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As banks blew up in 2008, they pulled back from high-risk lending. Private equity (PE) funds filled the void, raising capital from investors to buy all manner of companies, while private credit funded the companies that were acquired.

Today, some 70–80% of private credit loans are to PE-sponsored companies.

Both PE and private credit raise capital from the same types of limited partners (LPs): pension funds, insurance companies, endowments, and family offices.

Two recent bankruptcies, TriColor Holdings and First Brands Group, have reminded us that conventional lenders are also exposed.

Tricolor borrowed from banks like JPMorgan Chase, Fifth Third Bancorp, and Barclays under warehouse facilities–revolving credit lines that helped them fund new loans before packaging and selling them into the securitization market.

When Tricolor collapsed, the banks discovered that loan collateral was impaired or double-pledged (i.e., the same loans had been pledged to multiple lenders). That meant the collateral backing their credit lines was worth much less than expected.

First Brands, a U.S.-based auto-parts supply company that rapidly expanded by acquiring many smaller auto-parts makers over about a decade, is also reported to be unravelling under heavy, opaque debt and possible financial irregularities (double-pledged invoices, off-balance-sheet liabilities) tied to warehouse/asset-finance and private credit structures.

The complexity and opacity of these financing structures led to a collapse in collateral verification, allowing the same assets to be pledged to multiple creditors.

Different cycle, similar antics.

As JP Morgan CEO observed last week,  “When you see one cockroach, there are probably more … everyone should be forewarned on this one.” See A Private-Credit Winter is Coming:
 

Herein lies the real story, and it isn’t about fraud allegations: Private credit has grown so fast that verification and audit frameworks haven’t kept up, leading to structural weaknesses across modern credit markets. Lenders are discovering that their control mechanisms, designed for more transparent syndicated markets, don’t work in opaque financing ecosystems.

There’s no better leading indicator of market psychology than real-time covenant changes, which show where the smart money is quietly hedging. Right now, the smart money is fortifying against a downturn.

…Wall Street’s public narrative is that the economy is resilient, inflation is cooling, and consumer credit remains stable. That may all be true on the surface. But the legal architecture of the credit markets tells a different story. When lenders quietly rewrite the rules of engagement, or demand all-for-one consent before lien subordination, it signals a system steeling itself for impact.

We may not yet see distress in earnings reports, but the foundations of credit protection are shifting fast. When that happens, it’s never an accident. It’s the market whispering what headlines haven’t caught up to: The next phase of this credit cycle may have already begun.

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