The Smart Money Is the Subprime This Time

Every year a new reason the exits didn’t come, and it’s never them.

I keep having the same conversation, and it keeps getting worse.

I am not in the business. I just meet people and talk to them — the ones who run this money and know how it actually works, and the ones who know better, who have looked at the same thing I have and cannot talk themselves out of what they see. I have done a lot of that this year, and you would think all that listening would calm a person down, hand him the reassuring detail the headlines leave out. It has gone the other way. Every conversation gives me one more piece, the pieces keep fitting the same way, and somewhere this year I stopped being surprised by them and started being shaken.

Here is the thing the believers will not say and the ones who know better say first: the money was supposed to be back by now, it is not back, and they have spent four years explaining why that is somebody else’s fault.

In 2022 and 2023 it was the multiples. Rates went up, the math went bad, you could not sell a company for what your own model said it was worth, so you held it and called that discipline. Then it was Lina Khan, who would not let anybody buy anything — a good story, because she was a popular villain. Then Khan was gone and Trump was in, and Trump was going to be the answer: animal spirits, deregulation, the exit window finally thrown open. Then 2025 came and the window stayed shut, and now it was the tariffs, the uncertainty, nobody can price a deal in a trade war. Four years. Four reasons. Every one of them outside the building. 32,000 PE-backed companies are waiting to be sold — 3.6 trillion dollars.

They walked into 2026 under clear skies. They thought.

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What came instead was the criticism, and it came harder than anyone inside was ready for. And the men who built it through the easy years did a strange thing. They did not argue. They performed. They went on television and said the words — nothing is wrong, the worst case is not so bad, it is sensationalized, the system is sound — in the bright, even voice of a man who has decided that conviction is a substitute for being right. Listen to Jon Gray sometime. He does not sound like an investor anymore. He sounds like he is running for something.

I have sat across from enough of them to know the face. Salinger had a word for it, and I have caught myself using it in my head in these meetings, which is not a word a grown man should be reaching for and is somehow the only one that fits. Phony. The whole performance is phony, and every conversation hands me one more reason it is worse than I thought the week before.

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To understand why they cannot put the story down, you have to remember how good the story was.

For the better part of fifteen years it was the easiest money anyone ever made, and not just in the lending — in the buyouts most of all. Rates sat on the floor and the price of everything went up, so you bought a company with a little of your own cash and a great deal of borrowed money, and a few years later you sold it to the next firm at a higher multiple than you paid, or you refinanced the loan cheaper and paid yourself a dividend while you waited. The borrowed money was the whole engine, and the leverage was easy to defend, because you were always going to be able to sell.

The lending grew up inside that, and for a while it looked like a miracle. Direct lending, they called it — skip the bank, lend straight to the company the buyout shop just bought. The yields were fat and the losses were almost nothing, because in a market where anything can be sold or refinanced, nothing ever actually has to go bad; a loan that should have defaulted got rescued by the next deal instead. For a decade the numbers came back beautiful, equity returns with the manners of debt, and those numbers are exactly what they hold up now, in 2026, as proof that everything is still fine.

And it welded the two halves into one. The buyout firm and the credit firm stopped being separate companies. The credit lends the money that buys the business; the equity owns the business the credit is lending against; more and more it is the same firm in both chairs, and behind both chairs now sits an insurance company it went out and bought so it would never have to ask anyone for the money again. We still say private equity. Private equity is the old room at the back. Apollo is Athene. Blackstone is a lender that happens to own some office towers, and when one of them goes on television to defend private equity, what he is defending is the credit, because the credit is the business now.

Then 2022 came and the floor moved. Rates went up, the prices stopped rising, the buyers went home, and the one assumption the whole machine was poured on top of — that you could always sell, that you could always refinance — stopped being true without anyone announcing it. The leverage that was so easy to justify while the exit was a sure thing is still sitting on every one of those companies. The exit is not.

And it is not one layer of leverage.

1. The portfolio company borrows to fund the acquisition.

2. The fund may have a bridge loan against the investment.

3. Then there is a NAV loan against the fund.

4. The co-invest is often levered itself.

5. The LPs are levered.

6. The people inside the firm are levered.

Around the edges there are liquidity lines where a man borrows against the distributions he expects to receive, or the bonus he has already mentally spent, so he can keep making the next capital call into the thing that is supposed to pay him back.

It is leverage on leverage on leverage, each layer justified by the layer beneath it, and all of it depends on the same assumption: the V in the Loan-to-Value is real. When you stack all of the layers of leverage built into this asset class, 40-50% LTV is really 80-90%. In other words, there is 5-10x leverage on excel spreadsheet Level 3 marks.

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A man who knows this for a living walked me through it slowly, the way you explain something to a child. When the firm tells its investors how the fund is doing, the return counts the PIK — interest the company never actually pays in cash, interest it just piles onto the loan and promises to deal with later. On paper that is income. Show me the cash, I said. Show me the collections, while the refinancing window is still open and the pretending still works. He smiled, because here is the move: when the same firm turns around and reports how levered the book is, the PIK quietly walks out of the math. Six turns of leverage becomes eight the moment you put the unpaid interest back. The same interest that pads the return they advertise vanishes from the leverage they admit to, depending on which number they need you looking at. And all of it sits on an EBITDA they have adjusted like a plastic surgeon — EBITDA before the bad quarter, EBITDA before the thing that went wrong, EBITDA if you squint.

I asked him how many of the thirty companies in a typical portfolio were genuinely fine. He thought about it longer than I wanted him to. “Two,” he said. The other twenty-eight are being carried, covering what they owe maybe one time over, and one of them is going to need money it does not have, soon. That is the credit the whole thing runs on, and it is what sits under the insurance policy middle America was told is the safe choice.

And nobody who can see it can afford to say it. The big firms run the club deals — a few sponsors split up the equity and bring the debt — and a lot of that debt comes from smaller private-credit shops on the outside who would do nearly anything to be in the room. So they do nearly anything. They sign documents they do not like, fund draws they should refuse, look at the mark and say nothing, because the day a man on the outside stands up and insists on his sacred rights, refuses to fund, fights the sponsor when the collateral starts walking out the back door, is the day he stops getting the call about the next deal, and the next deal is his whole business. The sponsor knows this. So when the company needs cash the sponsor takes it — moves the good collateral into a box the outside lenders cannot reach, borrows against it again, sends the money up to the equity as a dividend, and leaves the lender who was promised protection holding a thinner claim than he came in with. There is a phrase for it now, creditor-on-creditor violence, which is a bad phrase, because it sounds like a fight between equals. It is not a fight. The worst of it, the part that should have ended the whole arrangement years ago, is that the sponsor doing the taking and the biggest lender at the table are now, more and more, the same firm.

If the men on the outside cannot afford to tell the truth, the men on the inside can afford it even less. There is nothing new in insiders betting their own money — three hundred years ago the directors of the South Sea Company were ruined by the thing they built, and Parliament seized their estates to pay the public back. What these men have done is narrower: they have borrowed against the house to keep buying into funds they can no longer sell out of.

At Apollo, at Blackstone, at all of them, once you reach a certain level you are not allowed to just run the fund. You have to be in it — two percent of every dollar you put to work, your own money alongside the investors’. Eat your own cooking, they call it, and for a long time it cost nothing, because the funds were small and the money came back. The funds are not small now. Two percent of what these people deploy is half a million, a million dollars a year, after a tax bill that New York and Connecticut have already cut in half. They do not have it lying around. So they borrow it — a margin loan against the portfolio, a second mortgage on the house in Greenwich — to make the capital calls into the funds they are themselves out on the road raising. It is a wonderful arrangement for exactly as long as the money comes back. The money is not coming back. There are funds in their sixth year that have not returned a single dollar, and the men who run them are still calling capital, still wiring their own borrowed money in, into companies a number of which they already know, privately, are zeroes.

Why would a man keep writing checks into a grave? Because what is good for his firm and what is true about his fund stopped being the same thing a while ago. The firm needs the marks to hold together just long enough to raise the next fund, so you carry the dying one a little further, and on the day you finally have to mark it down you turn and point at the one beside it. XIII was a tough vintage. XIV looks strong. XV is the one — get in on XV. It is the same sentence every time, in the same voice: the next fund will fix what the last one did, the way Trump was going to fix it, the way the tariffs were the reason it broke. It is always the next thing as long as it can be.

And while all of it turns, the firm takes its cut. It charges to manage the equity and to manage the credit, it keeps a piece of the wins, and under that there is a toll on everything that moves — originating the loan, financing it, the lawyers and the auditors and the bankers, the buying and the selling and the refinancing — and it adds up, last I counted, to something like three-quarters of a trillion dollars a year. That is not the return on an investment. It is a salary, paid to a few hundred thousand people, and it works only for as long as nothing breaks.

Something is breaking.

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You will know it has finished breaking when the men who built it turn up on Bloomberg and CNBC to explain, gravely, that unless somebody does something we are looking at ten, twelve, fourteen percent unemployment. When you hear it, remember they mortgaged their own homes on the certainty that someone would always be there to catch them.

I am not sure anyone will be, and that is what makes this feel less like 2008 than like 1929.

The ordinary person should care, and not because anyone is asking him to feel sorry for Greenwich. He never got the upside — fifteen years of it went over his head — and he is going to get the bill anyway: the layoffs that come after the credit goes, the cost of propping up an insurance company he was told was the safe choice, the pension he does not manage and was never asked about, the one that has been quietly packed with these same funds. He paid in, and he gets the loss anyway. That is most of the last fifteen years right there.

But the shape of the loss is different this time. In 2008 it started at the bottom, with a family and a foreclosure sign, and the rescue traveled up from there to the banks that had it coming, and there was a face on the misery you could be made to feel something for. There is no such face this time. This time it starts at the top. It is the kid taken out of the private school over the summer because seventy-five thousand a year suddenly does not make sense. It is the margin call arriving for people who were certain margin calls happened to other, smaller men. 1929 wiped out the people at the top who had borrowed to get there and took the country down with them. 2008 wiped out the borrower and saved the lender. This one looks like 1929.

Which is why the rescue may not come. There is no family on the lawn this time. There is Greenwich, and I am not certain the country still has it in itself to bail out the richest and most pleased-with-themselves people in it when there is nobody sympathetic standing in front of them to justify it. They are counting on the save anyway, the way they always have, because in fifteen years not one of them has ever had to sit with the possibility that this time the reason is them.

And if it does come, the number will be one nobody is ready to say out loud, because this was never just the buyouts and the leveraged loans. The same cheap money and the same faith that you can always refinance went into the asset-based lending, the commercial mortgages, the houses people live in, the credit cards the whole country has been running its life on. There is no program large enough for all of that. You can only print it, and you cannot print a number that size without breaking the dollar it is printed in.

By the time the number is that big, it will be plain why it came and who it came for — three-quarters of a trillion a year, going to a few hundred thousand people — and a country does not stay one country once that is the thing everyone knows. The outcomes from here are wide and varied, and not one of them is good. For fifteen years these men have been certain the fault was always somebody else’s. This time it is theirs, and the people who never saw a dollar of the upside will pay for it anyway.

The music is still playing, but it will stop.

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Appendix:

Start with a company marked at 100.

At the company, there is 45 of debt.

So the sponsor says the deal is 45 percent levered, and in the narrowest possible sense that is true. That is what the portfolio company owes.

Then the fund borrows.

Maybe it is a subscription line. Maybe it is a bridge loan. Maybe it is a NAV loan. Maybe, at different points, it is all of them. Add another 10 to 15.

Now the stack is 55 to 60.

Then the co-invest is financed.

Add 5 to 10.

Now it is 60 to 70.

Then the LP is financed.

The LP borrows against commitments, against fund interests, against a private-markets portfolio that is supposed to be diversified and is, in practice, full of the same marks from the same years. Add another 10.

Now it is 70 to 80.

Then the people inside the firm borrow too.

They borrow to meet capital calls. They borrow against expected distributions. They borrow against carry. They borrow against the bonus they are supposed to get when the thing finally exits. Add another 5 to 10.

Now the true stack is 80 to 90 on an asset marked at 100.

Nobody reports it that way. They silo the leverage to make it work on paper.

1. The company lender sees company debt.

2. The fund lender sees fund NAV.

3. The co-invest lender sees a co-invest.

4. The LP lender sees fund interests.

5. The private banker sees a rich man with carry.

All of the debt is stacked on the same cash flows, and the same exit.

Now write the portfolio down 25 percent.

“Then plunges in the Southern waves,
Dipt over head and ears—in debt.”

— Jonathan Swift, The Bubble: A Poem (1721)