These People Are Not Investors

A rant about $3.5 trillion in private credit, the dealmakers who deployed it, and why I’ll be waiting with a vulture’s patience when the music stops.

I had just turned 13 years old when Bear Stearns collapsed.

I remember my uncle needing to peel out of my birthday dinner at the Pine Creek Cookhouse to take a call.

I ate elk.

I didn’t know what a mortgage-backed security was. I didn’t know what a tranche was. I didn’t know what “synthetic CDO” meant, and frankly, neither did most of the people selling them. What I did know was that something very bad had happened, and the adults on TV seemed scared, and that was new.

Then, a few years later, The Big Short came out. I was a teenager. And that movie did something to my brain that no AP Economics class ever could — it made me want to understand the incentives. Not the products. Not the math. The incentives. Why did the people at the banks do what they did? What were they actually paid to do? And how could an entire system be so obviously, catastrophically broken while everyone inside it kept collecting bonuses and telling each other how smart they were?

The answer, as it turns out, was simple: they were paid to do deals. Not to be right. Not to assess risk honestly. Not to think. To do deals. Volume. Throughput. Close it, book it, move on.

And here’s the thing that’s laughable: we’re doing it again. We’ve been doing it. Different product, same brain disease.

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The Numbers Are Staggering

The global private credit market hit $3.5 trillion in assets under management by the end of 2024 — up 17% year-over-year. Morgan Stanley projects it could reach $5 trillion by 2029. In 2024 alone, private credit lenders deployed nearly $593 billion of fresh capital, up 78% from the prior year.

Let me say that again. They deployed almost $600 billion in a single year, up 78%. Into an economy where the broadly syndicated loan market was wide open and actively undercutting them on price. They didn’t slow down. They sped up.

Now, layer on top of that the private equity universe — roughly $8-9 trillion in global AUM across all strategies — much of which is financed by these same private credit lenders, and you start to get a picture of the scale of capital being put to work by people whose entire career incentive is to... put capital to work.

Not to find the best risk-adjusted return. Not to preserve capital. To deploy it. Because that’s how they get paid. Management fees on committed capital. Origination fees. Transaction fees. The money is made in the doing, not in the being right.

These are not investors. They are dealmakers. And there is a difference.

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The PIK Problem (Or: How to Pretend Your Borrowers Aren’t Drowning)

Here’s where it gets fun.

Payment-in-kind — PIK — is when a borrower can’t pay you cash interest, so instead of, you know, paying you, they just add the interest to the loan balance. Your loan gets bigger. You book the “income.” Everyone pretends this is fine.

As of Q1 2025, 11% of investments valued by Lincoln International included some PIK interest. More than half of those had no PIK at underwriting — meaning the borrower was fine when they took the loan, and now they’re not. If you count those amendments as what they actually are — a borrower that would have defaulted if not for this accounting Band-Aid — you get a “shadow default rate” closer to 6%. That’s roughly triple the 2.1% headline default rate that the rating agencies report.

Nearly 20% of private credit loan documents now include PIK flexibility. This was historically a feature reserved for mezzanine and distressed debt. It’s now showing up in senior secured loans. First lien. The stuff that’s supposed to be safe.

Meanwhile, BDCs — the publicly traded vehicles that are retail investors’ main access point to private credit — have to distribute at least 90% of their taxable income, which includes PIK income they never actually received in cash. So they’re paying dividends on income that is, in many cases, a fiction. An IOU stapled to another IOU, distributed as yield to retirees who think they own something conservative.

The Cliffwater BDC Index was down about 6.6% in 2025 while the S&P returned 18%. But sure, “equity-like returns with bond-like risk.” That’s what they keep telling you.

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The SaaS Apocalypse Is Here

Here’s what nobody in private credit wants to talk about: a huge portion of their loan books is to software companies. SaaS businesses. Companies valued on revenue multiples and “annual recurring revenue” that, it turns out, isn’t quite so recurring when the economy actually slows down.

These firms underwrote loans against businesses at enterprise values that assumed perpetual growth. The loan-to-value ratios look fine — if you believe the value. But at a fire sale? In a real distress scenario? You’d be lucky to get 50 cents on the dollar for some of these assets. Software doesn’t have factories. It doesn’t have inventory you can liquidate. It has code, some employees who will leave, and a customer base that is month-to-month in practice regardless of what the contract says.

And it’s not just software. It’s everywhere. The underwriting standards across this entire $3.5 trillion complex have been degrading for years because the competitive dynamic between private credit lenders, and between private credit and the broadly syndicated loan market, means everyone is racing to the bottom to win the next deal. Lenders are bringing margins as low as 4.5% and handing out PIK flexibility like candy because they need to put the money to work. That’s the gig. That’s the incentive structure.

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Private Equity: The Roll-Up Industrial Complex

And let’s not pretend private equity is any better. These are the sponsors that private credit lenders are financing, after all.

The PE playbook in 2025 is almost comically simple. It goes like this:

Step 1: Identify a fragmented industry. Veterinary clinics. Dermatology practices. Car washes. HVAC companies. Literally anything with a lot of small operators.

Step 2: Buy a “platform” company at 8-10x EBITDA.

Step 3: Start bolting on smaller acquisitions at 4-6x. Add-on deal volume has increased over 1,000% since 2003. In 2023, there were 5,769 add-on deals, with nearly half representing the fourth or later acquisition by the buyer.

Step 4: Fire some people. Hire McKinsey. Raise prices.

Step 5: Tell your LPs the multiple expansion from 5x to 9x represents “value creation.”

Step 6: Sell it to the next PE firm at an even higher multiple, financed by — you guessed it — private credit.

That’s it. That’s the genius. The “value add” is financial engineering and market power. Buy stuff, consolidate it, raise prices on the consumer, load it with debt, and flip it. Companies bought by private equity firms are 10 times more likely to go bankrupt than their peers (Source: Ayash & Rastad (2021)). But the GPs got their 2-and-20, so who cares?

The FTC and DOJ have started sniffing around these roll-up strategies — they’ve launched public inquiries into serial acquisitions across healthcare, technology, and consumer markets. But I wouldn’t hold my breath for meaningful enforcement. The financial lobby is very good at its job, which is the one job in finance that actually requires intelligence.

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They Are Dealmakers, Not Investors

I want to be very precise about what I’m saying here, because it matters.

I am not saying the economy is about to collapse. The economy is broadly fine. Consumers are spending. Employment is solid enough. Corporate earnings for the S&P 500 are healthy.

What I am saying is that within this $3.5 trillion private credit complex and the private equity ecosystem it finances, you have an enormous amount of capital deployed by people who are paid to deploy capital. Not paid to have a view. Not paid to be right. Not paid to say “this deal doesn’t make sense at this price.” Paid to close.

They are trained from analyst programs upward to do the same exact thing. Build the model. Get the deal done. Book the fee. They have zero investment intelligence because investment intelligence is not what the machine selects for. It selects for throughput.

They’re yield monkeys. They’re selling “equity-like returns” while conveniently omitting the equity-like risk. And when the next recession hits, all of this is going to blow up. Not all of it at once, maybe. But the weakest 20-30% of these loan books? Cooked. The PIK-dependent borrowers that have been kicking the can? Done. The PE-backed roll-ups running at 6-7x leverage with declining organic revenue? Finished.

And it’ll be one generation removed from the last time this happened. Their parents watched it. Some of their parents did it. And here they are, heads down, crunching models, not looking up, doing the exact same thing with different acronyms.

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I Am Not Shorting This (But I Am Watching)

Here’s the uncomfortable truth: it does not pay to be needlessly bearish on this stuff.

I learned that lesson. We all watched what happened with SVB — the contrarians were right, eventually, but the timing was brutal. And these private credit firms and PE shops have one skill that actual investors often lack: survival. They are cockroaches. They will find a way to extend, amend, restructure, PIK their way through another quarter. They will lobby for regulatory relief. They will mark their books at fantasy valuations for as long as they possibly can.

I have zero intention of jumping in and shorting any of this. Not ARCC, not BX, not OWL, none of them. They’ll figure out a way to stay alive for another day. They always do.

But the math doesn’t lie:

• $3.5 trillion deployed by people whose incentive is volume, not accuracy

• A shadow default rate of ~6% that’s triple the headline number

• PIK usage at ~20% of loan documents — levels that would have been considered distressed-only territory five years ago

• $593 billion deployed in a single year, up 78%, while underwriting standards erode

• BDCs down 6.6% in 2025 versus 18% for the S&P, with the largest (ARCC) trading at a 4% discount to NAV (edited this number that was wrong)

Sound familiar? Different instrument, same human nature.

I was 13 in 2008. I’m one generation removed from the GFC. And here’s my prediction: when this cycle finally turns, the government will step in, the bailouts will flow, and the people who made the worst loans will collect their bonuses and go on vacation. Because that’s what happened last time, and there is zero structural reason to believe anything has changed.

The Dodd-Frank regulations after 2008 were supposed to fix the banks. And in a way, they did — by pushing all the risk off bank balance sheets and into the arms of private credit funds and BDCs that are even less regulated and even less transparent. We didn’t fix the problem. We just moved it. And we made it bigger.

When it all happens we are going to hear about “black swans” and how underwriters couldn’t have possibly been expected to model out the prices of the assets borrowed against scenarios where the asset values actually matter.

We are going to hear that that the liquidation values of software IP in a default scenario were expected to be much higher.

We are going to be fed the narrative that nobody is to blame for the calamity.

But somewhere in the wreckage — whenever it comes — there will be assets trading at real distress prices. Good businesses thrown out with the bathwater. Quality companies trading at 4x earnings because their PE-backed competitor just blew up and dragged the whole sector multiple down.

For now, I’m just sitting here.

Watching. Waiting. Taking notes.

The vultures wait.

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This is not financial advice. I hold no short positions in any BDC, private credit vehicle, or private equity firm mentioned above. I am merely a guy who watched The Big Short at an impressionable age and never quite got over it.

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