but different year (2026 v.s. 2020), has gone up 8,000 CAD (10K CAD considering tax), with a much higher rate (5.99% v.s. 0%). There is no way I'm buying another car in the foreseeable future. We can definitely afford it, but we won't.
The whole world has pushed up prices of food, housing and pretty much everything higher. This is the real problem -- although I wouldn't say it is the root problem.
i dont think the inflationary seventies and eighties are great lodestar
low interest rates are historically a sign of a stable polity and economy. so if anything, we want the conditions for prolonged low interest rates, rather than prolonged high interest rate.
That's not correctly stated. "Private Credit" is defined as non-bank lending. Banks are doing "public" lending in the sense of being regulated. Private lending is any sort of financial instrument issued outside of those guard rails.
It's generally felt to be risky and volatile, but useful. Basically, it's never illegal just to hand your friend $20 even if the government isn't watching over the process to make sure you don't get scammed. This is the same thing at scale.
It is. (EDIT: It's a mixed bag. OP was correctly calling out a definitional error.)
Banks have loaned $300bn mostly to private-credit firms. Those firms then compete with the banks to do non-bank lending. It's a weird rabbit hole and I'm grumpy after a cancelled flight, but it feels like I'm in the middle of a Matt Levine writeup.
- when a bank creates a loan, this has an effect on money supply in total
- when a private credit company "gives" a loan, it has no effect on total money supply and from balance sheet perspective its an accounting exchange on the asset side
A private credit firm is a non-bank entity that raises money from wealthy investors, pension funds, etc to loan out to businesses. The funds are generally locked up for several years to match the duration of the loans.
They also borrow money from banks to add leverage to this basic setup.
Not who you asked, but I think making the nuance between retail and corporate credit. With firms being corporate credit (i.e. we aren’t talking about individuals / retail).
- bonds. Loans interned to be bought by a range if investors and traded over time. Arranged and unwritten by investment banks.
- bank loans. The classic loan. The bank takes depositor money (that the depositor can take back anytime!) and loans it to someone or some company. The bank holds the loan
- private credit. Like a bank loan, but they get their money from long term investments by wealth people and institutions, add bank loans for leverage, and then hold the loan.
These are mostly syndicated. The traditional difference between loans and bonds was bank versus investment bank. The modern difference is in underwriting technique, degree of syndication/securitisation and loans mostly being floating and bonds mostly being fixed.
Convergent evolution in finance is actually a pet interest of mine. It seems like it's mostly driven by regulation. But the more you stare, the more the regulation appears like a canyon wall and the hydrology customs and connections. I'm not sure what the underlying geology is, however. Something bigger than customs or laws, but not so grand that it becomes ethereal.
The Banks get in trouble, and Gov has to step in. So Gov, reasonably, add regulations and restrictions. But the law can't be really specific, it requires gov employees to actually examine the bank and make decisions (eg about risk levels, etc).
The banks have a really large incentive to chip away at the effectiveness of the regulation. They hire lots of lawyers, consultants, notable economists, etc and just keep pushing on these rank and file gov regulators. They buy influence with politicians, and use that to pressure the regulators. They hire some of the regulators at very high pay, sending a signal to the others: play ball and a nice job awaits you.
Over time, they just wear down the regulators. The rules are interpreted to be mostly ineffective and nonsensical. Often at that point the politicians come in and just de-regulate.
The banks just have the incentive and focus to keep at it every day for years. No one else with power is paying attention.
Firm is used for partnerships, where the company is not a legal entity itself. An incorporated company may be closely held but it wouldn’t be a firm in that sense. (However, it may be customary to talk about law or accouting firms, for example, regardless of their actual legal form.)
Last year Jamie Dimon said there were some going to be some “cockroaches” found lingering unattended to in lots of private credit portfolios— the implication at the time was not that it was systemic and deep, merely that various incentives and market forces have meant a shakeout of either the incremental as-it-happens variety or slightly larger ones of multiple happening at a time.
Since then I’ve seen small things indicating lots of people quietly checking their books for such.
In the last week or two this has accelerated. A lot. Every few days there are ratchets tightening things up. Dimon just put some hard limits on some private credit lines and what they could take out. A few other banks trying to take other precautions.
I took that to be what it was intended it convey, and what Dimon wanted people to feel about what he said. That maybe they should poke around their own books but he wasn’t telling people “well ‘08 all over again”
My own read of the subtext was something a bit different. Dimon saw something he really didn’t like and my guess would be that more than just a handful of people at JP Morgan were having their next few days or longer personal plans cancelled—- or that it had already settled from something like that— to find whatever they had in the way of cockroaches. And so Dimon’s public statement was a soft nudge to try and get others to do the same, cautiously and slowly without panicking.
It’s tea leaves but the time since then seems to bear that out, with right now’s world economic volatility being a good opportunity for many places to go a little more aggressively in reigning in whatever they have in cockroach’s with some cover from that volatility and distraction to not have to explain too much more or get too much scrutiny that would accelerate things beyond manageable.
Overall, my take was that Dimon is still probably pissed off about SV bank and trying to make sure whatever shape or size this private credit rot may have doesn’t go down quite that haphazardly.
I wonder if anyone can say if there’s much risk of sub prime private credit? Not sure if that’s the right term. My understanding is that synthetic CDOs are the rise again, this backed by private credit - which the article is discussing
Since a lot of people here aren't familiar with the private credit situation, here's my understanding, which comes almost entirely from reading Money Stuff, a daily column by Matt Levine. If you are a tech person who wants to learn about finance, I recommend it! It's a lot more entertaining than most finance industry reporting.
"Private credit" is an idea that has been hot in finance for the last several years, originating from the great financial crisis (GFC). After the GFC, regulations made it very hard for banks to make business loans with any kind of risk anymore. So instead, new non-bank institutions stepped in to make loans to businesses. These "private credit" institutions raise money from investors, and lend it to businesses.
The investors are usually institutions who are OK with locking up their money long-term, like insurance companies and pension funds. This all seems a lot safer than having banks making loans: banks get their funding from depositors, who are allowed to withdraw their deposit any time they want. So a bank really needs to hold liquid assets so they are prepared for a run on the bank, and corporate borrowing is not very liquid. Insurance companies and pension funds have much more predictability as to when they actually will need their money back, so can safely put it in private credit with long horizons.
It's not quite so clean, though.
It's actually common for banks to lend money directly to private credit lenders, who then lend it out to companies. But when this happens, typically the bank is only lending a fraction of the total and arranges that they get paid back first, so it's significantly less risky than if they were loaning directly to the companies. Of course, the non-bank investors get higher returns on their riskier investment.
And the returns have been pretty good. Or were. With the banks suddenly retreating from this space, there was a lot of money to be made filling the gap, and so private credit got a reputation for paying back really good returns while being more predictable than the stock market.
But this meant it got hot. Really hot.
It got so hot that there were more people wanting to lend money than there were qualified borrowers. When that happens, naturally standards start to degrade.
And then interest rates went up, after having been near-zero for a very long time.
And now a lot of borrowers are struggling to pay back their loans on time. And the lenders need to pay back investors, so sometimes they are compromising by getting new investors to pay back the old ones, and stuff. It's getting precarious.
Meanwhile a lot of private credit institutions are hoping to start accepting retail investors. Not because retail investors have a lot of money and are gullible, no no no. 401(k) plans are by definition locked up for many years, so obviously should be perfect for making private credit investments! Also those 401(k)s today are all being dumped into index funds which have almost zero fees, whereas private credit funds have high fees. Wait, that's not the reason though!
But just as they are getting to the point of finding ways to accept retail investors, it's looking like the returns might not be so great anymore. Could be a crisis brewing. Even if the banks are pretty safe, it's not great if pensions and insurance companies lose a lot of money...
^ Encase the link also responds with this for you:
Access Denied
You don't have permission to access "http://www.marketscreener.com/news/us-private-credit-defaults-hit-record-9-2-in-2025-fitch-says-ce7e5fd8df8fff2d" on this server.
I've never heard the term private credit so I googled it.
> Private credit refers to loans provided to businesses by non-bank institutions—such as private equity firms, hedge funds, and alternative asset managers—rather than traditional banks
.
Is that correct?
So if these companies go under does anyone care? If they go under are they a systemic risk to the economy like the banks in 2008 that got a taxpayer bailout?
> At the Financial Times, Jill Shah and Eric Platt report:
>JPMorgan Chase ... informed private credit lenders that it had marked down the value of certain loans in their portfolios, which serve as the collateral the funds use to borrow from the bank, according to people familiar with the matter. >...
>The loans that have been devalued are to software companies, which are seen as particularly vulnerable to the onset of AI. ...
From what i can tell the problem isn't that an individual who had cash to invest in a private (tech in this case) company goes down
the problem is that a company "private credit firms run retail-focused funds (“business development companies” or BDCs)" which took out a bunch of loans to invest in private tech companies is now having the underlying assets that they got those loans against (long term investments in private tech companies) valued lower.
the link im missing is what happens when people who also invested in BDCs want their money back, where their actual money is locked up in long term investments made to private tech companies, and their ability to get loans is now valued lower. I think this is called a "run" where if someone starts pulling money out, and ultimately you cant, then its a race to get your money out before others do, which applies to both the individuals and the institutional loans.
Note: my quotes are from the bloomberg newsletter i mention, which helped me, not the OP article. And i am writing as much to clarify my own thinking as from a place of understanding. I welcome clarification.
It is a systemic risk because its size and credit risk is opaque, like mortgage-backed securities were in 2008.
Banks needs to disclose the % of non-performing home, auto, business loans to rating agencies and regulatory bodies so their credit risk is known, and so regulators they can set rules on how loose or tight lending criteria should be in the industry. With 'financial innovation' like tranched mortgage bonds rolling up thousands of mortgages at various levels of credit risk into one, they can be traded without anyone actually knowing what the default risk is.
With private credit, there is no disclosure requirement because the lenders are not banks. PC is financing the entire AI datacenter boom, without which GDP growth in the US is effectively zero. If PC defaults rise, the bottom could rapidly fall out of the S&P 500, which is already being hit by the oil price crisis, and affect people's 401Ks and retirement savings.
> So if these companies go under does anyone care? If they go under are they a systemic risk to the economy like the banks in 2008 that got a taxpayer bailout?
Mostly, no, which is exactly why private credit has become so big in recent years: they are making the loans the banks can't or don't want to make, because the banks are subject to a bunch of additional regulations, which are designed to reduce the probability of banks going bust and having to be bailed out.
But it can be difficult to judge second order effects in finance. It's possible that a lot of private credit houses going bust would indirectly and perhaps unexpectedly hurt the broader economy. An obvious one being companies that are reliant on private credit going bust because their financing needs can no longer be met.
Also, with this administration in the US I wouldn't entirely rule out bailouts for some of the more politically connected private lenders.
> But it can be difficult to judge second order effects in finance.
Another obvious question to ask is who is providing the money that is being lent? Those are the people who now won't be paid back. The assumption is that these are people with predictable, long-term obligations who can lock up their cash for a long time: pensions, insurance companies, endowments, etc. Hopefully they are allocating a responsible amount of their portfolio to something as risky as private credit, but as the details are private, it can be really hard to know.
There has also been a big push over the past year to put private credit assets into retail 401k's (which, in theory, also should be okay with locking up funds for a long time, but in practice, maybe less so), most insidiously by having private credit assets held in target date funds (which are the default funds for many plans).
Many private credit funds also increase their leverage by borrowing from actual banks.
All of that should pose less systemic risk than if banks subject to bank runs were lending all of the money. But that has to be balanced by the fact that these are unregulated entities taking more risks than banks would. Long-term average default rates on high-yield bonds are around 4%, so 9.2% is high, but not in panic-inducing territory yet. Who knows what they will look like in the event of an actual recession.
> So if these companies go under does anyone care?
This is nowhere near as bad as the 2008 crisis, no. The banks don't really use the checking/savings account money for this. If you've invested in something that either invests in Private Credit or is reliant on Private Credit, then it'll suck for you personally.
...
One teeny tiny extremely important detail: Private Credit is bankrolling the AI industry's datacenter construction. If anything happens to significantly increase interest rates, several datacenter companies and Oracle go bankrupt. The other big tech firms have taken on lots of debt as well so expect spending cuts there too, even if they survive.
The systemic risk isn't in "bankers fucked it up again", it's in the AI bubble.
Well, the question isn't "is there any consequence for the bank managers"? The answer to that is "No, never, not even during the French Revolution".
The question is "How long can they keep extracting money before the economy implodes?"
The people producing macroeconomic indicators in the US were fired about 6 months ago for putting out an honest report. Since then there's been very little correlation between public sentiment on the economy and the official indicators.
So, we're definitely in some sort of overhang situation, where the economy is imploding, but the stock market goes up. I think that's unprecedented in the US. In developing countries, when this happens, it usually leads to things like hyperinflation.
So, I guess the real questions are: "How do you short the dollar?", and "How can you tell when the banks start doing it?" so you know when to jump off the merry-go-round.
Luckily debt will be solved by the power of AGI, right? Just one more data centre! One more GPU! It can nearly write a basic three tier application with only 10 critical security vulnerabilities all by itself!
Definitely think we’re in for a rough year financial prospects wise, and doesn’t even feel like we recovered from the 2008 crash properly.
Luckily debt will be solved by the power of AGI, right? Just one more data centre! One more GPU! It can nearly write a basic three tier application with only 10 critical security vulnerabilities all by itself!
If you read the article, it says the default is directly related to the sell off of software stocks, which are heavy private credit borrowers.
What caused the SaaS apocalypse? Gen AI.
I'm long on AI hardware companies for this reason.
Hundreds of financial institutions with greater or lesser responsibility for the crash in 2008 went under in those years[0]. The shareholders in almost all of these companies lost all of their money and the responsible employees lost their jobs. This includes some of the most guilty companies, like Washington Mutual, Countrywide Financial, IndyMac, Lehman Brothers, Merrill Lynch (through First Franklin Financial), Bear Stearns. But all these companies are completely forgotten now.
Instead everyone hates on Goldman Sachs. Sure, Goldman Sachs deserves hate, but of the big banks they were the _least_ guilty of the crash in 2008. Not saying they were saints, but in 2008 they were the least bad.
When you have people at the top of those institutions who made those decisions, and made enough money during their tenures to weather any length of unemployment and were sometimes even given a severance worth more money than the average American makes in a lifetime, going out of business or losing a job simply isn't enough.
It's one of the only investments of labor and time where the risk is not proportional to the return.
In order to create risk, you have to either claw back their money through civil action - which you can't because the entire point of incorporation is to separate the business entity from one's personal finances - or look at criminal charges. Otherwise, you have created a class of hyper-wealthy people who have no real incentive to perform in a way that is for the best interests of shareholders or society at large.
It's the reason we tie so much for regular people to employment in the US, like healthcare. Many argue that if you give the rank-and-file worker the kind of long-term financial security that just one or two years of being a C-suite executive at a major company, they won't work as hard. They won't make the best decisions. They won't be the dynamic workers our economy supposedly wants. That logic goes right out the window when a board goes hunting for a new CEO.
>The shareholders in almost all of these companies lost all of their money
How is that penalizing those responsible?
Isn't it a pretty big leap to go from penalizing those selling packaged fraudulent loans to the public (whom, to my knowledge were never prosecuted) to the shareholders losing money as protection against it happening again?
The shareholders are responsible for the management of the company who are in turn responsible for their employees. By wiping out the shareholders in these companies hopefully other shareholders in other financial companies will demand more oversight. In the end people respond to incentives and the individual employees that sold the fraudulent loans were implicitly or explicitly incentivized to do so by management, who were in turn rewarded for this by shareholders. Going after the specific employees that sold the loans is of course morally satisfying, but if we want this to not happen again we need to make shareholders and executives keen to avoid a repeat. Looking at how popular Klarna, gambling companies and now private credit has been with investors, it doesn't seem to have worked, unfortunately.
But, yes, it is a travesty that more of the subprime loan salesmen weren't prosecuted. It has a lot of value for a society to actually convict people that have done actual wrong. We all want to live in a just world and seeing that people who have done wrong get what they deserve is part of that. Looking at the US from the outside I think a lot of the polarization we've seen in the US over the past 15 years could have been avoided if more prosecutions had happened in 2008-2012.
IMO this is also why big companies being allowed to do settlements without admissions of wrongdoing is so bad. They fail to fulfill the moral purpose of law enforcement. Ironically Goldman Sachs _did_ admit wrongdoing in their settlement with the SEC over their Abacus CDFs...
The problem is, shareholding is now so abstracted as to make actual corrective action incredibly unlikely.
If you have investments, go and look what your holdings are. There's a real chance you have some sort managed portfolio that will trade equities to maintain growth. It might be algorithmically-driven. Your holdings may very well temporarily include some companies that you don't approve of, but trading happens so fast and so often that you're not going to be able to keep up on what you actually own.
That's because debt IS money. Literally. If you create debt, you have created wealth. These people weren't punished so they could get back to creating new debt as quickly as possible.
The problem with credit defaults, especially private credit defaults, isn't that some private creditors lose some money, it's that twice that amount of money is destroyed, and disappears from the economy entirely.
In fact we rewarded them. We bailed them out by printing a lot of money. We then printed more money during the pandemic to pay people to stay home and watch Netflix. Probably a lot more examples. All that money flowing around that has no basis in actual productivity or value created. It's got to correct at some point. One of the corrections is how much more everything costs now, but I don't think that has fully absorbed the excess.
Exact opposite. We are in the midst of the COVID hangover.
So that govt money went to the wealthy to buy up houses (Californians bought real estate in the Midwest as investments and it drove up housing prices along with small immigration to these states)
Farmers etc benefited from bailouts when they were doing very well. It was a large blunder.
All that money directly led to housing inflation that still hasn't settled. The PPP loans were all forgiven (which massively favored business owners and upper class).
Meanwhile student loan forgiveness was overruled by the supreme court.
It's really hard to ignore the implication that it ended up being more like a wealth transfer than anything else.
It was inflationary but would spread out the pain over the recovery period after the crisis, the other option was to allow 100% of the pain to be felt immediately: economy shutting down, people losing their jobs, diminished household spending, less money circulating in the economy, businesses still running having fewer orders/customers, more people being laid off, all the way until the crisis passed.
Between the latter and the former I believe the former was a much smarter choice in the medium to long term.
We did. We created about $4 trillion. That just about neutralized the $4 trillion that evaporated in the crash, and the result was that we did not go through a deflationary collapse. You know that they did not create too much, because inflation was basically nothing for the next decade. It was flat until Covid.
Thanks, that was a perspective I hadn't thought about. But still doesn't seem like that taught any lessons, other than the taxpayers will bail out our carelessness.
I think it was a good call, yes. A deflationary collapse is incredibly damaging to the economy. The Great Depression was such a collapse, but there are others. The Panic of 1857, 1873, 1907... there's a long history of these.
The Fed avoided that. And they also avoided causing inflation. It was an amazing job of threading the needle. (One could argue that they caused a decade of stagnation, but in my view that was minor compared to the other options.)
I have really tried hard to figure out the counterfactual as being a good thing and it is just really hard to make the argument that we would have been better off with a deflationary collapse.
This is especially true from a global perspective. It would be a much more equal global economy but unimaginably poorer. The political consequences are unknowable but a deflationary collapse would not have had good political outcomes.
We largely shifted a nightmare into being a great time to be alive but take the good times completely for granted because we can't really know the nightmare we didn't see.
Thank you for the thoughts. Do you think if we had ripped the band-aid off then it would have been completely disastrous? I don't mind saying that this economy is frustrating, and it feels like we keep kicking the can down the road. I'm confident I'm not the only person that feels this way, and I'm quite open to being wrong here. My guts says there's just too much money sloshing around, and it gets vacuumed up, leaving the majority feeling like nothing changed.
I'm asking this in as non-confrontational way as possible, what am I missing?
I think you may be missing that $4 trillion evaporated in 2008, and the scale of the catastrophe that would have caused if the Fed did nothing. What the Fed did then was, essentially, restore the amount of money to what it was in 2007. They were trying to turn 2008 into as much of a "nothing changed" as they could, and they did it quite well.
I think the economy can adjust to any amount of money; it's the abrupt change in the amount that causes problems (because it causes an abrupt change in the value of money).
I think you may be missing that I'm not saying the same thing about the pandemic response. I think that too much money got poured in during the pandemic years, and that has caused inflation, and we've been seeing that inflation since. I wonder if you are taking how you feel about the last five or six years, and mapping that onto the last 18 years.
Now, from 2008 to 2020 was not all roses. Things were kind of stagnant. The rich were probably doing better than you were, because assets like stocks and land went up in value as interest rates went down, but your wages didn't go up. So, it was reasonable for you to feel "there's too much money sloshing around" in things like stocks during those years.
But I think it got worse after Covid. The government air-dropped too much money in, and there has definitely been too much money sloshing around since then.
In all of this, I'm not really saying that you're wrong in feeling that there's too much money sloshing around, or that the economy is frustrating.
Consequences would be nice, but actually forbidding it for the future would be enough. Obama promised to do it, but didn't, and everybody kind of forgot and moved on.
We sure did when Frank-Dodd was written by the legislative and then signed into law by the executive.
GP's comment is about the aftermath of 2008, entirely missing the fact that the legislative did in fact create laws which were signed by the executive and then later, in 2018, dismantled under a different administration.
I mean people have been saying a crash is coming for years... Consumers recklessly purchased homes and cars at double their value, while relocating for remote work that was never long term in the eyes of their employer. Sounds like a receipt for disaster or a repeat of 2008- however, so much has changed since 2008... whatever happens, Black Swan! Hope "you" have your ducks in a row... As for AGI, lol. A box of matmuls isnt going to solve any real problems, so far, as you point out- is can barely write software. LLMs are basically gifted children. Smart sounding, lacking wisdom, chaotic, and likely just going to end up not that impressive. Either way- before we ever see AGI, we better get our heads out of the holes of the wealthy and enact UBI...
They do not in fact do it just fine. That's why it's utterly laughable to suggest that they can lead to AGI. They can't even do the one thing they are supposed to be good at, even after years of effort.
I didn't say anything about AGI, nor will I except to say it's an incoherent quasi-religious topic that has next to no engineering relevance, at the very least until somebody can empirically test for it. Stop coping.
He's one of the "Big Short" guys but more importantly he has great guests on. Everyone is trying to teach & inform, not sell.
He's been calling this risk out for over a year, especially once the White House started trying to allow retirement accounts access to private credit. For a lot of people that was the big alert, even before Jamie Dimon said he saw "cockroaches".
I can't remember the names. Best bet if you don't want to listen is to just get summaries or transcriptions of the episodes you can an LMM questions on.
The info on his podcasts isn't telling you who to short. It's more who has gone under & general knowledge.
I'm not surprised. Weren't we getting signals like 3 or 4 months ago that used car repossessions were ticking up? That's a breaking point for folks. The economic boulder keeps rolling and I'm not wearing any shoes. Spiking the price of oil is definitely going to help. This too shall pass?
There is so much misinformed fear-mongering about private credit right now.
Important Facts:
1) The majority of private credit funds are classed as "permanent capital". When you put money into these vehicles, you give the Asset Manager discretion over when to give the money back. Redemptions are often gated at ~5% per quarter.
(So there cannot, by definition, be a run on the bank)
2) Credit is senior to equity, so if you expect mass defaults in private credit, it means the majority of private equity is effectively wiped out. Private equity has to be effectively a 0 before private credit takes any losses.
3) The average "recovery rate" for senior secured loans is 80%. Even if private equity gets wiped to 0, the loss that private credit incurs is cushioned significantly by the collateral backing the loan. These are not unsecured loans the borrower can just walk away from.
(The price of senior secured loans dropped by ~30% in 2008, as a worst case datapoint)
4) Default rates on many of the major private credit managers is ~<1% in recent years. There are other estimates stating higher default rates, but that often classifies PIK income as a default. A loan modified and extended with added PIK that ultimately gets repaid is not a "true" default.
5) Finally, it's true that NAVs are likely overstated, but generally it's by a modest amount. Every Asset Manager today could go out tomorrow, mark NAVs down by 20% and suddenly there is no crisis.
(The stocks of Asset Managers have already traded down such that this seems expected and priced in anyway)
> Private equity has to be effectively a 0 before private credit takes any losses
Technically yes. But the overlap between private equity as it's commonly described and private credit is slim.
> average "recovery rate" for senior secured loans is 80%
Oooh, source? (I'm curious for when this was measured.)
> A loan modified and extended with added PIK that ultimately gets repaid is not a "true" default
True. It's a red flag, nonetheless.
> Every Asset Manager today could go out tomorrow, mark NAVs down by 20% and suddenly there is no crisis
Correct. The question is if 20% is enough, and if a 20% markdown creates a vicious cycle as funding for e.g. re- or follow-on financing dries up.
You seem knowledgable about this. I'm coming in as an equities man. Would you have some good sources you'd recommend that make the dovish cash for private credit today?
> Oooh, source? (I'm curious for when this was measured.)
It depends when you measure, but you can Google around and find figures in the 60-80% range. 80% may have been a bit on the optimistic end of the range. But it's important to note that a "default" doesn't imply a 0.
Of course this will depend on the covenants, underwriting standards, type of collateral.
I would guess software equity collateral recovery rates are lower than hard assets like a building. (Which is why I personally don't like Software loans, nothing to do with AI)
> Correct. The question is if 20% is enough, and if a 20% markdown creates a vicious cycle as funding for e.g. re- or follow-on financing dries up.
I think it's almost certain that new fundraising for private credit will be materially hindered going forward. But this just limits the growth rate of these firms, does not introduce any "collapse" risk.
They may move from net inflows to net outflows and bleed AUM over a period of some years.
If NAVs were inflated previously, they may be forced to mark down the NAV to meet redemptions rather than using inflows to payoff older investors.
In the world of credit, 20% is an enormous haircut. Again, senior secured loans fell by around 30% peak to trough in 2008.
We have the public BDC market as a comparison point where the average price/book is around 0.80x. So the public market is willing to buy credit strategies at a 20% discount to stated NAV.
The real systemic risk here, if we were to reach for one, is really that these fears become self fulfilling.
If investors pull funds out of credit strategies en-masse, there is no first order systemic issue, but it means borrowers of many outstanding loans may not be able to secure refinancing as money is drying up.
This could lead to a self-fulfilling default cycle. But this would be a fear driven default cycle, there is no fundamental issue with cash flows of borrowers or otherwise (in aggregate, currently).
Finally, in regards to the asset managers themselves, many are quite diversified.
Yes, they have private credit funds, but many have real estate funds, buyout funds etc. OWL is one of the biggest managers of data center funds, for example (which they also got hammered for on AI bubble fears)
Given how depressed pricing is in public REITs, for example, I expect a lot of asset managers to pivot towards more real asset funds.
So, if I hold a bunch of Private Equity, and my holdings need a continuity of business loan, would I:
(a) have the holding take out the debt, exposing 100% of my stake
or,
(b) have the holding divest a piece of itself, giving me control of the existing and new entities, then have that piece take out the debt, exposing 0% of my stake?
I imagine any PE firm worth its salt would go with option (b).
Presumably regulators would sometimes try to block such deals, but I cannot imagine that happening during the current administration. (Do the regulators even still work for the US government? I thought they were mostly fired.)
Similarly, I can imagine the banks refusing to lend in scenario (b), but I cannot imagine bank leadership being allowed to make such a decision if the PE firm is politically connected to the current administration.
It sounds like you're effectively describing some fraud scheme.
A smart lender will not issue loans without real collateral. If you create a subsidiary, that subsidiary has to have sufficient collateral and cashflow to secure a loan.
Same basic issue, but not exactly the same thing in terms of sector or potential impact. The sub prime mortgage delinquency rate remains low as home loans became much more strict after 2008. So that portion of the economy is relatively safe right now. PE is a much smaller market and so the fallout from a private equity collapse, while significant, would theoretically be less likely to negatively disrupt the total market to the same extent as the 2008 housing crisis.
People have cried wolf or been wrong about incoming crashes and bubble pops so many times that this signal -- whether it's a good signal or not -- simply won't change anything I do.
I'm sure someone somewhere could make a trade off of this article and this signal is definitely for them.
It is incredibly hard to make money going short. Even if you are right about the direction, most short positions require interest payments to hold, or have some sort of decay built into the structure. So timing is everything and even then, if the underlying security slowly grinds down (instead of a quick abrupt move) you could still lose if the interest/decay on the short position outruns the downward movement on the underlying.
I have been actively trading in the market for a little over a year now, and while winning on a short position is probably the most satisfying trade for me, the overwhelming majority of those trades are losses and at this point I mostly treat them as hedges. I suspect that is true for most market participants as well.
Even if this was a reliable signal for most of us it shouldn't change anyway. Timing the market is hard, so if you have a job keep investing in your retirement accounts and let dollar cost averaging work it out - odds are you are buying at fire sale prices. If you are one of those who lose your job - it doesn't matter much if the economy is good or bad, you need to adjust a lot of things (even in the best of times sometimes by chance you can be out of work for a long time)
If you are the manager of a mutual fund you can take useful action on signals like this if you can figure out what they mean. Most people don't have enough money to be worth trying to take action.
You may not be able to properly let dollar cost averaging do its thing if you rely on your job to invest, since there's a high correlation between periods where people are out of work and periods where asset prices are lower.
Even in the worst part of the great depression 75% of the people had a job. Most years where much better.
Don't get me wrong, if you don't have a job things are bad. If you have a job but it isn't giving good raises, or it is a worse job than you are qualified for things are bad. However things are not hopeless for the majority of people even when things are really bad, and you can get through it.
"Signals" are rubbish. The market is irrational and will change its mind at random.
This is, however, one of many indicators of an overall wobbling system. It would be a good time, not make the line go up, but to look for ways to stabilize the economy as a whole.
Which is unfortunately a hard question. One could theorize that we should do different things than the thing we've been doing for the past year or so, but of course there will be many who say that we just haven't done it hard enough yet.
It is easy to keep your head above water level for surprisingly long times. Just look how some people in retail manage to rack up credit card and other type of debt.
And it is especially so when money given is not their own, but instead they get to take cut. Which these funds can do. They might even just take promises that you will pay in future and even allow adding the interest on top of loan amount. Numbers look good, bonuses look good.
Fundamentally this can only last so long and now is the time it starts to blow up.
Yea the market will correct any time now from 2009.
Things will stay the way they are for as long as people want them to. The economy and money is fundamentally made up. It’s so funny when these types come out and start talking about made up fundamentals as if they are physics.
Employers will never be able to pay a living wage, because the real problem is a lack of housing. Rents and mortgages will always outrun wage increases in the current market.
Having worked in IB / PE my whole career (both buying & selling businesses and distressed debt, primarily in the middle market) it is always fun when my area of domain hits the front page and I can read the confident opinions folks have on my industry.
I think most people in this thread are missing the boat.
First, it’s important to realize that “default” does not imply wipeout. Default just means that you’ve violated a credit agreement, and that can be solved many different ways. Sometimes it’s solved by the sponsor restructuring the debt (injecting equity, asking for covenant/interest relief); sometimes it’s a true Ch 11 bankruptcy; in very rare cases, it can be a true Ch 7 liquidation. But even in those destruction-of-value scenarios, first-lien recoveries run 50-70% of “par value” borrowed. Lenders are smart, their job is to underwrite these deals, and they’re compensated for this with healthy interest rates - typically S+500-650 plus fees, which comes out to 10–12% unlevered returns. So they are basically pricing junk bonds, and in exchange get senior secured risk with real covenants around what the business can / can’t do.
Second, the myth that PE firms can just saddle a company with debt at the lender’s expense with no skin in the game and walk away with a profit while the company files for bankruptcy is hilarious, in part because it obviously doesn’t hold up to the slightest bit of scrutiny. The typical PE firm is buying a middle market business for 10-12x EBITDA on average. In today’s world, lenders will usually let you put 4.5-5.5x EBITDA on the business as leverage (in the ZIRP era, you could push things up closer to 7x, sometimes above that if it’s a stellar business). So on a typical 10x deal with 5x debt, 50% of the capital structure is PE firm equity which gets wiped out first before the lender loses a dollar. If that happens, the PE fund’s investor returns crater, which means no more Fund II/III/IV, which means no more fees for them to generate.
(As an aside, the typical “fees” paid by portfolio companies to the PE firm are, at least in modern limited partner agreements, largely offset against management fees and recaptured by the fund’s investors. The PE firm is not getting rich off these fees, at least not anymore.)
Third, private credit is not your local commercial bank. Many of the largest private credit firms are actually PE firms themselves - e.g., Apollo, Ares, and Blackstone, who are all known as “private equity” have actually become more valuable to the public investor community due to their private credit business. These are not sadsack regional banks and credit unions getting hoodwinked by New York finance elites. In many cases, they are the same firms, with the same resources (in-house restructuring / “workout” teams, portfolio ops, etc.).
It’s important to realize that private credit funds raise capital from institutions and HNW individuals with locked-up commitments - it is the exact same investor base as PE, and fundamentally a very similar business, they just invest at a different part of the capital stack. Because of this, risk of contagion is very low. Bank exposure to private credit is something like 1.5% of their portfolio - it is tiny. The extent of the blowback will be that a pension fund investing in alternatives has a poor return in one asset class across a dozen - it’s not systemic risk.
Finally, what IS true is that pre-ZIRP portfolios and software-heavy credits (something like 15-20% of leveraged loans outstanding) are in a tough spot. These businesses are either failing or they have too much debt that has “re-rated” to higher interest rates as interest rate hedges fell off. What happens from here is that the companies with structural issues in their business model will cease to exist (e.g., certain SaaS businesses). This happens all the time - it’s capitalism. But the good businesses are not going to disappear because of a bad cap structure - they will just get recapitalized.
Zionism is an ideology, not a "minority group". People associate with it due to their values (most often, Christianity), not because of the way they were born.
The US Ponzi scheme coming to an end. It works great while everything is going up.
2008 Financial Crisis was triggered by Oil prices. There were lots of problematic structural elements that were fine if nobody looked close. Oil was just the sideway hit on the building to knock it over.
Just takes a nudge to collapse. And here we go again.
I thought it was by the layers upon layers of interconnected unregulated derivatives valued at a few orders of magnitude above the underlying subprime mortgages given to anyone with a pulse.
> it was by the layers upon layers of interconnected unregulated derivatives valued at a few orders of magnitude above the underlying subprime mortgages given to anyone with a pulse
It was interconnected derivatives and structured products linked to banks that caused a liquidity crisis in the former to cause a crisis of confidence in the latter.
Meanwhile: "In the letter, Morgan Stanley said the fund wasn’t designed to offer full liquidity because of the nature of its investments, and that credit fundamentals across the underlying portfolio have been broadly stable. The bank's shares fell 2% in premarket trading Thursday" [1].
> liquidity crisis in the former to cause a crisis of confidence in the latter
Wait what? Your thesis is the GFC was caused by a liquidity crunch/bank run? Isn't that... not true?
Isn't the proximal to distal chain of events government encouraged subprime loans -> inaacurately valued MBS -> exponential, unregulated derivative instruments -> leveraged contagion. What does market confidence have to do with any of that?
> your thesis is the GFC was caused by a liquidity crunch/bank run? Isn't that... not true?
It's absolutely proximally true and it's not just my thesis. From Wikipedia: "The first phase of the crisis was the subprime mortgage crisis, which began in early 2007, as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS, collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and bank runs in several countries" [1].
The subprime crisis shouldn't have been bigger than the S&L crisis [2]. What turned it into a financial crisis was the credit crunch that followed. That crunch was caused by folks running on banks that had sponsored these products.
On "inaccurately valued MBS," note that the paper marked AAA mostly paid out like a AAA security. It would be like if you were perfectly good for your word and I lent you money, but then I wanted to sell on that debt to a third party who didn't trust you at a 50% discount. What does "properly valued" mean in that context? It's ambiguous in a dangerous way. (In this analogy, you wind up paying back the debt at face value. But years later, albeit on schedule.)
it did. GFC was a financial recession no doubt, but oil prices was one of the final things that tipped everything over. Oil prices climbed high, slowed economic activity a bit, and the whole financial that teetering just collapsed.
I did make a snarky derivatives comment elsewhere in the thread, but I do see you're not wrong about oil prices peaking at $138 in June 2008 (Lehman collapsed in September 2008): https://fred.stlouisfed.org/series/DCOILBRENTEU
This time it took ~35 blows with a sledgehammer. You have to be impressed with the degree of resilience here, even a chaos monkey like Trump has a hard time completely destroying the US economy even when all checks & balances utterly fail.
Trump is a symptom, not a cause. One of probably hundreds of mediocre failsons gifted unbelievable wealth in the birth lottery who’s greatest achievement in life was managing to not lose all of it to his awful business acumen and utter refusal to listen to a single living person.
Every industry’s leadership is full of trumps, many more palatable personally, many far better spoken, many even with better politics but none fundamentally are any actually better for society. They don’t understand their company, the products it makes, they have utterly no care for anything besides the quarterly stock price and their lack of care costs real people their jobs and ruins the products we use every day.
And, they are why every company is ripping the copper out of its own walls instead of actually building a business that will last.
Spot on! I worked with execs at a FAANG, they don't have the foggiest idea what they are doing! Extraordinarily dumb, and they get all their 'information' and take decisions from gatekeeping orgs which are super incompetent. This is the one org where incompetency is a super weapon. These orgs don't take competent people, because they won't be loyal to you and do your bidding. And worse, if the execs realize there is a competent person, they will come straight you, bypassing the gatekeeping hierarchy.
It’s more accurate to say that the private credit market was created by the government adding new regulations, not removing them. Business development corporations have existed since the 80s but they didn’t explode in popularity as business loan originators until Dodd Frank and other post-2008 regulations made it more difficult for banks to lend money. This led small and medium size businesses to seek out credit from firms like Ares et al instead.
And to make matters worse, those who remove regulations then get voted out, but show up on infotainment "opinion" shows disguised as news broadcasts....and whine that those who were voted in to fix the mess aren't fixing the problem fast enough, so those who caused the problem should be voted back in. And lo and behold, they get voted back in, to cause more damage.
Its un-fixable. The situation cant be explained simply enough for the majority of americans. Even if some of them do mange to understand, it will be quickly forgotten amid the flood of trump sewage we are sprayed with every day.
I think we'll get there (to explanation), but it'll be through the lizard-brain-level pain of poverty instead of rational understanding unless we get much better at communicating to the least willing to listen among us.
Pretty sure the solution that US politicians will find will be to create new dollars out of thin air, so instead of increasing taxes they increase the money supply.
Of course this is going to increase prices, but then they can blame China / Russia / Iran whoever is the scapegoat at that time.
It would cause inflation, isn’t that sort of a tax on people who have more wealth than income? (Which includes people like retirees, so, I’m not saying this is a universally good thing).
> isn’t that sort of a tax on people who have more wealth
Classically, yes, particularly when that wealth is closer to productive capital. In modern economies, the rich also hold a lot of debt, which lets them benefit from inflation.
Theoretically yes, but in practice the wages of people already not making much have not tracked inflation and there's no reason to believe that they will now. That means any inflation is also a tax on them.
Poor people are hit a lot harder, but rich still have to pay capital gains on inflation even despite having no real change in value. So the rich pay inflation at the rate * 0.2. Poor pay it at the rate * 1.0 (5x the rate of the rich).
> rich still have to pay capital gains on inflation
“Pay” is doing a lot of work there. My house is half equity half debt. The debt gets to be paid off with inflated dollars. And I pay no capital gains on the appreciation. I can, however, tap it for liquidity if I need it.
Rich people don't tend to have a sizeable portion of their worth tied up in their primary residence (and even then, IIRC there is a cap on capital gains exception), otherwise property tax would turn into a wealth tax for them which obviously they want to avoid. Non-primary residences still require paying capital gains. The inflated value you paid off with debt for a non-primary residence still gets captured as capital gain in the end when you actually want to sell the house for money.
Yeah, I'm going down a bit of a rabbit hole this morning. Turns out Wells Fargo's $59.7bn of private-credit lending is equal to 44% of its CE Tier 1 capital [1]. Meanwhile, Deutsche Bank got back to being Deutsche Bank while I was not looking [2].
[1] https://www.sec.gov/Archives/edgar/data/72971/00000729712500...
[2] https://www.reuters.com/business/finance/deutsche-bank-highl...
Deutsche gonna Deutsche.
Recruitment tables should just have a banner that reads 'we've already spent your bonus on legal fees, here's some chocolate'
I'm re-running some of the Fed's stress tests and, somehow, still find myself flabbergasted that DB is at the top of my risk list. Despite only having $12bn of exposure, if they see a 60% loss on that risk alone (assuming 60% recovery and 1.5x leverage), they breach their 4.5% capital requirement. That's the lowest threshold I'm finding across all of the banks the Fed stress tests.
Now 50% loss means wipe out. But given the size of the portfolio, there is also the concentration risk. A single private-credit firm going bust shouldn't take out a bank. But that seems–seems!–to be what I'm seeing.
Time to short them?
It's never the time to short a company, even a really bad one. You have only 100% upside, infinite downside, and you have to time it perfectly. A short can be a part of a combination strategy where you go long on one company and short on a related one, but you still have to be really careful.
If DB stock increases 50% before it crashes, would you be forced to sell at the top and lose all your money?
This is sensible advice for most people. I see some thoughtful quibbles but I wish you weren't down voted. If you are a normal retail investor, please listen to pocksuppet.
pocksuppet’s advice is I think more of a reaction to a specific way that you could take a short position, and in 2026 I think you want to assume that people who know what “short” means, also know what options are.
The advice is good in a kind of stopped clock sense.
I'm old, so I am a stopped clock. However, I have invested my whole life including good times and bad. I believe that for a retail trader -- someone who doesn't get paid to trade other people's money-- options are bad. OK yes there are special cases like when your job requires you to hold a lot of one stock etc. I'm not going to make the case why here I am sure it has been argued to death.
I do remember smart friends getting interested in options at different times in the last thirty years because they make higher returns. Then they have a period where make lower returns, or have a real problem. I don't think its worth the attention and the trading cost for most people, even people who understand what a short is. You can't argue with a person who has been doing really well with them for five years but it always seems like people stop.
My take on why options are bad—options are bad most people because most people don’t get use from hedging, don’t have enough information about the timeline of price movements, and all you’re left with is a form of gambling. A form of gambling that’s pervasive enough to worry me. People on Reddit trying to get rich with SPY options (how could you possibly know where SPY is moving?)
Short positions are also bad, because there’s an ongoing cost to carrying a short position, and that cost is likely to cannibalize your expected gains.
Lots of good reasons around to avoid short positions and options like they’re the plague. I don’t like the “unlimited downside” reason because it’s solvable.
To people who are making lots of money in stocks or options… my question is always, “do you have high returns, or do you just have high volatility?” Because it’s easy to look at high short-term returns and believe that you’ve somehow beaten the market, when you’re really just holding a high volatility position that got lucky.
> I do remember smart friends getting interested in options at different times in the last thirty years because they make higher returns. Then they have a period where make lower returns, or have a real problem.
Volatility. Never trade options if you don’t understand volatility.
“Shorting” a company does not just mean short selling stock. Instead, it means having a short position, which you can use without unlimited downside.
The easy way is to buy puts. Maybe your next question is, “who is selling puts?” And that’s a good question, but you don’t really care, because you can buy your puts on the open market and when you do that, you get protection from credit risk.
There are other reasons why this isn’t a good idea but “unlimited downside” is not one of them.
> “Shorting” a company does not just mean short selling stock. Instead, it means having a short position, which you can use without unlimited downside.
If you are an equity index holder anyway, simply by not holding any exposure in an otherwise "market" portfolio is a "short" relative to benchmark.
ie if I "buy" the SP500 constituents according to weight but with TSLA zero'd out my portfolio is essentially the same as long SP500 and short weigtht*TSLA.
Normally you buy into something like SP500 via something like an ETF, something with a very low fee because it’s managed entirely automatically via simple algorithms.
How can you invest in SP500 minus TSLA without racking up exorbitant fees?
Unless such a fund already exists, you’d be managing it yourself and pretty much wiping out any gains any time you rebalanced.
> How can you invest in SP500 minus TSLA without racking up exorbitant fees?
Various options…
1. Direct indexing (requires minimum amount of assets),
2. Certain actively-managed ETFs like GGRW, which is not exactly SP500 minus TSLA but it’s not too far off
3. Buying passively-managed ETFs in sectors that don’t include TSLA,
4. TSLQ, maybe. You get fees and other problems. I wouldn’t.
Direct indexing costs more than ETFs in terms of fees, but there’s apparently some kind of tax loss harvesting that you can do with direct indexing to offset the fees, and some people say you can come out ahead. I don’t understand how tax loss harvesting works at a satisfactory level (I’ve read articles and watched videos, but I think I would need to take an accounting class and really sit down with a spreadsheet before I could say that I understand how direct indexing and tax loss harvesting work together.)
Oh for sure, not an actual proposal for how to invest
And puts are highly manipulated by MMs so you have to really study the chain and how it behaves before you have a chance to buy the contracts at a fair price. MMs will flood the market with contracts and devalue yours even when the price is moving in your direction. I highly suggest people think twice about trading options, they are best used as hedges for large positions during particularly vulnerable periods.
I’m not convinced. If you think you know what the fair price is for a put, then you can bid that price. If you don’t think you know what the fair price is, then you shouldn’t be trading options.
There are reasons for not trading options, but the main reason is “you know less about price movement than you think you do”.
Realistically, if you don't have the volume to be a market maker, there's no point bidding anything except the current market price. Either the price is higher than your bid, and your order won't fill (so why place it?) or the price is lower than your bid, and you should expect the market knows something you don't.
> Either the price is higher than your bid, and your order won't fill (so why place it?) or the price is lower than your bid, and you should expect the market knows something you don't.
There is no risk-free way to trade. You can place a market order and guarantee execution, bearing the risk that you get a bad price. You can place a limit order, and guarantee price, bearing the risk that your trade doesn’t execute.
It sounds like you’re starting with the assumption that you don’t know whether the options are undervalued or overvalued, and if you start with that assumption, yes, the correct answer is don’t buy or sell the option (barring some other reason to buy or sell). Duh. But the reason the market “knows something you don’t” is because it’s full of people doing research. Sometimes, the person doing the research is you, and you have an idea of where the price will go. That’s what an edge is. When you have an edge, you can make money, but maybe not very much and not very reliably.
Where it gets ridiculous is when people speculate with SPY options or dumb shit like that. The reason why speculating with SPY is so ridiculous is because it’s just so unlikely that you could get an edge with SPY. But in general? Yes, it’s possible to get an edge.
Trades always execute at exactly the market price. A limit order says that if the market price reaches your limit price, execute the trade. At that moment, your limit price will equal the market price.
It would be more helpful to say don't buy options once the trade is obvious. As soon as something has hit the FOMO phase and IV skyrockets and all strikes cost the same, that's a sign you're too late and might want to bet against your thesis or use a different instrument. The financial shoggoths do a reasonably good job ensuring there's no free money. However they're obligated to trade regardless of conditions and sometimes that's their weakness.
Are you accusing market makers of manipulation?
Squeezing shorters is a national pastime in the US. You can lose a whole lot of money shorting a stock that objectively must go down eventually.
Infinite downside is theoretical. The bigger problem that I learned a long time ago is that the leadership of every company is fighting against the stock going down. So if you're long a company then your interests are aligned. If you're short you really need to have conviction that it's a winning bet because everything else is fighting you. Also, it's a short term play - the short eventually needs to be unwound. So you're not just making a bet you're making one that's losing you money over time.
> never the time to short a company
> can be part of a combination strategy
Never hold a net short position.
You may hold a short position as part of a net neutral or net long position with extreme caution.
What you are saying suggests that there's a single number (that can be positive or negative) that characterises your net short or long position.
That's silly.
You can build pretty much any kind of shareprice-to-payoff function with enough options and other instruments. And that's one dimension (a line) more than just a single number. You can get arbitrarily more complicated, if you want to.
If you think they are going belly up this year it is far cheaper and safer to buy a put. You risk losing the money you spend for it up front but your losses are capped. Right now the 25 strike for a DB Jan 15 2027 put is 2.50/2.85 bid/ask. DB is sitting at $29.44 as of yesterday's close. That's $285 bucks up front that gets into the money if DB falls beneath 22.15 by Jan 15th 2027. But if it moves down sharply in the near future you could just turn around and sell that put for a profit long before expiration.
This is not financial advice, it is gambling advice.
As long as nobody knows then it isn’t risk… /s
don't worry, they're adopting AI
Oh god help us… Last thing we need is a Deutsche bot.
Whenever a Bank is sued, you can be certain a guy from Deutsche is somehow involved.
Is that a Deutsche bag they are holding?
DB's fall has been glorious. I shorted them back in January when I learned they were delivering 1.3% of their market cap in gold to the COMEX. No bank gives up that much of a hard asset unless something is wrong. Things are also looking bleak for Scotia Capital, BofA, Barclays, and UBS. JPMorgan seems to be doing fine. However Citigroup appears to be making out like a bandit. https://www.cmegroup.com/delivery_reports/MetalsIssuesAndSto...
What do their gold deliveries have anything to do with their financial situation? That'll just be settling GC contracts, and there will be clients on the other side.
https://justine.lol/tmp/CrazyGamblingOnFutures.mp4
With the current concentration of wealth and banking, it almost seems like there is an incentive for banks to ruin themselves when they end up in a little trouble.
If the bank has trouble, shareholders/executives lose - if the banking system has trouble... then QE will solve the bank trouble.
> If the bank has trouble, shareholders/executives lose - if the banking system has trouble... then QE will solve the bank trouble
It's a game of chicken, though. The folks at Lehman and SVB didn't cash out. JPMorgan did. (Both times. Actually, all of the times since 1907.)
Jamie pull up the JP Morgan titanic conspiracy theory
https://www.history.com/articles/titanic-sinking-conspiracy-...
JP threw his own money on the table . Silicon valley's VCs whined for bailouts.
And they got them.
IMHO, if QE solves the trouble, the Fed or treasury should be taking a bigger bite of ownership from the bailed out companies in exchange specifically to disincentivize taking risks with a bailout backstop.
That all relies on the assumption of petro-dollar, something that could have been taken for granted during the last 50 years but could easily change within weeks now.
No it doesn’t, the petro-dollar isn’t a real thing. Forcing USD denomination for a transaction doesn’t help USD because there is a buyer of USD and an equally sized seller of USD.
However, there does seem to be an outsized effort applied to defending this not-real thing. A leader who defies the petrodollar has a good chance of getting killed or kidnapped. In a way, the same principle makes any god real: he doesn't have to exist, as long as people who will beat up non-believers do.
Total USD reserve involved in that transaction is not zero. They have to already hold dollars to do the transaction at all, which means a benefit has already been provided to the US. The transaction doesn't change the US's position, but enabling the transaction to occur does.
Petrodollar hypothesis is debunked. The total volume of petrodollar trade approximates minutes in stock markets. This simply isn’t a real factor anymore; a lot of people think it is because there are writings from the 70s that are compelling.
As you said, trade volume doesn't drive valuation, it's reserve size.
Which goes up with inflation btw, so you can export inflation. Actors who maintain reserves of your currency will have to keep buying more from you, providing you with benefits.
When can qe start ?
Are you saying that they're using their private-credit portfolio as a Tier 1 capitalization to meet their regulatory demands (not sure if the ~10-15 something% rule has come back yet?)
Been a bit out of the finance game
> they're using their private-credit portfolio as a Tier 1 capitalization
Banks' private-credit lending constitutes part of their risk-weighted assets. So yes, it's part of their CET1 [1], which is part of Tier 1 capital, and since it's equity measured it incorporates fucking everything.
4.5% is the U.S. minimum. Regulators start throwing their toys out of the pram when a bank breaches 7%. To be clear, I'm not seeing anyone in the near future breaching those limits. Deutsche Bank, the stupidest of the lot, seems to have let DB USA stuff most of the risk in its German AG.
[1] https://www.investopedia.com/terms/c/common-equity-tier-1-ce...
No one is paying attention that has any kind of plan to fix it. We’re just going to watch it crumble and the governments bail them out again.
So, if I’m following: Banks are lending to private equity firms to fund purchases of businesses.
Many of these businesses are SaaS which means their valuations are tumbling.
It seems possible that valuations tumble so much that the private equity owner no longer has any incentive to operate the business, bc all future cash flows will belong to the bank. What happens in practice then? Will banks actually step in and take operational control? Will the banks renegotiate terms such that the private equity owners are incentivized to continue as stewards? Or, will they prefer to force a business sale immediately?
> Banks are lending to private equity firms to fund purchases of businesses.
Yes some businesses are SaaS but here's the real problem: Many businesses' sole purpose is _leveraged buy-outs_ which really is the devil in disguise.
It goes like this: A VC specialising in veterinary clinics finds a nice, privately owned town clinic with regular customers and "fair" prices, approach the owners saying "we love the clinic you've built! We'll buy your clinic for $2,500,000! You've really earned your exit!".
So now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books_. So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly, ~~burn out personnel~~ slim operations accordingly, and any surplus that doesn't go to interest and amortization goes straight to the VC.
Debt and collateral on the veterinary clinics.
Risk free revenue to the VC.
> now the VC lends the money from the bank, buys the clinic, and here's the important part: _they push the debt onto the clinic's books
This mostly correctly describes a leveraged buyout (LBO). LBOs are done by LBO shops, a type of private equity (PE) firm. Not VCs. (VCS do venture capital, a different type of PE.) And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent.
Private credit, on the other hand, involves e.g. Blue Owl borrowing from a bank to lend to software businesses, usually without any taking control or equity. It’s fundamentally different from both LBOs and VC or any private equity inasmuch as it doesn’t have anything to do with the equity, just the debt. (Though some private credit firms will turn around and lend into a merger or LBO. And I’m sure some of them get equity kickers. But in that capacity they’re competing with banks. Not PE. Certainly not VC, though growth capital muddles the line between what is VC and other kinds of PE or even project financing.)
> And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent.
Doesn't the LBO shop still need to pay off the debt, technically speaking? AFAIU the company's assets (hospital in OP's example) are used as collateral in a credit agreement between the LBO shop (as the hospital's new shareholder) and the bank. But unless I'm mistaken, this is not exactly the same as the debt being on the hospital's books and the hospital having a credit agreement with the bank. (For an increase in debt on the liabilities side of the balance sheet there would have to be an equal increase of assets on the other side. The hospital didn't receive the cash, though, nor does the hospital suddenly own itself.)
LBO firm will create a new company called Acquisition Co. ("AcqCo") and put $500K of cash into it (equity). The Blue Owl will lend $2M to AcqCo (debt). AcqCo uses the $2.5M to buy the vet clinic. AcqCo will use cash flow from vet clinic to pay Blue Owl loan interest. If AI makes vet clinic lose revenue because customers treat Fluffy's ear infection at home, then Blue Owl and LBO firm are in trouble.
So the debt isn't "pushed" and it's not risk-free as the original comment said... also not Venture Capital. Lots wrong in that comment.
It's not risk free for the companies involved. Limited liability protects private assets which is the original motivator behind all of this. And yes, there could be alot of book cooking going on to extracting liquidity. Over here, we call them locusts, not PE and externalizing risk is kind of their job.
This is the general leap, wealthy dynasties do. They scale up from a regular (family) business that provides services (eg. the clinic) to eventually transition into investors with lesser or indirect motivation of providing services/goods.
Sure, it should say PE not VC. But it was pretty accurate. The PE firm won't be on the hook for much of the debt. The nano-debate over the word "push" is probably obscuring more than it's revealing.
It sort of accurately described something, with the wrong terminology, that is orthogonal to the headline issue.
[delayed]
Guy who works in the PE market here (not a PE shop myself) - this comment is correct.
Correct. One niggle in that PE can access private credit as part of the capital stack. One flavor of debt in the ice cream store.
If you work in a PE shop you’d know it’s not riskfree and that the PE firm also puts their own money up plus money raised through LPs (hence “leveraged”)
> And LBO debt isn’t “pushed” onto the company’s books, it’s never on the sponsor’s (LBO shop’s) books in the first place to any material extent.
Could you please explain the how and why of the mechanics of this process (edit: from the perspective of the lender)?
It seems like the lender is taking a massive sucker bet.
Or is the reality that the lender gets repaid the vast majority of the time, and we only hear about the bad outcomes?
The lender generally has a positive EV, but variability is high. The interest rates on leveraged buyouts are high, and the lender has priority over everything but taxes. If the company can stay afloat for a while, the lender probably got made whole and then some, even if the full loan never got paid back.
It’s the same as buying a house. I want to buy a house for $1.2m. I put down $200k and borrow $1m. The bank determines the value of the house. My equity absorbs a 20% drop in prices, so the bank is fairly protected. Businesses are different because they really can go to $0. Banks will need more collateral and/or make many different types of loans to dilute the risk.
Any one loan may be risky, but in aggregate the rates compensate for it.
They pay you 0-4% for the money in your checking account and lend it at 1-3% points higher. As long as they have a big enough uncorrelated portfolio, they make easy money.
And if the whole portfolio tanks all at once, the whole industry gets bailed out.
The latter. Big Banks lend to private equity because the profit is good and they are large enough to absorb the variability.
The public hates it because they see highly visible bankruptcies. They don't see the success stories, or the businesses successfully carved up for more value than the sum of their parts
Why does Blue Owl borrow from a bank to lend? Why would it need investors if it borrows from a bank?
> Why does Blue Owl borrow from a bank to lend? Why would it need investors if it borrows from a bank?
Leverage. They raise money in their public funds. And then they borrow, typically around 50% of their capital, to amplify returns.
Note: “Private credit lenders won’t lose money before private equity firms do. That’s how the capital stack of companies work: Equity is the first in line for losses. Before lenders like Apollo Global Management, Blue Owl Capital or Ares Management lose a dollar on their loans if a portfolio company fails, the private equity owners will already have been hit” [1]. Leveraging the senior debt is actually less risky than leveraging the underlying equity. (Though obviously they compound when done together.)
[1] https://www.nytimes.com/2026/03/12/business/dealbook/private...
For the gp: the other side of the risk/reward coin is that private credit has limited upside. They're going to get the margin between the private 6/7/8/9/10% loan and their funding source + admin. Whereas PE can go “to the moon” if things work out.
morningstar had a nice writeup of the changing winds https://dbrs.morningstar.com/research/469893/2026-private-cr...
I think the free market response is that another vet with fair prices will show up, but A) that's a waste of everyones time and very inefficient and B) a real grass roots business takes time and passion, somebody to start it, buy in from the community etc.
That work had already been done. To throw it all away for VC or PE to squeeze the life out of it and by extension the community, that's just sad, and a net negative for society. I don't really care about who to blame, the PE or the business owner who sold, the process is destructive.
The business owner is in a job that takes a huge amount of their life, with a suicide rate four times higher than average.
People accuse veterinarians of being in it for the money, the same day another owner decides to euthanize their dog because they don't want it anymore. While an angry owner on social media is rallying pitchforks over something that the vet can't even respond to due to privacy standards.
I have no sympathy for PE that's wandering around our lives, destroying the actual purpose of businesses to extract profit from everyone they can.
There's only one way to combat this, which is to make it unprofitable.
...by regulating the practice to extinction
Waste and inefficiency is real. As unpalatable as it is, cleaning up the mess of decay often requires brutal methods. That begs the question, is waste and inefficiency socially undesirable? Maybe not. Maybe not on certain scales or in isolation. But waste compounds.
A certain amount of inefficiency or slack is necessary buffer in any system to reduce brittleness. When a problem occurs, a system that is running with 50% slack can recover more easily than a system with 5% slack.
See Germany's rail network, where almost every time-slot is occupied by a train, and then one train is delayed, and the system collapses with nobody getting to their destination on time for the rest of the day, until the overnight buffer.
In queuing problems, queue length (which means latency) is inversely proportional to slack time. If a network link is running a 90% capacity, on average there are 10 packets queued up and a packet that arrives will have to wait for 10 packet transmission times. At 99%, 100. At 99.99%, 10000. And if you try to use exactly 100% of your network link, the expected queue length is infinity, and the expected latency is infinity, which will not occur in practice because sometimes it will exceed available memory and packets will be dropped, even though utilization never exceeded 99.9999...%.
"That begs the question, is waste and inefficiency socially undesirable? Maybe not."
Organic farming is one example.
> So all of a sudden the nice town clinic has $2,500,000 in debt, raise prices accordingly...
From a financial engineering perspective this is wrong.
Both equity and debt have costs of capital. Debtholders expect interest, capital holders expect RoE. The money going to debt interest is money that would previously have gone to equity, but now does not because the equity is replaced with debt.
Crucially, the costs of debt is lower than the cost of equity because of the interest tax shield. Therefore, the vet clinic now requires less revenue to maintain or even increase its return to equity.
Technically true, but RoE expectations from a PE firm are typically a lot higher than from the original owners of a small business.
And the LBO model is much less resilient to economic headwind. Let's assume a 25% EBITDA margin business, with most costs fixed (like the clinic example). Unfortunately revenue drops 20% because of external factors. It would maybe have a tiny profit left, tax would also be tiny and there is no interest to pay. The shareholders receive near zero, absorbing most of the problem for a year waiting for times to get better.
Now the same business, same reported EBITDA, but paying a large interest sum every year to the bank. If revenue drops 20% they can't pay their interest, and banks don't just wait for next year. Now the business has the restructure, agree with the banks what that looks like, or face a bankruptcy risk.
While the new PE shareholder has a better RoE due to leverage in the upside scenario, the business (and the PE) could be completely cooked in a downside scenario. For the PE this is a calculated risk, they optimise the overall portfolio. But for the employees and customers this isn't a great scenario.
> the vet clinic now requires less revenue to maintain or even increase its return to equity
The small-town vet would have probably accepted a lower RoE. More critically, they’d have been more willing to absorb shocks to said RoE than a lender will to their debt payments.
Small businesses are notoriously bad about calculating RoE; bookstores that own a building that would rent for way more than they ever make in a month, etc.
The free market solution to this seems to be making it easy / easier for competitors to arise. Then, when private equity does this, the customers, and workers, just hop ship to a competitor that's better managed and the original clinic goes under.
I don't expect this happens in reality though. In general the things that happen in a healthy free market are NOT happening in our society.
This completely discounts the work involved to find service providers you trust. I spent a long time finding a Doctor I trust, finding a Vet I trust, etc. I don't want a "free market" solution where I need to switch providers every 6 months because some rich dude is being a dick.
This is the problem with so many market focused solutions. They discount the burden put on the consumer.
Participating in a market is work, the only way a market (or life in general) works is if you hold your counterparties accountable.
> I don't want a "free market" solution where I need to switch providers every 6 months because some rich dude is being a dick.
Nature does not have a mandate that good quality services and products be available at low prices at all times. The rich dude being a “dick” was a tired vet owner who wanted to sell their equity, just like anyone else who sells their SP500 shares or their house.
The only thing that can be done is encourage government policies to ensure more sellers exist.
Nature doesn't have a mandate for anything. It's up to us to shape the world we want to have as a society
If the market is healthy, there will already be two or three providers in town instead of one that has any sort of monopoly, and the LBO won't be lucrative to begin with.
Unless the PE firm comes in and buys up all of the vet practices in town (or enough of them), which is a tactic they like to employ.
They buy all of them.
In a perfect world we'd have antitrust enforcement all the way from the top of government down to the municipality, so that this kind of behavior could be curbed. But I bet few cities bother to try at all.
I think the idea is that you'd have to switch less often.
People can scam you and jerk you around because you don't have options.
If you had options, they might be less inclined
You're complaining about healthcare being tied to employment. That sucks. Yeah, we should get rid of that.
Coupling healthcare and employment makes it harder for agents to move and trade "freely" in the "free market".
So, I say again. The things that happen in a healthy free market are not happening in our society.
The original poster was talking about vets, which don’t have that issue.
You’re confused because you are treating free-market and capitalism as the same thing.
Capitalism is about who owns the assets, free markets are about how they are transferred. They don’t require each other. State owned enterprises can participate in the free market, an example are municipal utility companies. Private enterprises can operate without a free market, an example would be Lockheed Martin, whose defense business is mostly cost plus contracts.
The US hobbled the free market with deregulation since the 1980s. We encourage monopolies with strange reactionary legal precedent, use tax and other policy to establish price floors on residential units and health procedures.
The behavior that these firms are able to carry on with in veterinary, dental, dermatology, hvac and plumbing is anti-competitive and predatory.
A business owner lamented to me recently that it wasn't the taxes that were crushing his business, but the costly regulations that keep on coming.
The harder the government makes it to operate a business, the less businesses there will be.
One alternative is to educate the population so that regulations are less necessary. But having an educated population has become unpopular.
Fewer businesses. But that aside when people say regulations are costly without providing specifics typically they are upset they can't rip off the public, pollute the environment or perform other acts to the disadvantage of the population.
Very nuanced take, thank you for your insight.
Free markets are a fiction, the real world contains a lot of friction.
> Risk free revenue to the VC.
How is that risk free? If the clinic goes bankrupt the VC will be on the hook for the rest of the loan. It’s not free money.
They're not so silly as to have any personal or professional liability, they probably spin up a special purpose vehicle or llc to hold the bag if it all goes south
No bank would agree to such nonsense
It’s analogous to a mortgage in a non-recourse state. If the borrower defaults the bank (or non-bank lender) gets the leveraged company, but can’t usually go upstream.
It's called "financial engineering" and banks and courts agree to it on the daily.
> No bank would agree to such nonsense
Ohhhh a live one! Sir do I have a wonderful bridge in Brooklyn to sell you! :)
Fun fact: banks fund this sort of nonsense constantly. I've asked about this before: why they do it. They must be making money I just don't know how. The LBO guys pay themselves massive management fees and dump the debt on the company so they walk away scott free.
My wild guess was the banks offload the eventual IPO onto investors and so make their money on the IPO fees and funneling their own clients the dead-man-walking shares. But I honestly don't know.
> wild guess was the banks offload the eventual IPO onto investors and so make their money on the IPO fees and funneling their own clients the dead-man-walking shares
The banks get paid back their debt when the next PE fund buys the company or the company pays it off. Unless an IPO is being done to pay off debt, which it never is, the mechanism you describe doesn’t occur.
The list of companies imploded by LBO/PE is quite high though. Why do banks keep lining up to fund such deals? They must be making money somehow. These companies aren't worth much in liquidation. Are they able to extract enough value during the dead-man-walking period to make it worthwhile? Especially for retail or similar deals where the bank isn't going to foreclose on a bunch of real estate or assets worth selling.
I was not saying this is how they make money - I was saying I honestly don't know. If you do know please share. I would love to understand why the banks are so keen to fund what looks to my eyes like super shady vulture capitalism. We start with a profitable company and end with a smoking husk. The Wall Street guys are doing it to steal as much value as they can before it all blows up. Someone is eating the eventual loss. Who? Or are you saying the majority of these deals don't end up with the company being eviscerated?
The usual arrangement for an LBO is to saddle the bought company, the vet in this example, with the debt,or spin off a secondary company from the vet with the poorest assets and most to all of the debt. It's all a scummy business.
Then why is everyone complaining "my vet sucks now" and not "my vet went out of business"?
Because the vet does suck now, and yet is still profitable because there's not enough competition.
This is exactly what happened at a SaaS company I previously worked at. It was an awesome company with ~1500 employees, turning a small profit. Private Equity comes along, buys it with ~$2B in debt. Sticks the SaaS company with a $100M+ annual interest payment. Round after round after round of layoffs ensued. Then interest rates went up... and it got even worse.
I think they are under 500 employees now. They basically laid off almost all of engineering and hired 100 new contractors in India to completely rebuild the entire platform in Node.js, as if the language it was written in was the problem. So glad to be far from that dumpster fire.
Really disappointing to see a great company gutted by some private equity people who almost certainly got their bonuses before the shit hit the fan.
I don't understand: Who's lending the $2B in situations like this? Wouldn't they be worried that the above situation (company gutted, then going down the drain) is going to play out and they won't get their $2B back? Or is that the root problem with this whole YC submission: banks are being hit by defaults because of this exact problem?
It's from the rapid exploitation of an asset. If I have a cow, I can milk the cow or kill the cow. If a cow costs $1, maybe I can get $5 worth of milk over the cow's lifespan, or I can kill the cow immediately and get $2 of meat. The man with $100 who buys all the cows in town and kills all of them doubles his money in a short timespan, but now there's a shortage of both meat and milk next season.
That is the exact problem. The people who put up the $2B thought they were safe - after all they were putting up money to buy a successful profitable business.
Problem is they didn’t really understand the business and trusted the PE guys to keep running it well…
This was driven home to me at SaaS company with > $80M ARR when the new CEO was parachuted in by the PE owner said in an all-hands "and we're close to cashflow positive when we account for our interest payments..." How can a software company generating this much subscription revenue NOT be making money? When it's servicing the > $500M the PE firm used to buy it. The rest of the playbook was boringly predictable: cut costs, sign multi-year enterprise deals, sell before the current fund's horizon and hope the music doesn't end.
As a result I prefer the naked greed of VCs where everybody - VC, owners, employees - knows the plan is IPO because at least it's transparent compared to the dirty lies a lot of PE pushes.
It's the destructiveness that gets me. It's a perfectly good company, employees are happy, consumers are happy, profit is being made, it's sustaining itself... Then they come and just literally destroy all that.
This can't be good for society. I wonder why it's just not criminalized somehow.
> It's a perfectly good company [...] I wonder why it's just not criminalized somehow.
Not-an-expert here, but I think part of the problem is that it's hard to draw a nice legally-enforceable line that would distinguish when it's a "perfectly good" company versus one crying out for intervention.
For example, suppose a company is floundering because of executive mismanagement, outrageous compensation to the C-suite, etc. In that case, someone could LBO in, fix things up, and then sell the revitalized thing later and make a modest profit while improving the world.
It's... less likely, but they could.
The way I see it, it's literally simply the PE paying the existing owner for the privilege of squeezing the value out of the business and its customers in the short term (or in the ideal/theoretical case, running it more sustainably and making higher profits). Management's job becomes to extract high profit in the short term, not to keep the company running profitably.
So, logically, selling to PEs/operators who are known to do this is basically the owners selling out and taking the cash. The consequences are clear to anyone who's been watching.
I saw another model where the PE buys a hospital. They sell the land under the hospital, everyone gets a cut, then they spin out the hospital. Now the hospital has to pay rent on the land it sits on.
It seems like almost every decision made is for short term gain, at the cost of long term viability.
why wouldnt the previous owners just open a new vet clinic, and hore all the same people back?
or some manager at it? it must be easy enough to raise that starting money, if the PE firm could get the loan
An acquisition like that would have non-compete restrictions. And often the previous owners don't get 100% cash, they would receive part as shares in the new holding company.
Yeah, they thought about it well on how to shackle, extract and leave a husk behind. What about the clinic's long term success? Not in their plans, they just want to extract cash from the customers as fast as they can. I'm sure that if people organized well enough and change their mindset they'd find workarounds to these financial engineering scums.
About eight years ago I had a chat with a physician in Texas, who had a several year old private clinic that he was planning to sell within a year to an investment firm, and it wasn't the first time he had done this. I expect all those urgent health care clinics that show up follow a similar path.
I mean, just getting new management, improving efficiency and raising prices of any business is… normal business?
Whether a PE firm decides to buy it and do the same isn’t some nefarious act or special in any way, it’s just new owners.
Let’s say your neighbor has a lawn mowing business but wants to retire, says they’ll sell for $50,000. You think great! You could run the business better, plus the old man hasn’t raised prices since 1990! But you don’t have $50k, only $30k, so you borrow $20k from your brother. Congrats, you just did a leveraged buyout.
And no, it’s not risk free revenue (I think you mean profit?) because it clearly might go under and PE firms need to pony up some of their own cash too plus money raised through LPs.
"So now the VC lends the money from the bank"
"lends" -> "borrows", right?
No dude. Read it again.
The VC lends (the money from the bank) which the vc borrowed, to the clinic.
They are a sort of middle man. It the clinic is on the hook to the bank and the Vc takes fist cut before playing the bank.
Eg. The vc only risked the company they were buying, and gets paid first.
If the VC borrows money from the bank and lends it to the clinic, the clinic is not on the hook to the bank. The clinic is on the hook to the VC and the VC is on the hook to the bank. Which means that if the clinic goes under, the VC takes the loss because it still has to repay the bank.
(Edit: To be clear, I agree with the other commenters that none of this is what VCs do. I'm just pointing out that the way this is being described doesn't even work on its own terms. Needless to say, LBOs are not "risk free".)
Nope. The clinic is the collateral to the bank. VC stand to loose nothing.
It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.
This can be done in about 6mo to 1 year process with some companies. The initial out of pocket expense is small and paid back very quickly.
I also forgot. Sometimes they will take the newly owned company and merge it. During that process they extract more money and load more debt onto the remaining entities, again making the VC money.
In some cases they can even get huge tax benefits by loading the company with debt which offsets the tax bill of the final entity.
When these transactions are done, within the span of a day multiple companies are created and merged and absolved.
There is little to no risk for the VC
> The clinic is the collateral to the bank. VC stand to loose nothing
This is actually a case where using the correct terminology clarifies.
VCs don’t do LBOs. Private equity firms do. When their deals go bust they lose the equity they invested. That equity is the first layer to take a loss. When that happens, the lenders—whether they be banks or private credit firms—take over the company, often converting some of their previous debt into equity.
There is a lot of risk in LBOs. It’s why they have such a mixed record.
PE includes buy-out (leveraged and not) and VC transactions. PE is typically any medium to long term equity investment not traded publicly on an exchange. Even this is cloudy now that the PE firms themselves are going public.
LBOs are also not a black and white classification, at least not the way they were in the Gordon Gecko 80's, with varying levels of target-borne debt financing specific to the deal. So while I agree "VCs don't do LBOs", PE does both LBOs and VC deals, with the PE firms doing their own style of fund and deals.
I found this book (though dated) to be a more academic analysis of PE: https://www.wiley.com/en-us/Private+Equity%3A+History%2C+Gov...
don't buy it; try your local library.
> this is cloudy now that the PE firms themselves are going public
The public or private status of the manager has no relation to private equity being cloudy. Out of all of the delineations, PE is a pretty sharp one. VC is PE. Private credit is not. It’s private debt. Not equity.
> It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.
This was the missing bit for me. Thanks for taking the time to explain!
Who are the bagholders in these scenarios?
The PE sales pitch is often that the target company can benefit from expertise management and/or there is value locked in it that can be captured. Both of these claims are... marginal? Studies around the "expert management" claim tend to show this is not true, based on pre/post returns, but it's hard to account for the long term, because PE also tends to focus on sales with very specific characteristics & time horizons (and associated cost savings) that benefit a 5-7 year fund that sells the portfolio company (wait for it) around years 3-5.
Which is a long-winded way of saying the bag holders are anyone invested in the long-term success of the company: 1. employees, 2. customers, 3. owners (i.e. the next PE fund) when the music stops, i.e. what we saw when interest rates went up impacting debt financing, and (real or not) AI-eats-SaaS impacted valuations. I'll add 4. "the public" if the company is big enough, with various levels of goverment and employment, taxes, etc. lost but I think it's more the smaller organizations in aggregate that hurt at this level than any specific company.
What's the betting that it's (somehow, eventually) the taxpayers?
If hours of preparation for college testing taught me anything, it's the difference between lend and borrow.
So yes, PE funds are probably overvalued right now and there are a lot of PE funds getting rich off management fees while not providing promised returns...but this comment is so wrong I don't know where to begin.
First, VC stands for venture capital, which is a subset of private equity that does zero LBOs and doesn't even acquire any businesses. VC funds buy equity in startups, and take on zero debt to do so. You have your boogiemen totally confused.
Second, the entire point of a PE fund that uses a leveraged buyout strategy is that they need to sell the acquired firm at a profit to make any returns to the fund. LBO funds don't 'cashflow' businesses, and saddling a business with a bunch of debt is antithetical to that purpose anyways.
Third, this is not "risk free revenue." It's a high risk strategy to use the debt to increase the value of the business by improving operations enough that you can sell it for a profit to the fund. If you saddle a company with debt and DON'T increase the value of the business beyond the debt you took on, the PE fund will not be in business for fund 2.
The risk-free revenue while the fund is alive comes from the management fees that investors in the fund pay (usually 2%, which is way too high IMO, but has nothing to do with the debt or the acquired businesses).
Please do not write confident sounding comments about things you don't understand, it spread misinformation and makes the internet a worse place.
As someone who's life is currently being affected directly by PE middle-manning something I spend a LOT of time on, I am sensitive to this issue.
IF you have problems with the vocab and terms, fine. But I have seen personally this issue in my life, that is affecting my bank account.
And we have seen example after example of these LBO's ruining otherwise functioning businesses. It's happening. All over the place.
> And we have seen example after example of these LBO's ruining otherwise functioning businesses. It's happening. All over the place.
Your anecdotes and the anecdotes in media are no statistical evidence for "this is happening all over the place".
Yes, PEs/LBOs deserves criticism, but "PE" and "LBO" isn't a one size fits all situation.
It is absolutely possible (and even likely!) that a bad PE fund was the cause of the issue you're talking about. But there is also a media hysteria around PE, and a lack of understanding among the general public of what it is.
It's just as likely the business that was acquired was already failing or unsustainable to begin with (hence why the owner wanted out at low multiples). LBO funds don't acquire promising businesses at 5-10X revenue like tech companies do, they usually buy businesses at low multiples that are past their prime or failing in an attempt to revitalize them (with debt, since you can't raise capital by selling equity in a failing business).
Obviously this will not always work out great, given the trajectory of target companies was already not great to begin with. Momentum is the strongest factor in all markets.
The problem is, Private Equity has become a conspiratorial catchall boogieman and scapegoat for every problem under the sun, so it's hard for me to assess without further details of the situation.
> Momentum is the strongest factor in all markets
Nit: beta is the strongest factor in all markets. Which is actually relevant for the success for PE funds in general, as a rising tide lifts all boats and people taking on debt to finance equity generally post outsized returns in bull markets.
Anyway, the rest of the stuff you're saying I agree with.
Yes, beta is the overwhelming source of returns. I was referring to factors in the sense of the University of Chicago research on market inefficiencies (where momentum is the strongest factor for inefficiency).
If you buy a “factor-weighted” etf the idea is it’s tilting you into those “factors” away from pure beta like buying whole market.
PE you could argue is largely just leverage plus an illiquidity factor play, since if PE just returned beta (which these days it might!) you’d be smarter to buy the S&P500 with equivalent leverage and not pay crazy fees.
Background: I work for a PE-owned company and I have friends in PE (associates up to MDs).
On your second point: LBOs aren't the only tool in the toolkit, and it's not as popular as it was decades ago, so I would lean towards the parent simply conflating "buying an ownership stake in a business in some capacity using other people's money" with the strict definition. Regardless, yes PE firms need to figure out how to get 20%+ IRR throughout a short timeframe (usually a 5 year holding/funding cycle) -- however this is through any means necessary. Philosophically, it's about increasing efficiency of operations and growing the business. In practice, it's financial engineering because PE firms do not have the operational skills to make any value-added changes to firms besides driving costs down.
Saddling a business with debt is reductionist. I've seen absolutely nonsensical financial structures that make no sense for a layman, but in practice end up "using the business' finances to 'own' (beneficially) the business" (see: at the most vanilla, the strategy of seller financing in SMBs). No this is not technically "putting debt on the books" but it is in all practical respects a novation/loan transfer that can leave the purchased co financially responsible for servicing any debt that was used in its purchase.
On your third point: what I wrote above can be used as context. It's not risk free revenue, frankly it's very risky unless you're in an inflationary environment where your assets will grow regardless of your business operations solely because the overarching economy is growing and you're riding a tailwind. However, it again boils down to financial engineering. It's not as simple as assets - liabilities = equity. The calculations used to determine valuations are so ridiculously convoluted. The amount of work that goes into financially analyzing businesses and finding "loop holes" that can justify higher prices is the core business model. The debt factors into it, but there's ways to maneuver around it through various avenues.
For example:
* debt-to-equity conversions (reclassification of debt as equity)
* refinancing
* sale-leaseback (selling company's assets to a 3rd party and using that money to pay down the debt, then leasing the equipment back)
* creative interpretations of what is actually debt (e.g. reclassifying real debt as a working capital adjustment or a "debt-like")
* dividend recapitalization (a nasty trick of loading the company with debt, paying that out as a dividend to the holdco, then selling the company at lower enterprise value. They still extracted value for their LPs/investors, despite the exit being lower)
* separating the debt from the operating company into a different holding company that services the debt
The Mars family is doing that with the vets.
They also own a large part of the pet food industry. Given how much health is affected by diet, that's a huge conflict of interest.
Why can't they find something more interesting to do with their lives? They are wealthy enough to do anything and they choose to keep hoarding more and more.
This is just wrong. VC is not PE. The Vet example is really a bad trope. For every bad deal there are many others you never hear about. PE firms are not making money by simply buying everything up. The business still has to maintain and grow.
VC is most definitely a form of Private Equity, though it's not the limited-partnership deal model that we often see in SaaS, or Vet Clinics, or Housing, etc. Yes, they need to grow but PE firms don't invest directly. They have funds with relatively short time horizons that want 2 things: 1. cashflow during the fund lifetime and 2. equity growth so they can sell the assets in the fund prior to the end. PE firms will sometime flip portfolio companies to their next fund but this is frowned upon because the investors are sophisticated and recognize the valuation conflict of interest. The PE business depends on repeat business for selling their funds; the best are always over subscribed and never go shopping for investors, while the rest are marginal forever.
Did not read all of it. Yes, it is a form of private equity. Of course. You missed the context. The post kept saying VC is buying a vet shop. In that context they meant private equity. VC is not the same as what they meant to say, PE.
True.
Sure there are differences between tigers and vultures, but they both eat things till they're dead.
I absolutely believe you on the facts, and it all sounds very disgusting, but here's what I don't understand: customers and staff alike no longer like the clinic. Won't that be a huge boon to competitors, essentially ruining the VC's investment?
I get that it's not so clean cut with something as equipment- and licensing heavy as the veterinarian sector. But I've heard the same story exemplified with pizza parlors instead. Won't all the good staff take all the loyal customers and go elsewhere very easily in that case?
Private equity is a huge inflation driver. I'm thrifty, and for years I enjoyed a $10/mo phone provider, ~$12.39 with taxes. I even evangelized this carrier with some young parents who were struggling to get financial traction while paying off student loans.
Our affordable plan came to an end when the rates tripled! Turns out a private equity firm bought the company, jacked the rates on every customer, and sold it off again. This was not a fundamental cost being passed on in slightly increased fees -- it was private equity extracting millions from the people who can afford it the least. Across my financially optimized life, I see this happening repeatedly.
Personally, I can afford a more expensive cell phone bill. But I would imagine that many who have a $10/mo plan do not have many other options. I would like to punish the banks who are funding attacks on consumers. If by no other means, then by letting them fail.
Why did the phone provider sell to a private equity firm?
for the money presumably? This questions feels like you're actually making a cryptic statement but I don't understand what it is.
Usually companies that have a fantastic, growing business model don’t sell to PE.
I also don’t like it when a money-losing business stops giving me below-market pricing.
- Phone subscriptions is a price competitive market in most places, not some growth-hacking industry.
- Not every business has a growth story. Not every business needs a growth story.
PE can offer a business owner more than they expect it to make by:
- being ignorant about the business (Which we are seeing repeatedly)
- intend to run it hot to juice the numbers and resell it for their profit.
It’s not private equity’s fault, it’s the continued imposition of increasing taxes and government-mandated fees:
“The wireless market has become increasingly competitive. The result has been steady declines in the average price for wireless services. Over the last decade, the average monthly revenue per wireless line has fallen from $47.00 per month to $34.56 per month. Unfortunately, this price reduction for consumers has been partially offset by higher taxes.” - Tax Foundation (2023)
Taxes coincidentally causing a 3x price change right when private equity buys a company is quite unlikely. Especially since I doubt every other company has tripled their prices.
Every other carrier hasn't tripled their prices - this one unnamed and unsourced company did. You can get a $10 or $15 cellphone plan right now, so his claim is false, or that PE company has magical powers to completely outprice the otherwise competitive mobile phone market.
However, "Taxes, fees, and government surcharges make up a record-high 27.60 percent of the average wireless services bill... Since 2012, the average charge from wireless providers decreased by 29 percent, from $47.00 per line per month to $33.36 per line. However, during this same time, wireless taxes, fees, and government surcharges increased from 17.18 percent to 27.60 percent of the average bill, resulting in consumer benefits from lower wireless prices being offset by higher taxes and fees".
> Banks are lending to private equity firms to fund purchases of businesses
Not quite. Private credit is to debt what private equity is to equity. (Technically, any non-bank originated debt that isn't publicly traded is private credit. Conventionally, it's restricted to corporate borrowers.)
So bank exposure to private credit generally means banks lending to non-banks who then lend to corporate borrowers.
What does this typically look like? Who is the intermediary here between the bank and corporate borrowers - are these buy side created SPVs?
> Who is the intermediary
Business development companies [0]. Blue Owl. BlackRock [1].
> are these buy side created SPVs?
Great question! Not always [2].
[0] https://www.reuters.com/business/finance/private-credit-fund...
[1] https://www.blackrock.com/corporate/newsroom/press-releases/...
[2] https://www.datacenterdynamics.com/en/news/meta-secures-30bn...
Am I wrong thinking this is similar to the housing loan crisis of 2008? This is just another form of that "shadow banking" system isn't it?
You'll find plenty of talking heads on YouTube right noe claiming exactly this. Time will tell if private equity is actually wound up as tight as housing was in the GFC.
I don't think you're wrong if the following holds true: Before the housing bubble burst, banks lent funds to countless borrowers who couldn't, ultimately, afford their mortgage payments (because the banks didn't do their due diligence when underwriting the loans). This was widespread across pretty much every bank and mortgage banker. Not sure of the actual percentage of borrowers who, when all was said and done, had no business getting a mortgage for a house or condo, but suffice it to say it was well into the double digits percentage-wise (there's much more to this than simply banks and borrowers with Wall St. playing a major role in the collapse, but just keeping things simple).
In this private credit situation the analog for the banks are these private credit funds that have raised the capital they've lent from institutions and high-net-worth individuals (as opposed to banks, which have funds from consumer deposits). The analog to the individual mortgage borrowers from 2008 are actual companies.
To connect the dots, if the private credit funds were like the banks pre-2008, where due diligence was an afterthought, then this could turn out to be similar. So the real question is: are the borrowers (businesses in this case) swimming naked? Or do you believe the private credit funds when they say they actually conducted a good amount of due diligence when extending their loans? Once you know the percent of the companies that are naked you can evaluate whether this could/would end up similar to 2008. Nobody knows that yet, even, I suspect, the private credit funds themselves.
Yes, instead of banks lending sub prime mortgages directly, it's as if they are lending to private equity groups who are then lending rather undiscerningly. Within the last week, we now have Blackstone, Blackrock, Owl, and Morgan Stanely limiting withdrawals on private credit funds. Not a good look...
Even the best due diligence can't do anything if a crisis (not necessarily banking-related, a Middle East might just do the trick) starts manifesting itself and now many of those businesses have issues in paying down the debt they owe.
Late to reply here, but, yes, agree generally, though I don't think what these private credit companies are being accused of falls into that category (i.e., I think they're being accused of playing fast and loose with their due diligence, which was baked into their competitive advantage over the banks themselves. The competitive advantage being "we'll close quickly" without all the fuss a bank would require).
I've had quite a few conversations with someone who claims to be in the know about this situation (though, really, I don't think they're any more in the know than anyone!) and they swear up and down it's all a misunderstanding, which, cynic though I may be, immediately makes me think the accusations are at least somewhat true.
"I did my due diligence but didn't anticipate these risks". Doesn't sound like due diligence to me. Not having a plan to unwind your position if SHTF doesn't sound like due diligence to me. You can argue it any way you like but it boils down to "The money was good and I didn't think the worst was gonna happen".
I agree with this and tend to think due diligence needs to not only account for the regular course of business, but also for the exceptional circumstance. You'll never be able to accuse someone of not thinking of the exceptional UPSIDE circumstance, of course. The problem is the complete ignorance of the exceptional downside. That said, your parent is right that you can't really do due diligence on "war in Iran." Instead you something like "ok, if there's a shock to the system and 20% of our loans default what does that mean for our business?"
My comment was mostly against the idea that due diligence is a silver bullet, it isn’t. Of course that it can “catch” the most egregious cases, like outright fraud, but, again, no due diligence process can read the future.
> This is just another form of that "shadow banking" system isn't it?
Private-credit lenders are literally shadow banks [1]. But I'd be cautious about linking any shadow banking with crisis. Tons of useful finance occurs outside banks (and governments). One could argue a classic VC buying convertible debt met the definition.
That said, the parallel to 2008 is this sector of shadow banking has a unique set of transmission channels to our banks. The unexpected one being purely psychological–when a bank-affiliated shadow bank gates redemptions, investors are punishing the bank per se.
[1] https://en.wikipedia.org/wiki/Non-bank_financial_institution
> So bank exposure to private credit generally means banks lending to non-banks who then lend to corporate borrowers.
Isn't this similar in spirit to the infamous (according to Western media) Chinese shadow banking market? There are articles [1] more than 10 years old talking about the collapse of China because of that practice, but it looks like the US is all too happy to do a very similar thing. I also wonder how big of a market we're talking here, as I was too lazy to check. A few hundred billions? $1 trillion? $2 trillion? More?
[1] https://www.cnbc.com/2014/12/03/china-shadow-bank-collapse-e...
Banks have zero appetite for taking any operating responsibility for these firms and will work tirelessly to get them off their books ASAP.
In at least the US and EU but probably elsewhere, the asset categories of banks are tightly regulated as well. They can have transient ownership of anything but there are hard limits on what portion of their assets can be indefinitely tied up in nonbanking businesses that they are operating on their own behalf.
Wouldn't they still owe interest to the banks on the money they borrowed, as well as the money they borrowed? I mean if all the money I make goes to the bank to pay off my mortgage my solution is not quitting my job, even though life is not very good under that situation.
The analogy has a lot of problems.
Imagine you got a loan to buy a bunch of laundry machines to run a laundromat. But your laundromat earns $8,000 a month, and the loan payment is $10,000.
You can decide to sink $2,000 of your personal money into the laundromat every month, or you can give up.
The business owes the money or the fund. In any case the individuals do not unless they backed it with personal collateral.
hmm, yeah ok so the collateral is the business they are buying, I forgot that one.
Why would banks take control? If they had that skillset or interest they wouldn't be lending to middle men to begin with.
Misleading title*
> The default rate among U.S. corporate borrowers of private credit rose to a record 9.2% in 2025
Emphasis added. Headline makes it sound like retail credit, not corporate specifically.
*Edit: Not misleading, just an unfamiliar term/usage from my perspective. I'm not a finance guy so didn't know the difference and assumed others wouldn't either. Mea culpa.
TBH "private credit" (meaning exactly what this article is talking about) is such a big thing in the finance industry that probably most finance industry people can't even fathom that the title is misleading to non-finance-industry people.
I'm not saying they are right. But it's like if you posted an article called "Python Is Eating the World" on a non-tech side and people got mad because they thought the article was about a wildlife emergency. Fair for them to be confused, but maybe not fair to accuse the title of being misleading (at least not intentionally).
Ha, yes I didn't even consider it meant anything other than corporate private credit. Otherwise we'd be talking about presumably mortgages or "consumer debt". Right?
It's some sort of Gell-Mann-Amnesia-like effect. I am accustomed to seeing thoughtful, informed discussion about technical topics on HN, so then it's jarring when something like this hits the front page and nobody seems to have any idea what they're talking about.
It's opposite Gell-Mann-Amnesia: I am a SWE and I come here because I find it one of the best places to keep abreast of the broader software world, not just the little corner of it that I'm currently working in. So in the things that I know well, I trust it. My wife is a medical professional, and so I know just enough to see that most medical conversations here are complete and utter nonsense.
So the mental model I have of the average HN contributor is basically that they are all SWE's- they know software engineering extremely well, and the farther you get from that the less valuable the conversation will be, and the more likely it will be someone trying to reason from first principles for 30 seconds about something that intelligent hard working people devote their careers to.
Probably mostly accurate. Though a few of us do know lots of topics. Can outscore med students on USMLE prep, know what private credit is, etc., etc.
> Headline makes it sound like retail credit
I’m coming at this loaded with jargon, so excuse my blind spot, but why would the term private credit bring to mind anything to do with retail specifically?
(The term private credit in American—and, I believe, European—finance refers to “debt financing provided by non-bank lenders directly to companies or projects through privately negotiated agreements” [1].)
[1] https://corporatefinanceinstitute.com/resources/capital_mark...
>, by why would the term private credit bring to mind anything to do with retail specifically?
If a layman is unfamiliar that "private credit" is about business debts, and therefore only has intuition via previous exposure to "private X" to guess what it might mean, it's not unreasonable to assume it's about consumer loans.
"private insurance" can be about retail consumer purchased health insurance outside of employer-sponsored group health plans
"private banking" is retail banking (for UHNW individuals)
But "private credit" ... doesn't fit the pattern above because "private" is an overloaded word.
> But "private credit" ... doesn't fit the pattern above because "private" is an overloaded word
Makes sense. Thanks. Private here is as in private versus public companies.
No 'private' meaning that the transaction is between the lender and the borrower without a public rating agency involved (Moody's, etc...). This used to be for niche things like a data center where a rating agency might have trouble figuring out reasonable rating. Then the data center company would go to somebody like Apollo who could do custom analysis on the risk.
But now those private loans are being syndicated to affluent investors who probably don't understand that while some of this debt is solid, alot of it is not. And without a rating agency involved nobody knows how much risk is in there.
In other words, "private credit" is private the way "private equity" is private, not how "private insurance" is private.
> and, I believe, European
Yes.
It surprises me that most people would read "private credit" to mean "retail credit" by default, but I also come to this loaded with jargon so I guess would defer to others on this. But to be clear, the title is not misleading to anyone who has any familiarity with the financial markets.
Outside of finance, people associate "private" with "individual"
With the caveats that banks can originate private credit as long as it is separate from their reserve system credit (and consequently does not increase the money supply when originated)
That's not the likely definition most will reach for here automatically (especially amidst the constant financial blackpilling).
I think you’re mistaken. We’ve been in a private credit bubble for a couple years at least, it’s in the finance/economic news every week and I’ve even started to hear regular NPR doing primers on it for normies. The term for “retail credit” is consumer debt or consumer debt. We don’t call it retail debt because the retailer is not actually a counterparty.
Out of curiosity where do you primarily get your news?
> not the likely definition most will reach for here
A lot of the datacenter buildout has been financed with private credit [1].
> financial blackpilling
?
[1] https://www.bloomberg.com/news/articles/2026-02-02/the-3-tri...
"Blackpilling" is apparently an incel term for fatalism/nihilism. Sounds like they're trying to read financial news through that lens.
> "Blackpilling" is apparently an incel term for fatalism/nihilism
Any idea as to the etymology? What was the black pill? Is it a Matrix reference?
Meta: why are incel neologisms so catchy?
I think (but I don't move in such circles) that originally there was "redpilled" to refer to people playing "The Game" (pickup artists). Original reference is to The Matrix, of course.
what on earth is "financial blackpilling"?
That's exactly where my mind went as soon as I read the title. HN rules say to "use the original title, unless it is misleading". I think the original title meets the misleading bar but I can't speak for other readers.
"Private credit" is a finance term of art. It could be misleading if you don't have context for the correct definition, but that's true of many posts on this site.
We just need to socialism harder.
why was finance post even allowed here?
it's not programming and it's not tech
it is correct, though.
someone not knowing the definition != misleading title
FWIW when I read "private credit" I think of private issuers, not retail.
Private as in private (i.e. non-public) corporation, not as in individual/retail/natural person borrowers.
That’s not what it means though. It’s done through a partnership. Or not, if we count Business Development Companies as “private credit” - but then they are not usually private corporations either.
Has the title been changed already? It currently says 'private credit', I don't see how that misleadingly sounds like 'retail credit'?
Thanks, I completely miss-read it thinking that it was about retail credit. facepalm. Time for coffee.
Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.[a]
tick-tock, tick-tock, tick-tock...
---
[a] https://news.ycombinator.com/item?id=47351462
You can always tell when there is a problem. When things are fine the companies keep the profits to themselves. When things start to get dicey - foist it off onto retail investers.
Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets. - Google AI
It's why as a retail investor, never buy things that would otherwise have not been available to you (but was to those "elite"/institutional investors previously).
Think pre-IPO buy-in. Investors in the know and other well connected institutional investors get first dibs on all of the good ones. The bad ones are pawned off to retail investors. It's no different with private credit and private equity. These sorts of deals have good ones and bad ones - the good ones will have been taken by the time it flows down to retail.
This can't be a to-die-on rule though. Retail would've never bought GOOG, or TSLA, or AAPL if that were the case. Maybe I'm just being pedantic.
Google and Apple didn't go through ten funding rounds like today's startups do. Apple had one angel and three rounds, Google had one angel and literally just an A round after that; then retail investors could capture all the upside. Now there's way more time for private investors to pick the bones clean before it gets dumped on the public.
I think you're both right. Those were great opportunities, but the proportion of such opportunities which are made available to retail traders has greatly diminished over time.
There's a great chart out there somewhere (I couldn't find it) which breaks down the impact of private equity on the availability of such opportunities in public markets. It showed a dozen or so companies (like Google, Apple, Uber, Stripe, etc) and broke down their market cap gains into two parts, "pre IPO" and "post IPO" gains. Of course, the pre-IPO gains were only available to private equity (or, at best, accredited investors), whereas the post-IPO gains were available to retail traders as well.
"Older" companies like GOOG & AAPL were much more likely to have experienced that vast majority of gains after their IPOs, meaning retail investors could have made big money by betting on them early. Meanwhile newer companies (like Facebook, Uber, Stripe, etc) were much more likely to have yielded the vast majority of their gains before their IPOs, meaning retail investors didn't have the opportunity to benefit from big returns.
That's quite an interesting observation.
I suspect that the reason those "newer" companies were able to have the majority of their gains reaped pre-IPO was that during that time period, it was easy to acquire capital from investors without resorting to public market IPOs, where as the era of google and apple have not got the same level of private investment.
And i think it has to do with low interest rates. During the google early years, it is difficult to obtain low-cost loans (for private investors that is). Therefore, public markets look like an easier path for companies to raise money.
The "newer" companies in your list are mostly post-GFC, during a period of ultra-low interest rate. This makes money easy for private investors to obtain, and so companies have an easier time getting funding from those private sources. The IPO is realistically not a funding mechanism, but an exit mechanism for those early private investors.
Survivorship bias and the corporate finance world of today is completely unrecognizable from the world of Google and Apple. Just look at the resulting performance of the SPAC craze
Even for good assets there's a price you shouldn't pay. People are joking(?) about triple-layer SPVs where you can get pre-IPO exposure but at higher-than-IPO price.
> Private equity (PE) is increasingly being introduced into 401(k) plans, driven by a 2025 executive order encouraging "democratization" of alternative assets
Thanks for the reminder! I need to switch my plan away from a TDF to avoid this.
Funny enough Chinese State owned banks have been doing much the same for quite some time. No one ever defaults, loans are extended as long as it takes. Presumably the threat of being called into the next party meeting to explain yourself is sufficient motivation for the people running the business to pivot as many times as it takes until they find a way to make money. Worst case the state swaps someone else into leadership.
I say this to say... who knows? I guess if you shuffle deck chairs fast enough everything works out fine (?)
The larger you are, the larger the rounding errors are, the more money that can disappear due to a failure and explained away or extended or written off or whatever euphemism you want to pick. But the sum of rounding errors is less likely to itself be a rounding error. It works until it doesn't, and Evergrande collapsing with $300 billion in Chinese real estate debt will be a case study for years to come.
Isn't the real underlying risk here concentration, as opposed to diversification?
If you have unlimited capital and time horizon, because you're a nation with the power to tax and print money, then you can keep this game going for a long time.
The only thing that mandates it stops are if (a) too many of your loans are correlated with the same thing that crashes (e.g. energy, tulips, AI, etc) or (b) too many of your loans are tied together in a single entity (either because it combined multiple smaller entities or because it tied itself into all their financial arrangements).
The only problem is allowing regulated US banks with an implicit gov guarantee to lend money to them.
There are limited ways to short these positions which would probably add some fuel to the fire.
I don't see it as adding fuel to the fire. I see it as helping the market price companies correctly
Its a balancing act.
But what will break the clock ?
> what will break the clock ?
So unlike money-market funds, these private-credit funds can gate withdrawals and extend and pretend by turning cash coupons into PIKs. So I don't actually see credit concerns directly driving liquidity issues for the banks that didn't hold the risk on their balance sheet glares Germanically.
Instead, I think the contagion risk is psychological. Which is an unsatisfying answer. But if there are massive losses on e.g. DBIP and DB USA halts withdrawals, then the 2% stock loss Morgan Stanley suffered when it capped withdrawals [1] could become a bigger issue.
[1] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...
I believe the gated feature can be waived though it causes a precarious situation. It ends up with same psychology of a bank run -- people (institutions) concerned because they can't access funds or they think that the queue to exit a failing fund is too long - filled each quarter (i.e. by the time they redeem NAV has collapsed).
> the gated feature can be waived
Or never invoked. It's a safety feature for the fund and, arguably, systemic stability.
Totally - its supposed to prevent a collapse of confidence but at the same time can signal a collapse of confidence. Double edged sword.
You can't gate redemptions forever amigo.
People eventually want to spend their money.
As Buffett said, "only when the tide goes out do you learn who has been swimming naked" - luckily, skimming the news, there's no obvious huge exogenous macroeconomic shocks on the horizon that could cause "the tide to go out" so to speak, so everything should be ok for now.
Umm... Couldn't whole Iran debacle be such shock? If the effects are not contained?
Woosh.
What kind of trouble is brewing from the migration of partner capital committment to credit based on NAV?
What is the risk, probability of actualizing the risk, and the outcome of actualized risk?
The ticktock ticktock routine reads like baseless fearmongering to me.
My understanding is that many private credit funds have been very lax about conducting basic due diligence on the creditworthiness of borrowers.
For example, take First Brands, a multi-billion-dollar company which filed for bankruptcy last year. First Brands had pledged the same assets as collateral for loans from multiple private-credit funds. Those loans were being carried at a fantasy NAV of 100 cents per dollar, until suddenly they were not. Did none of these lenders submit UCC filings so other lenders could check which assets had already been pledged as collateral? Did none of these lenders ever check to see which assets had already been pledged? Did all these lenders make loans based on blind trust?
Failing to check and verify that assets have not been pledged as collateral to other lenders is an amateur mistake. It's reckless, really. The equivalent in home-mortgage lending would for a mortgage lender never even bothering to check that a homeowner isn't getting multiple first-lien mortgages simultaneously on the same home, then forgetting to put the first lien on the property title.
My take is that for many private credit funds, NAVs are basically fantasy.
Do you know if First Brand's actions are considered fraud? Or was this entirely on the lenders to make sure they were in the clear regarding the collateral? Doesn't excuse the lack of diligence, but curious if there was some assumption of good faith that may have played a role in what diligence was or was not done.
Only a court can decide if the actions are fraud, but they sure look like it to me. Fraud doesn't excuse the lack of due diligence.
If lenders are in fact not performing due diligence and passing off good credit as bad...sounds suspiciously like a 2008-like era where noone cared about the credit worthiness but just wanted to generate lines of credit.
Oh boy, if this is the case, oh boy.
Lessons not learned indeed.
Remember, the lesson was that Daddy Government won’t let you fail. Barring any federal regulations, there’s no reason for financial entities to not repeat the exact “mistakes” that caused the 2008 (2007) Great Recession.
The lesson isn’t being ignored- it’s being used as justification.
Once you get outside of things that are highly standardized (like home loans to individuals) you quickly find out that no matter how regulated, finance is done on a handshake.
That's true, but only to a point. Due diligence is not uncommon, especially with more traditional forms of credit.
I resorted to the mortgage-lending analogy so others could quickly grok what multi-pledging means.
Reason this number caught my eye: last year the Fed's stress tests found "loss rates from [non-bank financial institution] exposures (i.e., the percentage of loans that are uncollectible) were estimated at 7%, under a severe recession in scenario one" [1].
That's the scenario in which unemployment goes to 10%, home prices crash by 33%, the stock market halves and Treasuries trade at zero percent yield [2].
[1] https://www.mfaalts.org/industry-research/2025-fed-stress-te...
[2] https://www.federalreserve.gov/publications/2025-june-dodd-f...
The categorization the Fed uses for NBFI is broader than private credit. E.g. if a hedge fund gives a loan to a private company, that's not private credit because hedge funds seem to have their own category. And lending backed by securities is also in a different category, it seems.
So I guess the Fed expects these other kinds of lending to be safer than private credit?
What's odd is according to the article, this index estimated an ~8% default rate in 2024. So maybe the stress test was measuring something different? It's weird to think the stress test would find a lower loss rate during a severe recession than in the most recent year with data available.
The regulators were modeling a scenario where private credit was dragged down by a problem elsewhere in the economy, not one where the rest of the economy was dragged down by private credit. Everyone understands that center of a financial implosion is always worse than its effects on the broader economy, but regulators aren't tasked with stopping the explosion at ground zero, they are tasked with stopping contagion dominoes from falling, so that's what they model.
> maybe the stress test was measuring something different?
The Fed is measuring the loss on bank loans to the private-credit lenders. A 10% portfolio loss shouldn't result in those lenders defaulting to their banks.
By my rough estimate, one can halve the portfolio loss rate to get the NBFI-to-bank loss rate. So a 10% portfolio loss means we're around a 5% expected long-run loss to the banks. Which is still weirdly high, so I feel like I must be missing something...
The 9% of borrowers defaulting stat cited in the title is not the same as 9% of the loanbook defaulting.
As stated in the article, 9% is the number of borrowers that defaulted, which was concentrated in smaller borrowers (thus smaller loans).
And then, again, you can say probably half of the dollar amount of those defaults are recoverable.
Bond defaults spiked to around 6% in aggregate in 2008, to use a worst case example.
Unless I'm misunderstanding something, this isn't that big of a number in the larger scale of US banking; According to the numbers in the article that's only about 2.5% of all bank lending (300B/1.2T, with the 1.2T being ~10%)
> this isn't that big of a number in the larger scale of US banking
It's not. It's just that we're seeing potentially 10% losses on the portfolio level [1], which could imply up to–up to!–5% losses to the banks' loans to those lenders.
Again, tens of billions of dollars of losses are totally absorbable. But Morgan Stanley's stock price took a hit when it gated one of these funds [2]. And some banks (Deutsche Bank, somehow, fucking again, Deutsche Bank) have small ($12n) but concentrated portfolios where a single wipeout could materially impair their ~$80bn of risk-weighted assets.
[1] https://www.reuters.com/business/us-private-credit-defaults-...
[2] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...
> Again, tens of billions of dollars of losses are totally absorbable.
They are, in isolation. The _problem_ is that PE doesn't generally trade assets in public, which means that valuation only really come when you're either wanting to buy, wanting to sell, wanting to re-loan or in deep shit.
This means that something like MFS can happen (https://www.reuters.com/business/finance/mfs-creditors-claim...) where assets appear to be used to raise two different loans without the other lender knowing.
But! banking can absorb a few billion right? yes, so long as people are not asking questions about other assets.
Because PE assets are not publicly traded (hence private in private equity) the value of assets are calculated at much lower rates than on a public market. This means that the assets that PE holds could be wildly over or under valued. The way we assess the value of PE holdings is thier looking at the Net Asset Value calculations (which might be done twice a year) or infer the value based on public information.
Now we are told that markets are rational and great at working the value of things. This dear reader is bollocks. Because PE is a black box, if a class of asset that they hold (ie SaaS buisnesses, or high street stores, or coffee trading etc) looks like its not doing well, people will start to write down the value of people holding loans given to PE, or shares in PE.
This creates contagion, because one PE company is in distress, the market goes "oh shit, the whole thing is on fire" and you get bank runs (because where is the money coming from to loan to PE? thats right banks, eventually)
you're the only person replying to comments on this post that seems to know what they're talking about. what do you do for a living?
good explanation, thanks
You're welcome! Also, bank credit is like $20tn in the U.S. [1].
[1] https://fred.stlouisfed.org/series/TOTBKCR
Washington Mutual had $307 billion in assets, and one credit downgrade and a bank run of $16 billion in September 2008 was enough to get them shut down.
These private credit numbers are estimates provided by Moody's, who were famously clueless about the scale of mortgage bond risk even as they stamped them all with a AAA rating.
Someone else owns all the other credit. This is the 1st domino.
The liquidity challenges of a $1.2T shock to the economy is meaningful, because it has knock on effects on equity as well.
When private credit (which is propping up private valuation) falls, private equity also falls and then everyone realizes that everyone else has been swimming naked.
Yeah but don’t major problems usually take the form of debt chains being forcibly unwound? Like default happens somewhere, expected money doesn’t land, that next entity who was receiving the debt money that defaulted defaults on something because now they can’t pay, expected debt payment money from them doesn’t land, that next entity etc.
So I think it’s not about how much of the debt is this, it would be about how intertwined it is with other things.
I’m not claiming it’s major btw, I’m just clarifying that in my understanding it could be a small percent but still end up causing default cascades, or it could be a large percent and not, depending on the debt graph.
Update: original comment should be. 300B/1.2T*(10% of bank funds) = 2.5%. If I'm reading comment correct. Also I believe the whole private credit ecosystem is about 1T.
In a catastrophic scenario: if the whole asset class went to 0 (on the banks asset sheet they would lose 2.5% - absorbable pain assuming its not leveraged through creative financial mechanisms).
I would wager that risk is more concentrated on certain institutions instead of across the board so acute pain likely.
I've been told by the head of compliance of the largest European banking group that 2.5% is exactly the threshold at which they begin to be very worried/ at systemic risk
Apparently they operate on very low level of tolerable risk (way lower than I thought)
>2.5% is likely still survivable, but i think risk departments + regulators are all a lot less risk tolerant after seeing how quickly things went south in 2008 and worries about an out of control spiral
That's only loans to non bank financial institutions.
Total bank balance sheets are about $25T.
And then that 25% is 10% of US banks' entire lending portfolio, so private credit is about 2.5% of their entire portfolio.
If there are credit default swaps involved anywhere, this could amplify the pain in the economy.
Off by an order of magnitude.
For those that want a broader context on private credit, the Bank for International Settlements has been publishing some great material on the topic, including the connections between private credit and other corners of the financial system. Some examples follow.
---
[0] https://www.bis.org/publ/qtrpdf/r_qt2503b.htm [1] https://www.bis.org/publ/bisbull106.pdf [2] https://www.bis.org/publ/work1267.pdf
Oh, that's why they were pushing so hard to get private equity into 401k's. They wanted to pass the bag to regular folks.
For the OP: what’s your view on the overall private credit situation? Who are the bag holders and how bad is the contents of the bag?
You seem to be answering a number of other questions in the post so interested to hear your impetus for sharing in the first place.
nb: thank you for being an ongoing contributor to the site! I see your handle cropping up a lot in substantive conversations
> the top five lenders in the private credit market include Wells Fargo, which leads the way with $59.7bn (£44.8bn) in lending
anything Wells Fargo leads in must be bad
Wells Fargo so big its suing itself
July 10, 2009
https://www.denverpost.com/2009/07/10/lewis-wells-fargo-so-b...
My normal bank was acquired by Wells Fargo in 2008 and they also owned my mortgage.
When I went to pay off my mortgage in 2012 they required a cashier's check for the final payment of around $80.
I asked if we could do it electronically like all of the previous payments and they said no.
So I walked into my local bank asking for a cashier's check of that amount and the bank teller told me that most people would accept a personal check for that little. I said yeah but YOU don't. She looked at me funny.
So she asked who to make the cashier's check out to. I said "Wells Fargo" and she looked at me funny again and said "Wells Fargo is us, the check comes FROM Wells Fargo. Who do I put on the TO line" and I said "Wells Fargo"
She again looked at me funny and I explained that I am paying off my mortgage. Wells Fargo is where I have my bank account and my mortgage. She said "Can't we just do it electronically?" to which I said "You would think but apparently your employer can't handle that and told me to get a cashier's check and FedEx overnight to them."
She rolled her eyes and then started laughing.
Actually I believe they're just actually complying with new laws to disclose their balance sheets for these types of loans. Many other banks like JP Morgan have much higher amounts of these loans on their balance sheets, but refuse to report and are exploiting certain loopholes.
The requirement to disclose has only existed for a year I believe, but many are kicking the can or claiming that it would cause them issues.
Trouble has been brewing in private credit for quite a while, but lenders and investors have been reluctant to write anything down, resorting to all kinds of "extend and pretend" games to avoid write-downs.
tick-tock, tick-tock, tick-tock...
The concern here seems to be that the credit risk on the underlying borrowers is being transferred to banks through the loans made by the banks to the private credit firms. But the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers (the same regulations and constraints that led them not to lend to the underlying borrowers in the first place). When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans.
> the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers
Yes.
> the same regulations and constraints that led them not to lend to the underlying borrowers in the first place
No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks.
> When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans
Correct. Assuming 1.5x leverage and 60% recovery, you'd expect no more than half of portfolio losses to transmit to their lenders.
> secured loans which will be less risky than the underlying loans
So, it's sort of like bundled mortgage securities, where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting.
Presumably, since banks (by definition, an intermediary) are involved, those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? Also, I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans?
Clearly, like with housing, there's no chance of correlated defaults in a bucket of bad business loans that's structured this way!
In case you didn't quite catch the sarcasm, replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression, or replace it with "bucket shops" (which would sell you buckets of intermingled stocks) and it would describe every US financial crisis of the 1800s.
> where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting
Yes. This is mathematically sound.
> those are then recursively repackaged until they have an A+ rating, or some such nonsense, right?
AAA-rated CLOs performed with the credit one would expect from that rating.
The problem, in 2008, wasn't that the AAA-rated stuff was crap. It was that it was ambiguous and illiquid.
> I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans
Defining independence in financial assets like this is futile.
> there's no chance of correlated defaults in a bucket of bad business loans that's structured this way
Software companies being ravaged by AI fears.
> replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression
It also describes a lot of successful finance that doesn't reach the mainstream because it's phenomenally boring.
Generally speaking, the SEC exists to regulate communications about the underlying realities driving security values.
Any mechanism involving “the bank invested (lent) my deposits to organizations that avoid SEC scrutiny, and used an instrument that spreads culpability for fraud across many unrelated and unwitting organizations” will eventually lead to investment bubbles and fraud.
If I knew (and chose to have) 5% of my savings in private debt funds, where the holdings were public and had reporting duties, that’d be fine.
Instead, that money is being lent behind closed doors. If the loans pay out, then the ultra wealthy make money. If they default, they’ll be bailed out to prevent contagion. (And they still make money, since the lent money went somewhere before the loan default.)
This has happened at least a dozen times in the US, including in living memory.
Also, my example is not sound. Here is a counter example with a basket of investments with different risk profiles: I hold A directly. I hold A’, which is a leveraged fund that only holds A. I also hold B which is a business whose only customer is A. I hold C, which has a contract with A and is securing the loan with future revenue from the contract. Finally, I hold D which is A’s primary customer and a majority shareholder of C.
Note that my example describes actual privately held companies that are probably the ones providing the private debt in the article.
I don't think that's a true etymology of "bucket shop," which per my recollection of Livermore was just an off-track-betting parlor for ticker symbols, but where nobody actually bought the shares (bundled or otherwise). Strictly a retail swindle, having nothing directly to do with the risk/maturity bundling work you are criticizing above.
We had them in the US before the SEC, which regulated them out of existence.
It’s likely the term is a pejorative referring to the Liverpool setup you describe.
Sorry, I meant Jesse Livermore's "Confessions of a Stock Market Operator," worth a read to anyone interested in the history of this stuff.
> No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks.
How is this inconsistent with what I said? I was just making the point that the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap.
> the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap
That may have been true once. It's rarely true now. Banks and shadow banks compete for the same borrowers.
Private credit is cracking and lending standards are tightening behind the scenes. If you’re not building cash reserves right now you’re going to wish you had. The distressed opportunities ahead go to whoever kept dry powder while everyone else was chasing growth.
If your business is light on free cash flow (ie everyone in AI at the moment) buckle up as there are storm clouds ahead. If you’re running a business that relies on external cash (VCs, loans/bonds, etc) to keep things going things will get very ugly.
Well it only took 5 years of destroying responsible savers with every policy imaginable to make sure they get crushed by those who availed themselves of the negative real rate loan inflation machine. How many people are left remaining that were dumb enough to take that strategy and are still standing? If you were operating on a cash basis for the last 5 years you were mostly wiped out by people leveraged to the 9s on debts and meanwhile your buying power was erased.
Interest rates on things like CDs and low-risk bonds have been decent for a while now. It’s not been painful to sit on cash reserves provided you were smart about where the cash was parked.
It’s not an either/or, it’s just a question of who was participating in the boom while preparing for storms ahead vs those all in on the boom.
What implodes in the period ahead are things that are massively over leveraged and can’t absorb a hit without doubling down again with more funding/loans and such. These are the folks and companies that get wiped out.
Interest rates on things like CDs and low-risk bonds have been decent for a while now. It’s not been painful to sit on cash reserves provided you were smart about where the cash was parked.
Just make sure you can unpark it, else you're SVB.
You're not wrong it's always good to have cash but certain allocations could have done 50%-100% return on investment while a CD brought ~5.5% for a while. Look at S&P since 2021. Knowing when to transition from cash, liquidity, other instruments is what kills/allows people to survive. We can't all do the same thing, it's almost as if it's economic ecological evolution, random death.
It's decent only if you believe inflation = CPI
In actuality, the CPI is lower than inflation because technological advancement, automation, and economies of scale (due to globalization etc) are driving consumer prices low. In other words, if factories are still producing things like they were 20 years ago, the CPI would have been much higher, and that higher number is closer to what should have been the inflation number.
> if factories are still producing things like they were 20 years ago, the CPI would have been much higher, and that higher number is closer to what should have been the inflation number
This is an impossible counterfactual to test. In reality, tracking value across time requires adjusting for immeasurable preferences. This is why inflation is really only a useful measure for personal purposes across periods of years. It’s only macro economically interesting across a generation and close to meaningless longer than a human lifespan.
I think it's so obvious that no testing is needed, but generally I don't disagree with your take.
The thing is one really needs to understand what "real yields" mean when investing in bonds, i.e. it means your purchasing power with respect to cheap commodities tracked by the CPI is preserved, but it doesn't necessarily mean "value" (whatever that means in the abstract) is retained.
> it means your purchasing power with respect to cheap commodities tracked by the CPI is preserved
CPI isn't a measure of commodities. And "CPI" is a bit of shorthand, given there are pretty much as many measures of consumer and producer prices as there are economists.
> it doesn't necessarily mean "value" (whatever that means in the abstract) is retained
This is what any measure of inflation ultimately seeks to measure. Purchasing power is intrinsically tied to the basket of goods and services its measuring. That basket varies across people and time as preferences vary.
A better measure is what % of the total money supply you have.
I.e. you started out with 2e-20 % of the total money, and after 5 years you now have 1e-20 % of the total money, then whatever happened to CPI, you've been diluted and you would probably have been better off investing in something else other than cash.
That makes sense in theory, but in reality what "total money supply" is is a complete can of worms and basically impossible to measure
Decent is fine if you're about to retire and want to avoid risk but I wouldn't recommend parking your wealth in CDs/bonds if your retirement is still 15+ years out, personally. The government has to print money to bail itself out which means things are going to inflate quite a bit, just look at what gold has done in anticipation of this.
Banks bailed out the hedge funds in '98, then the taxpayer bailed out the banks in '08, then the government bailed out the taxpayer in '20... now monetary policy from the fed has to prevent the government from defaulting.
This is not my field of expertise, but I modeled keeping cash reserves to buy distressed assets. Unless I was able to perfectly predict the crash, the outcome was still better to not time the market.
> If you’re running a business that relies on external cash (VCs, loans/bonds, etc) to keep things going things will get very ugly.
Honestly thrilled to hear it. The AI bubble needs to burst so we can find out what's actually useful, start requiring real business models again, and get rid of all the noise and waste.
Most business is noise and waste. I love that no one gets that.
It’s like hoping for the apocalypse thinking you’re of course the hardcore survivalist. When in reality you’ll get eaten first.
The problem is all these over-leveraged sectors will drag everybody else. And guess who will be bailed out? Heads they win, tails everybody but them loses.
> The problem is all these over-leveraged sectors will drag everybody else
Well, the good news is that's what good public policy is for, to blunt the impact of the damage with strong anti-trust enforcement and careful cash injections to weak-but-critical areas of the economy to help stabilize in rough times.
Now, hang on for just one moment while I crawl out from under this rock and take a look at who we have entrusted to set our public policy.
Assets don't disappear they get bidded.
The problem is, what assets remain of a company that doesn't own anything material? OpenAI, Anthropic - they don't own datacenters that could be auctioned off. All they own is training data and trained weights, and both are relatively worthless.
The game that all the AI companies are playing is to be the last dog standing at all costs, because that kind of dominance is a money printer.
And who buys those troubled assets at deep discount? Where do they get the cash to pay for them?
I guess it is fair to say the federal funds rate has persisted at a high level over the past three years now isn't it?
https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
Also interesting to note, "Fitch recorded NO defaults in the software sector last year. The rating agency noted it categorizes software issuers into their main target market sectors when applicable."
The problem of the current situation is that even 5% is considered as a high interest for many people, if not most of them. Inflation already pushes up the base price, and if the interest rate keeps on 5% and above many people simply won't consume, which will further pull down the economy.
For example, we decided to keep our vehicle for another 4-5 years instead of buying a new one. The same Hyundai vehicle of the same model, but different year (2026 v.s. 2020), has gone up 8,000 CAD (10K CAD considering tax), with a much higher rate (5.99% v.s. 0%). There is no way I'm buying another car in the foreseeable future. We can definitely afford it, but we won't.
The whole world has pushed up prices of food, housing and pretty much everything higher. This is the real problem -- although I wouldn't say it is the root problem.
> but it's not really historically high
i dont think the inflationary seventies and eighties are great lodestar
low interest rates are historically a sign of a stable polity and economy. so if anything, we want the conditions for prolonged low interest rates, rather than prolonged high interest rate.
To private credit firms. Most of what banks do is private credit, the news is them funding private credit firms.
That's not correctly stated. "Private Credit" is defined as non-bank lending. Banks are doing "public" lending in the sense of being regulated. Private lending is any sort of financial instrument issued outside of those guard rails.
It's generally felt to be risky and volatile, but useful. Basically, it's never illegal just to hand your friend $20 even if the government isn't watching over the process to make sure you don't get scammed. This is the same thing at scale.
> That's not correctly stated
It is. (EDIT: It's a mixed bag. OP was correctly calling out a definitional error.)
Banks have loaned $300bn mostly to private-credit firms. Those firms then compete with the banks to do non-bank lending. It's a weird rabbit hole and I'm grumpy after a cancelled flight, but it feels like I'm in the middle of a Matt Levine writeup.
Good grief. I was responding to "Most of what banks do is private credit", which is wrong. Bank lending is not private credit.
Oh, gotcha. Sorry, got hung up on the first bit.
No, there is a huge difference:
- when a bank creates a loan, this has an effect on money supply in total
- when a private credit company "gives" a loan, it has no effect on total money supply and from balance sheet perspective its an accounting exchange on the asset side
I don't know a lot about finance. What is the definition/significance of "firm" in this context (if that's not a complicated question)?
A private credit firm is a non-bank entity that raises money from wealthy investors, pension funds, etc to loan out to businesses. The funds are generally locked up for several years to match the duration of the loans.
They also borrow money from banks to add leverage to this basic setup.
Not who you asked, but I think making the nuance between retail and corporate credit. With firms being corporate credit (i.e. we aren’t talking about individuals / retail).
No.
There are kind of 3 types of loans:
- bonds. Loans interned to be bought by a range if investors and traded over time. Arranged and unwritten by investment banks.
- bank loans. The classic loan. The bank takes depositor money (that the depositor can take back anytime!) and loans it to someone or some company. The bank holds the loan
- private credit. Like a bank loan, but they get their money from long term investments by wealth people and institutions, add bank loans for leverage, and then hold the loan.
> The bank holds the loan
These are mostly syndicated. The traditional difference between loans and bonds was bank versus investment bank. The modern difference is in underwriting technique, degree of syndication/securitisation and loans mostly being floating and bonds mostly being fixed.
I mean the classic “it’s a wonderful life” model
Convergent evolution in finance is actually a pet interest of mine. It seems like it's mostly driven by regulation. But the more you stare, the more the regulation appears like a canyon wall and the hydrology customs and connections. I'm not sure what the underlying geology is, however. Something bigger than customs or laws, but not so grand that it becomes ethereal.
The pattern I see is:
The Banks get in trouble, and Gov has to step in. So Gov, reasonably, add regulations and restrictions. But the law can't be really specific, it requires gov employees to actually examine the bank and make decisions (eg about risk levels, etc).
The banks have a really large incentive to chip away at the effectiveness of the regulation. They hire lots of lawyers, consultants, notable economists, etc and just keep pushing on these rank and file gov regulators. They buy influence with politicians, and use that to pressure the regulators. They hire some of the regulators at very high pay, sending a signal to the others: play ball and a nice job awaits you.
Over time, they just wear down the regulators. The rules are interpreted to be mostly ineffective and nonsensical. Often at that point the politicians come in and just de-regulate.
The banks just have the incentive and focus to keep at it every day for years. No one else with power is paying attention.
> What is the definition/significance of "firm"
Broadly speaking, privately-held companies are called firms. Colloquially, it tends to connote closely-held companies.
Firm is used for partnerships, where the company is not a legal entity itself. An incorporated company may be closely held but it wouldn’t be a firm in that sense. (However, it may be customary to talk about law or accouting firms, for example, regardless of their actual legal form.)
Isn’t private credit defined in part as “lending by non-banks”?
Like, when a bank originates a mortgage, that mortgage gets traded, much like private debts don’t.
Last year Jamie Dimon said there were some going to be some “cockroaches” found lingering unattended to in lots of private credit portfolios— the implication at the time was not that it was systemic and deep, merely that various incentives and market forces have meant a shakeout of either the incremental as-it-happens variety or slightly larger ones of multiple happening at a time.
Since then I’ve seen small things indicating lots of people quietly checking their books for such.
In the last week or two this has accelerated. A lot. Every few days there are ratchets tightening things up. Dimon just put some hard limits on some private credit lines and what they could take out. A few other banks trying to take other precautions.
> the implication at the time was not that it was systemic and deep
How is that what you took away from this?
> When you see one cockroach, there are probably more… Everyone should be forewarned on this. -Jamie Dimon
I took that to be what it was intended it convey, and what Dimon wanted people to feel about what he said. That maybe they should poke around their own books but he wasn’t telling people “well ‘08 all over again”
My own read of the subtext was something a bit different. Dimon saw something he really didn’t like and my guess would be that more than just a handful of people at JP Morgan were having their next few days or longer personal plans cancelled—- or that it had already settled from something like that— to find whatever they had in the way of cockroaches. And so Dimon’s public statement was a soft nudge to try and get others to do the same, cautiously and slowly without panicking.
It’s tea leaves but the time since then seems to bear that out, with right now’s world economic volatility being a good opportunity for many places to go a little more aggressively in reigning in whatever they have in cockroach’s with some cover from that volatility and distraction to not have to explain too much more or get too much scrutiny that would accelerate things beyond manageable.
Overall, my take was that Dimon is still probably pissed off about SV bank and trying to make sure whatever shape or size this private credit rot may have doesn’t go down quite that haphazardly.
I wonder if anyone can say if there’s much risk of sub prime private credit? Not sure if that’s the right term. My understanding is that synthetic CDOs are the rise again, this backed by private credit - which the article is discussing
Since a lot of people here aren't familiar with the private credit situation, here's my understanding, which comes almost entirely from reading Money Stuff, a daily column by Matt Levine. If you are a tech person who wants to learn about finance, I recommend it! It's a lot more entertaining than most finance industry reporting.
"Private credit" is an idea that has been hot in finance for the last several years, originating from the great financial crisis (GFC). After the GFC, regulations made it very hard for banks to make business loans with any kind of risk anymore. So instead, new non-bank institutions stepped in to make loans to businesses. These "private credit" institutions raise money from investors, and lend it to businesses.
The investors are usually institutions who are OK with locking up their money long-term, like insurance companies and pension funds. This all seems a lot safer than having banks making loans: banks get their funding from depositors, who are allowed to withdraw their deposit any time they want. So a bank really needs to hold liquid assets so they are prepared for a run on the bank, and corporate borrowing is not very liquid. Insurance companies and pension funds have much more predictability as to when they actually will need their money back, so can safely put it in private credit with long horizons.
It's not quite so clean, though.
It's actually common for banks to lend money directly to private credit lenders, who then lend it out to companies. But when this happens, typically the bank is only lending a fraction of the total and arranges that they get paid back first, so it's significantly less risky than if they were loaning directly to the companies. Of course, the non-bank investors get higher returns on their riskier investment.
And the returns have been pretty good. Or were. With the banks suddenly retreating from this space, there was a lot of money to be made filling the gap, and so private credit got a reputation for paying back really good returns while being more predictable than the stock market.
But this meant it got hot. Really hot.
It got so hot that there were more people wanting to lend money than there were qualified borrowers. When that happens, naturally standards start to degrade.
And then interest rates went up, after having been near-zero for a very long time.
And now a lot of borrowers are struggling to pay back their loans on time. And the lenders need to pay back investors, so sometimes they are compromising by getting new investors to pay back the old ones, and stuff. It's getting precarious.
Meanwhile a lot of private credit institutions are hoping to start accepting retail investors. Not because retail investors have a lot of money and are gullible, no no no. 401(k) plans are by definition locked up for many years, so obviously should be perfect for making private credit investments! Also those 401(k)s today are all being dumped into index funds which have almost zero fees, whereas private credit funds have high fees. Wait, that's not the reason though!
But just as they are getting to the point of finding ways to accept retail investors, it's looking like the returns might not be so great anymore. Could be a crisis brewing. Even if the banks are pretty safe, it's not great if pensions and insurance companies lose a lot of money...
https://web.archive.org/web/20260312130613/https://www.marke...
^ Encase the link also responds with this for you:
Unemployment increasing, CPI fairly stable, and credit tightening will cause the Fed to open the spigot. Here is a good entry for precious metals.
I've never heard the term private credit so I googled it.
> Private credit refers to loans provided to businesses by non-bank institutions—such as private equity firms, hedge funds, and alternative asset managers—rather than traditional banks .
Is that correct?
So if these companies go under does anyone care? If they go under are they a systemic risk to the economy like the banks in 2008 that got a taxpayer bailout?
I find the money stuff newsletter by Matt Levine (bloomberg) great for this, the link is behind a paywal, but the newsletter is free. strong rec. todays newseltter https://www.bloomberg.com/opinion/newsletters/2026-03-11/pri...
From that newseltter:
> At the Financial Times, Jill Shah and Eric Platt report:
>JPMorgan Chase ... informed private credit lenders that it had marked down the value of certain loans in their portfolios, which serve as the collateral the funds use to borrow from the bank, according to people familiar with the matter. >...
>The loans that have been devalued are to software companies, which are seen as particularly vulnerable to the onset of AI. ...
From what i can tell the problem isn't that an individual who had cash to invest in a private (tech in this case) company goes down
the problem is that a company "private credit firms run retail-focused funds (“business development companies” or BDCs)" which took out a bunch of loans to invest in private tech companies is now having the underlying assets that they got those loans against (long term investments in private tech companies) valued lower.
the link im missing is what happens when people who also invested in BDCs want their money back, where their actual money is locked up in long term investments made to private tech companies, and their ability to get loans is now valued lower. I think this is called a "run" where if someone starts pulling money out, and ultimately you cant, then its a race to get your money out before others do, which applies to both the individuals and the institutional loans.
Note: my quotes are from the bloomberg newsletter i mention, which helped me, not the OP article. And i am writing as much to clarify my own thinking as from a place of understanding. I welcome clarification.
It is a systemic risk because its size and credit risk is opaque, like mortgage-backed securities were in 2008.
Banks needs to disclose the % of non-performing home, auto, business loans to rating agencies and regulatory bodies so their credit risk is known, and so regulators they can set rules on how loose or tight lending criteria should be in the industry. With 'financial innovation' like tranched mortgage bonds rolling up thousands of mortgages at various levels of credit risk into one, they can be traded without anyone actually knowing what the default risk is.
With private credit, there is no disclosure requirement because the lenders are not banks. PC is financing the entire AI datacenter boom, without which GDP growth in the US is effectively zero. If PC defaults rise, the bottom could rapidly fall out of the S&P 500, which is already being hit by the oil price crisis, and affect people's 401Ks and retirement savings.
> So if these companies go under does anyone care? If they go under are they a systemic risk to the economy like the banks in 2008 that got a taxpayer bailout?
Mostly, no, which is exactly why private credit has become so big in recent years: they are making the loans the banks can't or don't want to make, because the banks are subject to a bunch of additional regulations, which are designed to reduce the probability of banks going bust and having to be bailed out.
But it can be difficult to judge second order effects in finance. It's possible that a lot of private credit houses going bust would indirectly and perhaps unexpectedly hurt the broader economy. An obvious one being companies that are reliant on private credit going bust because their financing needs can no longer be met.
Also, with this administration in the US I wouldn't entirely rule out bailouts for some of the more politically connected private lenders.
> But it can be difficult to judge second order effects in finance.
Another obvious question to ask is who is providing the money that is being lent? Those are the people who now won't be paid back. The assumption is that these are people with predictable, long-term obligations who can lock up their cash for a long time: pensions, insurance companies, endowments, etc. Hopefully they are allocating a responsible amount of their portfolio to something as risky as private credit, but as the details are private, it can be really hard to know.
There has also been a big push over the past year to put private credit assets into retail 401k's (which, in theory, also should be okay with locking up funds for a long time, but in practice, maybe less so), most insidiously by having private credit assets held in target date funds (which are the default funds for many plans).
Many private credit funds also increase their leverage by borrowing from actual banks.
All of that should pose less systemic risk than if banks subject to bank runs were lending all of the money. But that has to be balanced by the fact that these are unregulated entities taking more risks than banks would. Long-term average default rates on high-yield bonds are around 4%, so 9.2% is high, but not in panic-inducing territory yet. Who knows what they will look like in the event of an actual recession.
Two funny things:
Banks have lend to these institutions as they couldn't lend themselves. Might be systematic risk.
Lot of pension capital is tied to these vehicles. So they go under. Many people won't be getting their pensions in short or long term...
> So if these companies go under does anyone care?
This is nowhere near as bad as the 2008 crisis, no. The banks don't really use the checking/savings account money for this. If you've invested in something that either invests in Private Credit or is reliant on Private Credit, then it'll suck for you personally.
...
One teeny tiny extremely important detail: Private Credit is bankrolling the AI industry's datacenter construction. If anything happens to significantly increase interest rates, several datacenter companies and Oracle go bankrupt. The other big tech firms have taken on lots of debt as well so expect spending cuts there too, even if they survive.
The systemic risk isn't in "bankers fucked it up again", it's in the AI bubble.
Well, yes, as the article mentions. If this increases a bank's losses, then the bank could become insolovent.
Looks like we have another problem in the banking system once again, even before AGI has even been fully realized.
We are definitely in the year 2000 in this cycle [0] and between now and somewhere in 2030, a crash is incoming.
Let's see how creative the banks will get to attempt to escape this conundrum. But until then...
Probably nothing.
[0] http://news.ycombinator.com/item?id=45960032
>Let's see how creative the banks will get to attempt to escape this conundrum.
They don't need to get creative, they just need to buy congress or the administration. Same as they've done every time things get messy.
And you know what? It works every time.
Well, the question isn't "is there any consequence for the bank managers"? The answer to that is "No, never, not even during the French Revolution".
The question is "How long can they keep extracting money before the economy implodes?"
The people producing macroeconomic indicators in the US were fired about 6 months ago for putting out an honest report. Since then there's been very little correlation between public sentiment on the economy and the official indicators.
So, we're definitely in some sort of overhang situation, where the economy is imploding, but the stock market goes up. I think that's unprecedented in the US. In developing countries, when this happens, it usually leads to things like hyperinflation.
So, I guess the real questions are: "How do you short the dollar?", and "How can you tell when the banks start doing it?" so you know when to jump off the merry-go-round.
Important to note that this is about "U.S. corporate borrowers of private credit", so companies and not individuals.
Luckily debt will be solved by the power of AGI, right? Just one more data centre! One more GPU! It can nearly write a basic three tier application with only 10 critical security vulnerabilities all by itself!
Definitely think we’re in for a rough year financial prospects wise, and doesn’t even feel like we recovered from the 2008 crash properly.
What caused the SaaS apocalypse? Gen AI.
I'm long on AI hardware companies for this reason.
We didn't recover from the 2008 crash properly because we didn't introduce consequences for those who created it.
Hundreds of financial institutions with greater or lesser responsibility for the crash in 2008 went under in those years[0]. The shareholders in almost all of these companies lost all of their money and the responsible employees lost their jobs. This includes some of the most guilty companies, like Washington Mutual, Countrywide Financial, IndyMac, Lehman Brothers, Merrill Lynch (through First Franklin Financial), Bear Stearns. But all these companies are completely forgotten now.
Instead everyone hates on Goldman Sachs. Sure, Goldman Sachs deserves hate, but of the big banks they were the _least_ guilty of the crash in 2008. Not saying they were saints, but in 2008 they were the least bad.
0: This list only covers banks, not non-banks like Countrywide Financial: https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...
When you have people at the top of those institutions who made those decisions, and made enough money during their tenures to weather any length of unemployment and were sometimes even given a severance worth more money than the average American makes in a lifetime, going out of business or losing a job simply isn't enough.
It's one of the only investments of labor and time where the risk is not proportional to the return.
In order to create risk, you have to either claw back their money through civil action - which you can't because the entire point of incorporation is to separate the business entity from one's personal finances - or look at criminal charges. Otherwise, you have created a class of hyper-wealthy people who have no real incentive to perform in a way that is for the best interests of shareholders or society at large.
It's the reason we tie so much for regular people to employment in the US, like healthcare. Many argue that if you give the rank-and-file worker the kind of long-term financial security that just one or two years of being a C-suite executive at a major company, they won't work as hard. They won't make the best decisions. They won't be the dynamic workers our economy supposedly wants. That logic goes right out the window when a board goes hunting for a new CEO.
There's zero real risk involved.
>The shareholders in almost all of these companies lost all of their money
How is that penalizing those responsible?
Isn't it a pretty big leap to go from penalizing those selling packaged fraudulent loans to the public (whom, to my knowledge were never prosecuted) to the shareholders losing money as protection against it happening again?
The shareholders are responsible for the management of the company who are in turn responsible for their employees. By wiping out the shareholders in these companies hopefully other shareholders in other financial companies will demand more oversight. In the end people respond to incentives and the individual employees that sold the fraudulent loans were implicitly or explicitly incentivized to do so by management, who were in turn rewarded for this by shareholders. Going after the specific employees that sold the loans is of course morally satisfying, but if we want this to not happen again we need to make shareholders and executives keen to avoid a repeat. Looking at how popular Klarna, gambling companies and now private credit has been with investors, it doesn't seem to have worked, unfortunately.
But, yes, it is a travesty that more of the subprime loan salesmen weren't prosecuted. It has a lot of value for a society to actually convict people that have done actual wrong. We all want to live in a just world and seeing that people who have done wrong get what they deserve is part of that. Looking at the US from the outside I think a lot of the polarization we've seen in the US over the past 15 years could have been avoided if more prosecutions had happened in 2008-2012.
IMO this is also why big companies being allowed to do settlements without admissions of wrongdoing is so bad. They fail to fulfill the moral purpose of law enforcement. Ironically Goldman Sachs _did_ admit wrongdoing in their settlement with the SEC over their Abacus CDFs...
The problem is, shareholding is now so abstracted as to make actual corrective action incredibly unlikely.
If you have investments, go and look what your holdings are. There's a real chance you have some sort managed portfolio that will trade equities to maintain growth. It might be algorithmically-driven. Your holdings may very well temporarily include some companies that you don't approve of, but trading happens so fast and so often that you're not going to be able to keep up on what you actually own.
That is a highly abstract theoretical view that is true of private corporations but does not reflect the real world of public traded corporations.
The tap went off, but they kept the water they collected from it.
That's because debt IS money. Literally. If you create debt, you have created wealth. These people weren't punished so they could get back to creating new debt as quickly as possible. The problem with credit defaults, especially private credit defaults, isn't that some private creditors lose some money, it's that twice that amount of money is destroyed, and disappears from the economy entirely.
> That's because debt IS money. Literally.
OK.
> If you create debt, you have created wealth.
No, you have created money. Money is not the same as wealth. If you create money without creating wealth, then it's inflationary.
Just a minor nit. The rest of your post I agree with.
In fact we rewarded them. We bailed them out by printing a lot of money. We then printed more money during the pandemic to pay people to stay home and watch Netflix. Probably a lot more examples. All that money flowing around that has no basis in actual productivity or value created. It's got to correct at some point. One of the corrections is how much more everything costs now, but I don't think that has fully absorbed the excess.
I would argue the second instance (pandemic) was much more nearly what a good government should do than the first one
Exact opposite. We are in the midst of the COVID hangover.
So that govt money went to the wealthy to buy up houses (Californians bought real estate in the Midwest as investments and it drove up housing prices along with small immigration to these states)
Farmers etc benefited from bailouts when they were doing very well. It was a large blunder.
All that money directly led to housing inflation that still hasn't settled. The PPP loans were all forgiven (which massively favored business owners and upper class).
Meanwhile student loan forgiveness was overruled by the supreme court.
It's really hard to ignore the implication that it ended up being more like a wealth transfer than anything else.
It may be what they should have done, but the effect was still inflationary. There is no free lunch.
It was inflationary but would spread out the pain over the recovery period after the crisis, the other option was to allow 100% of the pain to be felt immediately: economy shutting down, people losing their jobs, diminished household spending, less money circulating in the economy, businesses still running having fewer orders/customers, more people being laid off, all the way until the crisis passed.
Between the latter and the former I believe the former was a much smarter choice in the medium to long term.
> We bailed them out by printing a lot of money.
We did. We created about $4 trillion. That just about neutralized the $4 trillion that evaporated in the crash, and the result was that we did not go through a deflationary collapse. You know that they did not create too much, because inflation was basically nothing for the next decade. It was flat until Covid.
Covid... yeah, that was inflationary.
Thanks, that was a perspective I hadn't thought about. But still doesn't seem like that taught any lessons, other than the taxpayers will bail out our carelessness.
I appreciate your posts generally, you have a lot of good insights.
Do you think replacing that 4T was a good call? I'm struggling to see how it was the right play.
I think it was a good call, yes. A deflationary collapse is incredibly damaging to the economy. The Great Depression was such a collapse, but there are others. The Panic of 1857, 1873, 1907... there's a long history of these.
The Fed avoided that. And they also avoided causing inflation. It was an amazing job of threading the needle. (One could argue that they caused a decade of stagnation, but in my view that was minor compared to the other options.)
I have really tried hard to figure out the counterfactual as being a good thing and it is just really hard to make the argument that we would have been better off with a deflationary collapse.
This is especially true from a global perspective. It would be a much more equal global economy but unimaginably poorer. The political consequences are unknowable but a deflationary collapse would not have had good political outcomes.
We largely shifted a nightmare into being a great time to be alive but take the good times completely for granted because we can't really know the nightmare we didn't see.
Thank you for the thoughts. Do you think if we had ripped the band-aid off then it would have been completely disastrous? I don't mind saying that this economy is frustrating, and it feels like we keep kicking the can down the road. I'm confident I'm not the only person that feels this way, and I'm quite open to being wrong here. My guts says there's just too much money sloshing around, and it gets vacuumed up, leaving the majority feeling like nothing changed.
I'm asking this in as non-confrontational way as possible, what am I missing?
I think you may be missing that $4 trillion evaporated in 2008, and the scale of the catastrophe that would have caused if the Fed did nothing. What the Fed did then was, essentially, restore the amount of money to what it was in 2007. They were trying to turn 2008 into as much of a "nothing changed" as they could, and they did it quite well.
I think the economy can adjust to any amount of money; it's the abrupt change in the amount that causes problems (because it causes an abrupt change in the value of money).
I think you may be missing that I'm not saying the same thing about the pandemic response. I think that too much money got poured in during the pandemic years, and that has caused inflation, and we've been seeing that inflation since. I wonder if you are taking how you feel about the last five or six years, and mapping that onto the last 18 years.
Now, from 2008 to 2020 was not all roses. Things were kind of stagnant. The rich were probably doing better than you were, because assets like stocks and land went up in value as interest rates went down, but your wages didn't go up. So, it was reasonable for you to feel "there's too much money sloshing around" in things like stocks during those years.
But I think it got worse after Covid. The government air-dropped too much money in, and there has definitely been too much money sloshing around since then.
In all of this, I'm not really saying that you're wrong in feeling that there's too much money sloshing around, or that the economy is frustrating.
Consequences would be nice, but actually forbidding it for the future would be enough. Obama promised to do it, but didn't, and everybody kind of forgot and moved on.
The legislative produced Frank-Dodd...which Trump and Republicans later scaled back...
Do we still have three separate branches?
We sure did when Frank-Dodd was written by the legislative and then signed into law by the executive.
GP's comment is about the aftermath of 2008, entirely missing the fact that the legislative did in fact create laws which were signed by the executive and then later, in 2018, dismantled under a different administration.
It's a matter of simple facts here.
Frank-Dodd wasn't nearly as strict as the post-1929 regulation (Glass-Steagall act) that actually prevented such crisies for half a century.
Sure, but is that Obama's fault? See GP
If it wasn't in his power to toughen regulation, why did he promise it in his campaign?
So do you or do you not understand how the branches of government work?
An executive's promise can only mean "I will sign the bill" because aside from executive orders, legal structures originate from the legislative.
I mean people have been saying a crash is coming for years... Consumers recklessly purchased homes and cars at double their value, while relocating for remote work that was never long term in the eyes of their employer. Sounds like a receipt for disaster or a repeat of 2008- however, so much has changed since 2008... whatever happens, Black Swan! Hope "you" have your ducks in a row... As for AGI, lol. A box of matmuls isnt going to solve any real problems, so far, as you point out- is can barely write software. LLMs are basically gifted children. Smart sounding, lacking wisdom, chaotic, and likely just going to end up not that impressive. Either way- before we ever see AGI, we better get our heads out of the holes of the wealthy and enact UBI...
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What cope? I work in AI, write code with AI, promote the use of AI... Im just a pragmatic realist man. Not a delusional cool aid drinker...
You're coping. Two years ago they could barely write software. These days they do it just fine.
They do not in fact do it just fine. That's why it's utterly laughable to suggest that they can lead to AGI. They can't even do the one thing they are supposed to be good at, even after years of effort.
I didn't say anything about AGI, nor will I except to say it's an incoherent quasi-religious topic that has next to no engineering relevance, at the very least until somebody can empirically test for it. Stop coping.
You and I have the same point of view... Try thinking instead of reacting...
This.
Highly recommend listening to past episodes on The Real Eisman Playbook podcast for more info on this topic & banking in general.
https://podcasts.apple.com/bz/podcast/the-real-eisman-playbo...
He's one of the "Big Short" guys but more importantly he has great guests on. Everyone is trying to teach & inform, not sell.
He's been calling this risk out for over a year, especially once the White House started trying to allow retirement accounts access to private credit. For a lot of people that was the big alert, even before Jamie Dimon said he saw "cockroaches".
> He's been calling this risk out for over a year
Any figures or lenders he's focussed on?
I can't remember the names. Best bet if you don't want to listen is to just get summaries or transcriptions of the episodes you can an LMM questions on.
The info on his podcasts isn't telling you who to short. It's more who has gone under & general knowledge.
I'm not surprised. Weren't we getting signals like 3 or 4 months ago that used car repossessions were ticking up? That's a breaking point for folks. The economic boulder keeps rolling and I'm not wearing any shoes. Spiking the price of oil is definitely going to help. This too shall pass?
Wrong market
Related:
Veteran fund manager George Noble warns that a private credit crisis may be unfolding in real time
https://finance.yahoo.com/news/veteran-fund-manager-george-n...
Skip the blogspam and read the original article: https://www.reuters.com/business/us-private-credit-defaults-...
Paywalled
Meanwhile: https://www.marketscreener.com/news/us-private-credit-defaul...
Banks are following incentives that exist because of government policies, and in doing that they create significant moral hazard.
The finance industry's main innovation is rent seeking.
We all know what is going to happen, it's just a question of when.
There is so much misinformed fear-mongering about private credit right now.
Important Facts:
1) The majority of private credit funds are classed as "permanent capital". When you put money into these vehicles, you give the Asset Manager discretion over when to give the money back. Redemptions are often gated at ~5% per quarter.
(So there cannot, by definition, be a run on the bank)
2) Credit is senior to equity, so if you expect mass defaults in private credit, it means the majority of private equity is effectively wiped out. Private equity has to be effectively a 0 before private credit takes any losses.
3) The average "recovery rate" for senior secured loans is 80%. Even if private equity gets wiped to 0, the loss that private credit incurs is cushioned significantly by the collateral backing the loan. These are not unsecured loans the borrower can just walk away from.
(The price of senior secured loans dropped by ~30% in 2008, as a worst case datapoint)
4) Default rates on many of the major private credit managers is ~<1% in recent years. There are other estimates stating higher default rates, but that often classifies PIK income as a default. A loan modified and extended with added PIK that ultimately gets repaid is not a "true" default.
5) Finally, it's true that NAVs are likely overstated, but generally it's by a modest amount. Every Asset Manager today could go out tomorrow, mark NAVs down by 20% and suddenly there is no crisis.
(The stocks of Asset Managers have already traded down such that this seems expected and priced in anyway)
> Private equity has to be effectively a 0 before private credit takes any losses
Technically yes. But the overlap between private equity as it's commonly described and private credit is slim.
> average "recovery rate" for senior secured loans is 80%
Oooh, source? (I'm curious for when this was measured.)
> A loan modified and extended with added PIK that ultimately gets repaid is not a "true" default
True. It's a red flag, nonetheless.
> Every Asset Manager today could go out tomorrow, mark NAVs down by 20% and suddenly there is no crisis
Correct. The question is if 20% is enough, and if a 20% markdown creates a vicious cycle as funding for e.g. re- or follow-on financing dries up.
You seem knowledgable about this. I'm coming in as an equities man. Would you have some good sources you'd recommend that make the dovish cash for private credit today?
> Oooh, source? (I'm curious for when this was measured.)
It depends when you measure, but you can Google around and find figures in the 60-80% range. 80% may have been a bit on the optimistic end of the range. But it's important to note that a "default" doesn't imply a 0.
Of course this will depend on the covenants, underwriting standards, type of collateral.
I would guess software equity collateral recovery rates are lower than hard assets like a building. (Which is why I personally don't like Software loans, nothing to do with AI)
> Correct. The question is if 20% is enough, and if a 20% markdown creates a vicious cycle as funding for e.g. re- or follow-on financing dries up.
I think it's almost certain that new fundraising for private credit will be materially hindered going forward. But this just limits the growth rate of these firms, does not introduce any "collapse" risk.
They may move from net inflows to net outflows and bleed AUM over a period of some years.
If NAVs were inflated previously, they may be forced to mark down the NAV to meet redemptions rather than using inflows to payoff older investors.
In the world of credit, 20% is an enormous haircut. Again, senior secured loans fell by around 30% peak to trough in 2008.
We have the public BDC market as a comparison point where the average price/book is around 0.80x. So the public market is willing to buy credit strategies at a 20% discount to stated NAV.
The real systemic risk here, if we were to reach for one, is really that these fears become self fulfilling.
If investors pull funds out of credit strategies en-masse, there is no first order systemic issue, but it means borrowers of many outstanding loans may not be able to secure refinancing as money is drying up.
This could lead to a self-fulfilling default cycle. But this would be a fear driven default cycle, there is no fundamental issue with cash flows of borrowers or otherwise (in aggregate, currently).
Finally, in regards to the asset managers themselves, many are quite diversified.
Yes, they have private credit funds, but many have real estate funds, buyout funds etc. OWL is one of the biggest managers of data center funds, for example (which they also got hammered for on AI bubble fears)
Given how depressed pricing is in public REITs, for example, I expect a lot of asset managers to pivot towards more real asset funds.
So, if I hold a bunch of Private Equity, and my holdings need a continuity of business loan, would I:
(a) have the holding take out the debt, exposing 100% of my stake
or,
(b) have the holding divest a piece of itself, giving me control of the existing and new entities, then have that piece take out the debt, exposing 0% of my stake?
I imagine any PE firm worth its salt would go with option (b).
Presumably regulators would sometimes try to block such deals, but I cannot imagine that happening during the current administration. (Do the regulators even still work for the US government? I thought they were mostly fired.)
Similarly, I can imagine the banks refusing to lend in scenario (b), but I cannot imagine bank leadership being allowed to make such a decision if the PE firm is politically connected to the current administration.
It sounds like you're effectively describing some fraud scheme.
A smart lender will not issue loans without real collateral. If you create a subsidiary, that subsidiary has to have sufficient collateral and cashflow to secure a loan.
I have been following this development for a couple weeks, and now it's on HN. How long until the elevator guy tells me about it?
You have an elevator guy?! /s
Ok, I think I now got where all the AI money was coming from.
is this not the subprime mortgage problem all over again?
Same basic issue, but not exactly the same thing in terms of sector or potential impact. The sub prime mortgage delinquency rate remains low as home loans became much more strict after 2008. So that portion of the economy is relatively safe right now. PE is a much smaller market and so the fallout from a private equity collapse, while significant, would theoretically be less likely to negatively disrupt the total market to the same extent as the 2008 housing crisis.
People have cried wolf or been wrong about incoming crashes and bubble pops so many times that this signal -- whether it's a good signal or not -- simply won't change anything I do.
I'm sure someone somewhere could make a trade off of this article and this signal is definitely for them.
It is incredibly hard to make money going short. Even if you are right about the direction, most short positions require interest payments to hold, or have some sort of decay built into the structure. So timing is everything and even then, if the underlying security slowly grinds down (instead of a quick abrupt move) you could still lose if the interest/decay on the short position outruns the downward movement on the underlying.
I have been actively trading in the market for a little over a year now, and while winning on a short position is probably the most satisfying trade for me, the overwhelming majority of those trades are losses and at this point I mostly treat them as hedges. I suspect that is true for most market participants as well.
There's actually (at least) three things going against you going short:
- position has significant negative carry (what you're talking about there)
- stock/bond prices are nominal and the government constantly prints the denominator so prices tend to go up even if there's no actual growth
- for equities there is a genuine long term positive drift over time even if the denominator doesn't change
So yes, it's hard to make money going short and timing is everything
Even if this was a reliable signal for most of us it shouldn't change anyway. Timing the market is hard, so if you have a job keep investing in your retirement accounts and let dollar cost averaging work it out - odds are you are buying at fire sale prices. If you are one of those who lose your job - it doesn't matter much if the economy is good or bad, you need to adjust a lot of things (even in the best of times sometimes by chance you can be out of work for a long time)
If you are the manager of a mutual fund you can take useful action on signals like this if you can figure out what they mean. Most people don't have enough money to be worth trying to take action.
You may not be able to properly let dollar cost averaging do its thing if you rely on your job to invest, since there's a high correlation between periods where people are out of work and periods where asset prices are lower.
Even in the worst part of the great depression 75% of the people had a job. Most years where much better.
Don't get me wrong, if you don't have a job things are bad. If you have a job but it isn't giving good raises, or it is a worse job than you are qualified for things are bad. However things are not hopeless for the majority of people even when things are really bad, and you can get through it.
"Signals" are rubbish. The market is irrational and will change its mind at random.
This is, however, one of many indicators of an overall wobbling system. It would be a good time, not make the line go up, but to look for ways to stabilize the economy as a whole.
Which is unfortunately a hard question. One could theorize that we should do different things than the thing we've been doing for the past year or so, but of course there will be many who say that we just haven't done it hard enough yet.
What the hell ?! Nearly 10% ?! How can it be?! World wide, it seems to be around 4% since 2004.
Page 22 (French but it's just numbers, you can read it). <https://www.eib.org/files/publications/thematic/gems_default...>
It is easy to keep your head above water level for surprisingly long times. Just look how some people in retail manage to rack up credit card and other type of debt.
And it is especially so when money given is not their own, but instead they get to take cut. Which these funds can do. They might even just take promises that you will pay in future and even allow adding the interest on top of loan amount. Numbers look good, bonuses look good.
Fundamentally this can only last so long and now is the time it starts to blow up.
Yea the market will correct any time now from 2009.
Things will stay the way they are for as long as people want them to. The economy and money is fundamentally made up. It’s so funny when these types come out and start talking about made up fundamentals as if they are physics.
Go figure. Employers don't want to pay living wages or hire.
Employers will never be able to pay a living wage, because the real problem is a lack of housing. Rents and mortgages will always outrun wage increases in the current market.
Having worked in IB / PE my whole career (both buying & selling businesses and distressed debt, primarily in the middle market) it is always fun when my area of domain hits the front page and I can read the confident opinions folks have on my industry.
I think most people in this thread are missing the boat.
First, it’s important to realize that “default” does not imply wipeout. Default just means that you’ve violated a credit agreement, and that can be solved many different ways. Sometimes it’s solved by the sponsor restructuring the debt (injecting equity, asking for covenant/interest relief); sometimes it’s a true Ch 11 bankruptcy; in very rare cases, it can be a true Ch 7 liquidation. But even in those destruction-of-value scenarios, first-lien recoveries run 50-70% of “par value” borrowed. Lenders are smart, their job is to underwrite these deals, and they’re compensated for this with healthy interest rates - typically S+500-650 plus fees, which comes out to 10–12% unlevered returns. So they are basically pricing junk bonds, and in exchange get senior secured risk with real covenants around what the business can / can’t do.
Second, the myth that PE firms can just saddle a company with debt at the lender’s expense with no skin in the game and walk away with a profit while the company files for bankruptcy is hilarious, in part because it obviously doesn’t hold up to the slightest bit of scrutiny. The typical PE firm is buying a middle market business for 10-12x EBITDA on average. In today’s world, lenders will usually let you put 4.5-5.5x EBITDA on the business as leverage (in the ZIRP era, you could push things up closer to 7x, sometimes above that if it’s a stellar business). So on a typical 10x deal with 5x debt, 50% of the capital structure is PE firm equity which gets wiped out first before the lender loses a dollar. If that happens, the PE fund’s investor returns crater, which means no more Fund II/III/IV, which means no more fees for them to generate.
(As an aside, the typical “fees” paid by portfolio companies to the PE firm are, at least in modern limited partner agreements, largely offset against management fees and recaptured by the fund’s investors. The PE firm is not getting rich off these fees, at least not anymore.)
Third, private credit is not your local commercial bank. Many of the largest private credit firms are actually PE firms themselves - e.g., Apollo, Ares, and Blackstone, who are all known as “private equity” have actually become more valuable to the public investor community due to their private credit business. These are not sadsack regional banks and credit unions getting hoodwinked by New York finance elites. In many cases, they are the same firms, with the same resources (in-house restructuring / “workout” teams, portfolio ops, etc.).
It’s important to realize that private credit funds raise capital from institutions and HNW individuals with locked-up commitments - it is the exact same investor base as PE, and fundamentally a very similar business, they just invest at a different part of the capital stack. Because of this, risk of contagion is very low. Bank exposure to private credit is something like 1.5% of their portfolio - it is tiny. The extent of the blowback will be that a pension fund investing in alternatives has a poor return in one asset class across a dozen - it’s not systemic risk.
Finally, what IS true is that pre-ZIRP portfolios and software-heavy credits (something like 15-20% of leveraged loans outstanding) are in a tough spot. These businesses are either failing or they have too much debt that has “re-rated” to higher interest rates as interest rate hedges fell off. What happens from here is that the companies with structural issues in their business model will cease to exist (e.g., certain SaaS businesses). This happens all the time - it’s capitalism. But the good businesses are not going to disappear because of a bad cap structure - they will just get recapitalized.
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This comment should be flagged for casting aspersions on a minority group.
Zionism is an ideology, not a "minority group". People associate with it due to their values (most often, Christianity), not because of the way they were born.
The US Ponzi scheme coming to an end. It works great while everything is going up.
2008 Financial Crisis was triggered by Oil prices. There were lots of problematic structural elements that were fine if nobody looked close. Oil was just the sideway hit on the building to knock it over.
Just takes a nudge to collapse. And here we go again.
> 2008 Financial Crisis was triggered by Oil prices.
Not by the subprime mortgages given to anyone with a pulse?
I thought it was by the layers upon layers of interconnected unregulated derivatives valued at a few orders of magnitude above the underlying subprime mortgages given to anyone with a pulse.
> it was by the layers upon layers of interconnected unregulated derivatives valued at a few orders of magnitude above the underlying subprime mortgages given to anyone with a pulse
It was interconnected derivatives and structured products linked to banks that caused a liquidity crisis in the former to cause a crisis of confidence in the latter.
Meanwhile: "In the letter, Morgan Stanley said the fund wasn’t designed to offer full liquidity because of the nature of its investments, and that credit fundamentals across the underlying portfolio have been broadly stable. The bank's shares fell 2% in premarket trading Thursday" [1].
[1] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...
> liquidity crisis in the former to cause a crisis of confidence in the latter
Wait what? Your thesis is the GFC was caused by a liquidity crunch/bank run? Isn't that... not true?
Isn't the proximal to distal chain of events government encouraged subprime loans -> inaacurately valued MBS -> exponential, unregulated derivative instruments -> leveraged contagion. What does market confidence have to do with any of that?
> your thesis is the GFC was caused by a liquidity crunch/bank run? Isn't that... not true?
It's absolutely proximally true and it's not just my thesis. From Wikipedia: "The first phase of the crisis was the subprime mortgage crisis, which began in early 2007, as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS, collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and bank runs in several countries" [1].
> government encouraged subprime loans -> inaacurately valued MBS -> exponential, unregulated derivative instruments -> leveraged contagion
The subprime crisis shouldn't have been bigger than the S&L crisis [2]. What turned it into a financial crisis was the credit crunch that followed. That crunch was caused by folks running on banks that had sponsored these products.
On "inaccurately valued MBS," note that the paper marked AAA mostly paid out like a AAA security. It would be like if you were perfectly good for your word and I lent you money, but then I wanted to sell on that debt to a third party who didn't trust you at a 50% discount. What does "properly valued" mean in that context? It's ambiguous in a dangerous way. (In this analogy, you wind up paying back the debt at face value. But years later, albeit on schedule.)
[1] https://en.wikipedia.org/wiki/2008_financial_crisis
[2] https://en.wikipedia.org/wiki/Savings_and_loan_crisis
That was the structural problem. Definitely bad. A weak economy propped up by some 'fake' money.
Oil was more of the outside force that put a shock to that weak system.
I think the GP is trying to say that oil prices where the nudge that pushed the bad loans and derivatives out of stability.
I don't remember oil getting expensive back then, but it's a long time ago.
it did. GFC was a financial recession no doubt, but oil prices was one of the final things that tipped everything over. Oil prices climbed high, slowed economic activity a bit, and the whole financial that teetering just collapsed.
Now the subprime credit of entire cities is being sold bank to bank. I'd argue that's a direct escalation of the 2008 credit crisis.
There were many involved factors, but the 2008 financial crisis was started when Ben Bernanke raised interest rates.
That was the structural problem.
But it was swept under the rug, it was hidden by market constantly going up.
Ponzi schemes can hide in a market going up, because nobody is trying to pull money back out.
Suddenly everyone wanting their money, and the shortfall suddenly become apparent.
Oil prices suddenly made everyone try to pull money out, and 'woops there is nothing here'.
I did make a snarky derivatives comment elsewhere in the thread, but I do see you're not wrong about oil prices peaking at $138 in June 2008 (Lehman collapsed in September 2008): https://fred.stlouisfed.org/series/DCOILBRENTEU
This time it took ~35 blows with a sledgehammer. You have to be impressed with the degree of resilience here, even a chaos monkey like Trump has a hard time completely destroying the US economy even when all checks & balances utterly fail.
It feels a bit like in a Road Runner cartoon. We already ran well past the cliff, just haven't noticed yet that we should be falling down.
Trump is a symptom, not a cause. One of probably hundreds of mediocre failsons gifted unbelievable wealth in the birth lottery who’s greatest achievement in life was managing to not lose all of it to his awful business acumen and utter refusal to listen to a single living person.
Every industry’s leadership is full of trumps, many more palatable personally, many far better spoken, many even with better politics but none fundamentally are any actually better for society. They don’t understand their company, the products it makes, they have utterly no care for anything besides the quarterly stock price and their lack of care costs real people their jobs and ruins the products we use every day.
And, they are why every company is ripping the copper out of its own walls instead of actually building a business that will last.
Spot on! I worked with execs at a FAANG, they don't have the foggiest idea what they are doing! Extraordinarily dumb, and they get all their 'information' and take decisions from gatekeeping orgs which are super incompetent. This is the one org where incompetency is a super weapon. These orgs don't take competent people, because they won't be loyal to you and do your bidding. And worse, if the execs realize there is a competent person, they will come straight you, bypassing the gatekeeping hierarchy.
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One guy has twice as much money as that. Can't be a big deal.
Equity/net worth is not quite the same as the liquid capital needed to cover losses or service debt.
Government removes regulations, economy collapses, government bails out the wealthy, quants get ski trips and bonuses while families starve.
It’s more accurate to say that the private credit market was created by the government adding new regulations, not removing them. Business development corporations have existed since the 80s but they didn’t explode in popularity as business loan originators until Dodd Frank and other post-2008 regulations made it more difficult for banks to lend money. This led small and medium size businesses to seek out credit from firms like Ares et al instead.
And to make matters worse, those who remove regulations then get voted out, but show up on infotainment "opinion" shows disguised as news broadcasts....and whine that those who were voted in to fix the mess aren't fixing the problem fast enough, so those who caused the problem should be voted back in. And lo and behold, they get voted back in, to cause more damage.
Its a big beautiful system!
Democracy
Its un-fixable. The situation cant be explained simply enough for the majority of americans. Even if some of them do mange to understand, it will be quickly forgotten amid the flood of trump sewage we are sprayed with every day.
I think we'll get there (to explanation), but it'll be through the lizard-brain-level pain of poverty instead of rational understanding unless we get much better at communicating to the least willing to listen among us.
I picked a bad time to rewatch Mr. Robot
Go figure. Employers don't want to pay living wages or hire anyone these days.
Pretty sure the solution that US politicians will find will be to create new dollars out of thin air, so instead of increasing taxes they increase the money supply.
Of course this is going to increase prices, but then they can blame China / Russia / Iran whoever is the scapegoat at that time.
That’s a tax on the poor
It would cause inflation, isn’t that sort of a tax on people who have more wealth than income? (Which includes people like retirees, so, I’m not saying this is a universally good thing).
> isn’t that sort of a tax on people who have more wealth
Classically, yes, particularly when that wealth is closer to productive capital. In modern economies, the rich also hold a lot of debt, which lets them benefit from inflation.
Theoretically yes, but in practice the wages of people already not making much have not tracked inflation and there's no reason to believe that they will now. That means any inflation is also a tax on them.
Isn’t it the opposite? Salaries are sticky while asset prices rise freely with the liquidity of the market for them
No because assets hold their worth. Poor people have no assets
Poor people are hit a lot harder, but rich still have to pay capital gains on inflation even despite having no real change in value. So the rich pay inflation at the rate * 0.2. Poor pay it at the rate * 1.0 (5x the rate of the rich).
> rich still have to pay capital gains on inflation
“Pay” is doing a lot of work there. My house is half equity half debt. The debt gets to be paid off with inflated dollars. And I pay no capital gains on the appreciation. I can, however, tap it for liquidity if I need it.
Rich people don't tend to have a sizeable portion of their worth tied up in their primary residence (and even then, IIRC there is a cap on capital gains exception), otherwise property tax would turn into a wealth tax for them which obviously they want to avoid. Non-primary residences still require paying capital gains. The inflated value you paid off with debt for a non-primary residence still gets captured as capital gain in the end when you actually want to sell the house for money.
You're right, thanks.
Stop paying rent. Stop going to work. Pirate everything. No constitution. No copyright. Starve the beast.
Don't let anyone who bought into this way of life get away with robbing the rest of us.
And don't let anyone who brought children into this cruelty hear the end of it: what they did was evil.
Now Skid Row hobos are commenting on HN, just great.