This Quietly Growing Market Could Be Trouble

Shah Gilani|December 6, 2024

I’ve been watching financial markets long enough to spot when something doesn’t add up.

Right now, there’s a $1.5 trillion elephant in the room that few people are talking about: private credit.

Let me explain…

Private equity firms – the people who buy companies using borrowed money – are finding themselves in a tight spot. Their usual exit strategy of taking companies public through IPOs has practically disappeared. Deal volumes have plummeted by half since late 2021.

These firms are sitting on companies they can’t sell, watching the clock tick on their investors’ money.

Enter private credit, their new favorite solution.

Think about this: In 2020, the private credit market was worth $1 trillion. Today? $1.5 trillion. And it’s projected to hit $2.8 trillion by 2028. That’s explosive growth.

“But isn’t this just normal business lending?” you might ask.

No. Here’s what’s concerning…

These private credit funds are lending money to companies that are already loaded with debt.

Imagine taking out a high-interest loan to pay off your existing high-interest loans – not exactly a winning financial strategy, right?

In August, the default rate in the private credit sector was 5%. With a $1.5 trillion market, we’re looking at $75 billion in troubled loans. And remember, this market is growing like wildfire.

What’s even more worrying is what private equity firms are doing to stay afloat.

They’re creating “continuation funds” – essentially new vehicles to hold onto companies they can’t sell.

They’re taking out loans against their entire portfolios (called NAV loans). They’re doing partial sales just to generate some cash flow.

This has “subprime mortgage” written all over it.

Each of these moves adds another layer of complexity – and risk – to an already opaque system.

Again… this capital comes with high interest rates, and it’s being piled onto companies that already have significant debt loads. With traditional banks stepping back from these risks, private credit funds are stepping in, often with less oversight and higher rates.

The regulatory response? Minimal at best… and not likely to get bigger in a pro-deregulation White House.

I’m not saying the private credit market will collapse tomorrow. But when a market grows this fast, with this much leverage, while traditional lenders are backing away, it’s worth paying very close attention.

As we head toward that projected $2.8 trillion market size in 2028, the question isn’t just whether private credit is too big to fail – it’s whether it’s too big to succeed.

The next few years will tell us if this financial innovation is truly sustainable or if we’re watching another bubble inflate in slow motion.

Either way, it’s a story that deserves far more attention than it’s getting.