Premium: The Hater's Guide to Private Credit

A few years ago, I made the mistake of filling out a form to look into a business loan, one that I never ended up getting. Since then I receive no less than three texts a day offering me lines of credit ranging from $150,000 to as much as $10 million, each one boasting about how quickly they could fund me and how easy said funding would be. Some claim that they’ve been “looking over my file” (I’ve never provided any actual information), others say that they’re “already talking to underwriting,” and some straight up say that they can get me the money in the next 24 hours.

Some of the texts begin with a name (“Hey Ed, It’s Zack”) or sternly say “Edward, it’s time to raise capital.” Others cut straight to the chase and tell me that they have been “arranged for five hundred and fourty (sic) thousand,” and others send the entire terms of a loan that I assume will be harder to get than responding “yes.” While many of them are obvious, blatant scams, others lead to complaint-filled Better Business Bureau pages that show that, somehow, these entities have sent them real money, albeit under terms that piss off their customers and occasionally lead to them getting sued by the government.

That’s because right now, anybody with the right lawyers, accountants and financial backing can create their own fund and start issuing loans to virtually anyone they deem worthy. 

And while they’ll all say that they use “industry-standard” underwriting, no regulatory standard exists.

This, my friends, is the world of private credit — a giant, barely-regulated time bomb of indeterminate (but most certainly trillions of dollars ) size that has become a load-bearing pillar of pensions and insurance funds, and according to Federal Reserve data, private credit has borrowed around $300 billion (as of 2023) from big banks, representing around 14% of their total loans. 

Sidenote: while there are some strict “private credit” firms — such as software specialist Hercules Capital — many of the “private credit” firms I’ll discuss are really asset managers. These asset managers create and raise specialist private credit funds that either extend debt directly to a party (such as Apollo’s involvement in xAI’s $5.4 billion compute deal), or as part of a leveraged buyout, where a private equity firm buys another company and raises the debt using the company’s own assets and cashflow as collateral, putting the debt on the company’s balance sheet. 

The eager, aggressive growth of private credit has even led it to start targeting individual investors, per the Financial Times:

Last year, a retired doctor in France’s southern region of Provence received a brochure in the mail from his bank touting a new investment opportunity.

A New York asset manager called Blackstone was offering the 77-year-old the chance to invest €25,000 into its flagship private debt fund. The former doctor called his son to ask: had he ever heard of Blackstone, or private debt?

His son Mathieu Chabran, co-founder of alternative investment group Tikehau Capital, had indeed heard of the powerful pioneer of private markets. But he was floored to discover that a company with $1tn in assets, which has minted over half a dozen billionaires, was seeking new business from novice investors such as his father.

The FT also neatly summarizes the problem of having regular investors involving themselves in the world of private credit:

He believes people like his father do not fully understand the risks of investing in funds that are harder to sell out of but which offer the opportunity to invest in private loans, property deals and corporate takeovers, with the allure of high returns.

And those high returns come with a cost: a lack of flexibility ranging from “you can only redeem your funds every quarter, and only a small percentage of your funds,” to “you can’t redeem your funds if everybody else tries to at the same time,” to “we make the rules here, shithead.” When an asset manager sets up a private credit fund, it often sets terms around how often — or how much — investors can pull at once, usually set around 5%, because in most cases, private credit funds are highly illiquid, as despite them acting like a financial institution, they more often than not don’t have very much money on hand for investors.

Why? Because the “private” part of private credit means that the lender directly negotiates with the borrower and values the loans based on their own internal models. Said loans generally have little or no secondary market, and private credit wants to hold them to maturity so that it can continue to provide ongoing yield (which I’ll explain in a little bit).

Sidenote: When you read about a “private credit fund,” it’s often a fund owned by an asset manager. For example, Blackstone recently raised “Blackstone Capital Opportunities Fund V,” a $10 billion “opportunistic” credit fund that incorporates as a special purpose vehicle that holds and invests the capital, and eventually sends out disbursements. Investors include New York State’s Common Retirement Fund ($250 million), Texas’ Municipal Retirement System ($200 million), and Louisiana Teachers’ Retirement System ($125 million), per Private Debt Investor.

Funds tend to have a life-cycle of somewhere between five and 10 years, which only really works if everybody keeps paying their loans.

Things were going great for private credit for the longest time, but late last year, some buzzkills at the Financial Times discovered that auto parts manufacturer First Brands and subprime auto loan company Tricolor had taken on billions of dollars of loans under dodgy circumstances, double-pledging collateral (IE: giving the same stuff as collateral on different loans) and outright falsifying lending documents, allowing the both of them to borrow upwards of $10 billion from private credit firms, including billions from North Carolina-based firm Onset Capital, which nearly collapsed but was eventually rescued by Silver Point Capital.

After the collapse of First Brands and Tricolor, JP Morgan’s Jamie Dimon said that “when you see cockroaches, there are probably more,” the kind of sinister quote baked specifically to lead off a movie about a financial crisis.

Seemingly inspired to start freaking people out, on November 5, software-focused asset manager Blue Owl announced it would merge its publicly-traded OBDC fund with its privately-traded OBDC II fund, and, well, it didn’t go well, per my Hater’s Guide To Private Equity:

Blue Owl tried to merge a private fund (OBDC II, which allowed quarterly payouts) into another, publicly-traded fund (OBDC), but OBDC II’s value (as judged by Blue Owl itself) was 20% lower than that of OBDC, all to try and hide what are clearly problems with the economics of the fund itself. The FT has a great story about it.

Two weeks later on November 18 2025, Blue Owl said it would freeze redemptions on OBDC II until after the merger closed, then canceled it a day later citing “market conditions.” Two months later in February 2026, Blue Owl would announce that it was permanently halting redemptions from OBDC II, and sold $1.4 billion in assets from both OBDC II and two other funds. The buyers of the assets? Several large pension funds that had a vested interest in keeping the value of the assets high, and Kuvare, an insurance company with $20 billion of assets under management that Blue Owl bought in 2024. This is perfectly legal, extremely normal, and very good.

Private equity is also the principal funding source for private equity’s leveraged buyouts, accounting for over 70% of all leveraged buyout funding for the last decade, which means that private credit — and anyone unfortunate enough to fund it! — is existentially tied to the ability of the portfolio companies’ ability to pay, and their continued ability to refinance their debt.

This is a problem when your assets are decaying in value. As I discussed in the Hater’s Guide To Private Equity, PE firms massively over-invested between 2017 and 2021, leaving them with a backlog of 31,000 companies valued at $3.7 trillion that they can’t sell or take public, likely because many of these acquisitions were vastly overvalued. 

You see, when things were really good, asset managers raised hundreds of billions of dollars from pension funds, insurance funds (some of which they owned), and institutional investors, and then issued hundreds of billions of dollars more (at times using leverage from banks to do so) in loans to private equity firms that went on to buy everything from software companies to restaurant franchises. Said debt would immediately go on the balance sheet of the acquired company, creating a “reliable,” “consistent” yield with every loan payment that the fund could then send on to its investors, on a quarterly or monthly basis.

The problem is that these investments were made under very different economic circumstances, when money was easy to raise and exits were straightforward, leading to many assets being massively overvalued, and holding debt that was issued under revenue and growth projections that only made sense in a low-interest environment. In simple terms, these loans were given to companies assuming they’d be able to pay them long term, and assuming that the sunny economic conditions would continue indefinitely, making them tough to refinance or, in some cases, for the debtor to continue paying.

And nowhere is that problem more pronounced than the world of software.

The jitters caused by First Brands and Tricolor eventually turned into full-on tremors thanks to the SaaSpocalypse (covered in the Hater’s Guide a month ago):

Before 2018, Software As A Service (SaaS) companies had had an incredible run of growth, and it appeared basically any industry could have a massive hypergrowth SaaS company, at least in theory. As a result, venture capital and private equity has spent years piling into SaaS companies, because they all had very straightforward growth stories and replicable, reliable, and recurring revenue streams. 

Between 2018 and 2022, 30% to 40% of private equity deals (as I’ll talk about later) were in software companies, with firms taking on debt to buy them and then lending them money in the hopes that they’d all become the next Salesforce, even if none of them will. Even VC remains SaaS-obsessed — for example, about 33% of venture funding went into SaaS in Q3 2025, per Carta.

The Zero Interest Rate Policy (ZIRP) era drove private equity into fits of SaaS madness, with SaaS PE acquisitions hitting $250bn in 2021. Too much easy access to debt and too many Business Idiots believing that every single software company would grow in perpetuity led to the accumulation of some of the most-overvalued software companies in history.

The SaaSpocalypse is often (incorrectly) described as a result of AI “disrupting incumbent software companies,” when the reality is that private equity (and private credit) made the mistaken bet that every single software company would grow in perpetuity. 

The larger software industry is in decline, with a McKinsey study of 116 public software companies with over $500 million in revenue from 2024 showing that growth efficiency had halved since 2021 as sales and marketing spend exploded, and BDO’s annual SaaS report from 2025 saying that SaaS company growth ranged from flat to active declines, which is why there’s now $46.9 billion in distressed software loans as of February 2026.

And to be clear, it’s not just private equity’s victims that are taking out loans. Over $62 billion in venture debt was issued in 2025, with established companies like Databricks ($5.2 billion in credit per the Wall Street Journal in 2024) and Dropbox ($2.7 billion from Blackstone in 2025) raising debt just as the overall software industry slows, with AI failing to pick up the pace. 

This is a big fucking problem for private credit. Per the Wall Street Journal, asset managers are massively exposed to software companies, and have deliberately mislabeled some assets (such as saying a healthcare software company is just a “healthcare company”) to obfuscate the scale of the problem:

The Blue Owl Credit Income Corp. fund said that 11.6% of its portfolio consisted of loans to “internet software and services” companies at the end of the fourth quarter. The Journal found its software exposure to be around 21%.

The Blackstone Private Credit Fund, known as Bcred, reported 25.7% in software at the end of the third quarter, while the Journal found roughly 33% exposure.

Ares Capital Corp. reported 23.8% in “software and services” at the end of the fourth quarter, while the Journal found nearly 30% exposure. 

The Apollo Debt Solutions fund reported 13.6% in software in the fourth quarter, while the Journal found a roughly 16% exposure.

And as I’ll explain, “obfuscation” is a big part of the private credit business model.

If I’m honest, preparing this week’s premium has been remarkably difficult, both in the amount of information I’ve had to pull together and how deeply worried it’s made me. 

In the aftermath of the great financial crisis, insurance and pension funds found themselves desperate for yield — regular returns — to meet their payment obligations. Private credit has become the yield-bearer of choice, feeding over a trillion dollars of these funds’ investments into leveraged buyouts, AI data centers, loans to software companies, and failing restaurant franchises. 

In some cases, asset managers have purchased insurance companies with the explicit intention of using them as funders for future private credit investments, such as Apollo’s acquisition of Athene, KKR’s acquisition of Global Atlantic, and Blue Owl’s acquisition of Kuvare. More on this later, as it fucking sucks.

Asset managers offering private credit market themselves as bank-like stewards of capital, but lack many (if any) of the restrictions that make you actually trust a bank. They self-deal, investing their insurance affiliates’ funds in their own equity investments (such as when KKR used Global Atlantic to invest in data center developer CyrusOne, a company it acquired in 2022), value and revalue assets based on mysterious and undocumented private models, and account for (as I mentioned) 70% of all funding of leveraged buyouts in the last decade, of which 30 to 40% were software companies purchased between 2018 and 2022, meaning that hundreds of billions of dollars of retirement and insurance funds are dependent on overvalued software companies paying loans funded during the zero interest free era.

While a market crash feels scary, what’s far scarier is that the present and future ability of many retirement and insurance funds is dependent on whether private equity-owned entities, software companies. and AI data center firms are able to keep paying their debts. If private credit fund returns begin to lag, the retirement and insurance industry lacks a viable replacement, and I don’t know how to fix that.

Fuck it, I’ll level with you. I think asset managers are scumbags, and I think the way that they do business is fucking disgraceful. The unbelievable amount of risk that asset managers have passed onto people’s fucking retirements is enough to turn my stomach, and if I’m honest, I don’t understand how this entire thing hasn’t broken already.

If I had to guess, it’s one of two reasons: that private credit funds have yet to escalate their risk enough, or we’re yet to see said risk’s consequences, with First Brands and Tricolor being just the beginning.

And Wall Street is prepared to profit, with S&P Dow Jones launching a credit default swap derivatives product to bet against a collection of 25 different banks, insurers, REITs, and business development companies. Bank of America, Deutsche Bank, Barclays and Goldman Sachs will start selling the derivatives next week, per Reuters, and I’d argue that enough demand could spark a genuine panic across publicly-traded asset managers. 

In any case, this is a situation where I fear not one massive catastrophe, but a series of smaller calamities caused by decades of hubris and questionable risk management resulting from the unbelievably stupid decision to let private entities act like banks. 

This is the Hater’s Guide To Private Credit, or The Big Shart.