The Cracks In Private Credit Are Widening

Last week, we explained in our article, “Markets Are On Thin Ice and The Cracks Are Starting to Show,” the reason for the constant hard selling of private credit stocks over the past 6 months was that they needed buyers for the garbage they hold.

For those who may not clearly understand how private credit became such a huge problem, which is now infecting the broader markets, we’ll share an overview.

Over the past few years, a number of firms jumped into the “private credit” sector and large investors loaded up with this sub-prime credit.

In late 2024, the big, not-so-smart banks, were raising $50 billion to put into private credit. These banks include Goldman Sachs (GS), Wells Fargo (WFC), and Citigroup (C), among others.

Private Credit firms are often called Business Development Companies (BDC). For a small firm, it is much easier to get credit from a BDC than a bank.

Private Credit firms are considered “non-bank lenders” and therefore they are not regulated. They make loans to more risky borrowers and then leverage those loans.

We have been warning about the Private Credit problems late 2024, right when this sector was considered to be the “hot new sector to buy” by Wall Street.

In our September 2024 Wellington Letter we explained,

“In good times, these firms get income double or triple the revenue that is earned by banks.

In bad times, the challenge is to handle the defaults. Some of the loans also have a PIK (payment in kind) feature. The borrower is allowed to borrow more in order to pay the interest. That is so reminiscent of the 2007-2009 crisis.”

In our May 2025 Wellington Letter we wrote about how private credit funds were booming and how they were going to be marketed to the public. We warned our members at the time, “We have a big warning for investors: Private Credit is illiquid.”

In June 2025, the Boston Fed and international agencies like the IMF were warning about these non-regulated lenders after realizing their systemic danger (i.e. “systemic risk”) and were trying to reign them in.

We warned in our Wellington Letter at the time that these private creditors “very dangerous and could topple the global financial system.”

Smart Family Offices were already making significant shifts away from private equity and into listed public stocks. That of course reduced the LIQUIDITY of private credit even further.

Then, in October 2025, the world saw the important “canary in the coal mine.” Two companies funded by private credit firms suddenly folded. Those were Tricolor and First Brands.

Tricolor Holdings was a subprime auto-lender that suddenly collapsed overnight amid allegations of fraud and whether the same collateral was pledged to multiple lenders.

That was quickly followed by the bankruptcy of First Brands Group, a car parts supplier. The problem of both was “asset backed lending.”

As the saying goes, “when you see one cockroach, there are many others hiding.”

Yes, while we had warned about the problems we saw in private credit over the prior year, Wall Street had its minions hitting the airwaves trying to get buyers for this “confetti” with talk of the great alleged “advantages” of private credit. They of course never mentioned the big disadvantage: lack of liquidity.

In our October 2025 Wellington Letter we explained how,

“Private credit includes “shadow banking,” certain types of “hedge funds,” and financings that are difficult to get data on. Firms like Ares (ARES), Apollo (APO), and Blackstone (BX) are in that business.

Shadow banking globally reportedly accounts for almost half of financing worldwide. That would be in the trillions of dollars. The market is basically like the Wild West, using the banter of “AAA-rated” to attract business. That makes “fraud” a major problem.”

Stocks of private credit and equity firms were already very weak at that time as the big shareholders of these stocks were selling their positions to retail investors.

Companies like Carlyle (CG), KKR, APO, Blackstone, among others were signaling that the credit markets saw trouble ahead.

Late last year we put on record that we expected many Private Equity and Private Credit firms will have trouble surviving.

CONCLUSION: The games these firms have played are now being exposed, but it is too late for those who bought that “private credit confetti.” These firms were forming ETFs over the past several months for dumping their unsaleable loans onto unsuspecting investors.

Isn’t this so reminiscent of what preceded the 2007-2008 Great Financial Crisis?

Leading up to the 2008 disaster, such shenanigans were done as well but in the housing sector. At that time, they were able to sell that garbage by buying a “AAA” credit rating for these garbage pools of credit and selling it to uninformed European institutions who believed the AAA rating because it was from leading US credit rating firms.

The Private Credit firms are now becoming big concern amongst smart analysts and finally being talked about on financial TV. Now, with Blue Owl (OWL) reportedly halting redemptions, investors are rushing for the exits out of these private credit stocks.