by kentonv | 2026-03-12 14:38:37+00:00
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...