Private Credit Could Be a Problem. But When?
Why Private Credit is Unlikely to Lead to a 2008 like financial crisis, yet
Key Takeaway:
I am not here to tell you if private credit will blow up in the future. Unfortunately I am not that smart.
But fortunately, you and I may not have to care that much about Private Credit blowing up, yet.
Two reasons why I am not that worried about Private Credit:
The catalyst for the most recent concerns around private credit is coming from Fraud and Software sell-off. The frauds are isolated blowups by bad actors that are getting exposed as liquidity dries up. Software on the other hand has already started recovering. I think the software sell-off went too far and now that it is recovering, it should ease liquidity concerns in Private Credit too.
Private Credit is only $1.8 to $3 Trillion in total size based on various estimates. For context, the U.S. bond market is over $52 trillion, US Equity market is over $69 trillion, Gold $36 trillion and Crypto $2.44 trillion. It is simply not big enough to take the entire market down and therefore I don’t have to care that much.
We’ve been hearing about private credit for at least a few years now. I think private credit will be an issue one day, as it keeps getting bigger and especially if it is not regulated, but not today.
Having said that if we get into a liquidity crisis owing to say the Iran war, or if the software sell-off is not indeed over, then private credit could trigger some market panic. But even then, I don’t see a 2008 like crisis today.
Background: How We Got Here
The modern private credit industry was born after 2008 as regulators capped bank risk-taking. Private credit firms stepped in to fund businesses that couldn’t access traditional financing, and the double-digit yields quickly attracted institutional capital. Private equity giants like Blackstone and Apollo built their own credit shops. Lending expanded from scrappy middle-market borrowers to large companies funding data centers and AI startups.
Then — fatally — the products were marketed to retail investors through semi-liquid “evergreen” vehicles promising quarterly redemptions while holding 3-to-7-year illiquid loans. That structural mismatch is the original sin underlying everything that followed.
Fall 2025: The First Cockroaches Appear
Tricolor Holdings (September 10, 2025) — Texas-based subprime auto lender targeting undocumented borrowers filed Chapter 7. The fraud: founders allegedly inflated collateral values and double-pledged the same loans across multiple credit lines, raising billions from lenders before the house of cards collapsed.
First Brands Group (September 28, 2025) — Ohio-based auto parts manufacturer (FRAM, Raybestos, Autolite brands) backed by Apollo filed Chapter 11. The fraud: double-pledging assets across supply chain and inventory finance arrangements, plus massive off-balance-sheet leverage. Lenders who thought they were underwriting at 5x leverage were actually at 20x. Exposed lenders included UBS O’Connor ($500M+), Jefferies ($715M through Point Bonita Capital Fund), Marathon Asset Management ($280M+), alongside Monroe Capital, Antares, Sagard, Värde Partners, Sycamore Tree, Franklin Templeton’s Alcentra, and others.
Jamie Dimon, fresh off these two collapses, publicly warned of cockroaches — noting that when you find one, there are usually more.
January 2026: First Brands Falls in One of the Largest Lending Frauds on Record
Restructuring advisors confirmed $2.3 billion in fabricated receivables — making it among the largest asset-based lending frauds on record.
First Brands told lenders it was owed $2.3 billion from customers. The invoices, the receivables, the paper trail — mostly fabricated. Billions in loans were extended against assets that simply didn’t exist.
Then it got worse.
A financing company called Onset Financial was lending First Brands short-term inventory loans at 300% annualized interest rates. While the company borrowed at those predatory terms, founder Patrick James’s brother Edward was personally investing in Onset — quietly collecting those same interest payments on the other side of the trade. The family was both the borrower and the beneficiary.
A bankruptcy judge put it bluntly: “We don’t know whether this case is a business with fraud attached or a fraud with a business attached.”
Late February 2026: MFS Collapses in the UK
Market Financial Solutions, a Mayfair-based specialist in short-term property-backed bridge loans, entered insolvency after lenders discovered collateral had allegedly been pledged multiple times. Creditors extended roughly £2 billion in financing but faced a collateral shortfall approaching £930 million. Barclays, Santander, Jefferies, and Apollo-linked funds were all exposed.
Barclays had frozen MFS’s accounts as early as January 2026 after detecting anomalies, and by mid-February every director except the founder had departed. The central accusation: the same properties had been used as collateral for multiple loans without disclosure. Creditors estimated only £230 million in collateral could be verified against £1.16 billion in claims.
The company had received a clean audit as recently as March 2025 — less than a year before administration — which will invite intense scrutiny of auditing and due diligence processes.
February–March 2026: The Redemption Wave Hits — Fund by Fund
Blue Owl Capital — Permanently closed redemption gates on its $1.6 billion OBDC II fund after a 200% surge in withdrawal requests. A failed merger attempt with a larger vehicle collapsed when shareholders realized it would crystallize roughly 20% haircuts. Blue Owl sold $1.4 billion of loan assets across three funds. Its tech-focused vehicle OTIC saw redemption requests hit approximately 15% of NAV. Blue Owl shares fell 30% over the following month.
BlackRock (HPS Corporate Lending Fund) — Capped client redemptions at 5% after a surge in withdrawal requests, becoming the latest major manager to restrict exits.
Blackstone (BCRED) — Its flagship $82 billion fund faced redemption requests totaling 7.9% of the fund. Blackstone allowed $3.7 billion in withdrawals, temporarily lifted its 5% cap to 7%, and covered the remaining gap with $400 million in internal and employee capital. Blackstone shares fell 21%.
Morgan Stanley (North Haven Private Income Fund, ~$8B) — Investors sought to withdraw almost 11% of shares outstanding. Morgan Stanley returned roughly $169 million, or about 45.8% of investors’ tender requests, applying its 5% quarterly redemption cap.
Cliffwater (Corporate Lending Fund, $33B) — Investors sought to pull a record 14% in Q1. Cliffwater capped redemptions at 7%, which its CEO described as the regulatory maximum. In a letter to investors, founder Stephen Nesbitt highlighted the fund’s annualized return of about 9.4% since 2019 and liquidity at 21% of NAV — attempting to project calm while simultaneously hitting the ceiling on what the fund could legally return.
JPMorgan — Pre-emptively marked down the value of loans used as collateral for back-leverage financing facilities extended to private credit firms. No margin calls triggered — the move was preventive, reducing available credit before problems emerge. The exact markdown percentage has not been disclosed. Notably, JPMorgan is an outlier in reserving the right to revalue assets at any time, without waiting for a payment trigger.
The Bottom Line
Isolated blowups—like the recent MFS, First Brands, or Tricolor situations—are standard late-cycle hygiene. When the era of zero-interest-rate liquidity ended, the tide went out, and the naked swimmers were exposed. This uncovers bad actors and poor business models, but it is a localized cleansing mechanism, not a macroeconomic contagion event.
The current situation looks less like a 2008-style systemic crisis (for now) and more like a healthy repricing of risk that got stretched during years of easy money and AI hype.
But the cadence is undeniable and accelerating — from two bankruptcies in fall 2025, to a UK insolvency, to five major fund managers restricting redemptions within a six-week window, to a major bank preemptively cutting collateral values.
Private credit is one domino, that one domino alone will not lead to a crisis. But if we get into a scenario where more than one domino starts falling simultaneously, then that could spell trouble.
In the short term, the real danger would be if a recession hits while redemption pressures are high — that’s when the lack of liquidity in private markets becomes truly problematic.
“Liquidity never matters until it matters.”
Private Credit is too small to trigger a 2008 like crisis (yet):
Software-driven distress is fundamentally different from housing-driven distress. Housing in 2008 was the collateral underpinning trillions in leveraged debt held by systemically critical institutions. A software company blowing up just doesn’t have that same cascade effect — there’s no physical asset class depreciating across the board dragging down balance sheets everywhere simultaneously. And software has shown remarkable resilience in repricing and recovering. The AI infrastructure buildout, despite the skepticism, is still ongoing.
Private credit at $1.8-$3 trillion sounds massive, but when you put it in context of other asset classes, it’s still a relatively contained slice of the financial system.
More importantly, it’s largely held by institutional investors, pension funds, and sophisticated allocators who know it’s illiquid. There’s no retail depositor equivalent who can spark a panic-driven bank run overnight. That’s a crucial structural difference from 2008.
A Risk For the Future:
The risk isn’t really today — it’s the trajectory. Private credit doubling again to $5-6 trillion while becoming more intertwined with insurance companies and retail “democratized” investment products changes that calculus meaningfully.
In the long term, regulation could prevent us from seeing another 2008 like crisis but Regulation tends to lag the risk cycle by about one full crisis.
Borrowed Conviction Rarely Works
Past performance is no guarantee of future results.
The ideas discussed in this article should not be constituted as investment advice.
I reserve the right to change my mind if the facts change.
Disclosure: We own positions in some/all of the tickers mentioned in this article