Private Credit And A Crisis That Could Go Public

Private credit isn't too hard to understand.  Up until the Great Financial Crisis in 2008 through 2011, if you wanted a loan you went to a bank.  That included companies that wanted money to expand their business.  But after the GFC brought all sorts of losses, layoffs, and new regulations to commercial banking, getting a loan from a bank was not nearly as simple as it was before the crisis.  

Enter the private credit industry.  If a bank didn't want to provide you with a loan then you could turn to these private lenders.  They would charge more interest than the bank would but they would most likely provide the loan.

Private credit has expanded wildly over the last 15 years, from somewhere around $500 billion to approaching $2 trillion.  No one really knows for sure, the markets are not well publicized because it is a private business.  But we do know that private credit is involved in all sorts of risky lending, including all sorts of private equity firms.  

These companies might be overleveraged into poorly managed, slow or no growth industries like car washes, restaurant chains, HVAC rollups or dental rollups, all sorts of B2B businesses that may or may not weather a recession well.  We also know that private equity (and thus private credit) is loaded with all sorts of niche software companies, many of which are not worth nearly as much as the marks the private equity shops are assigning them.  Some of these firms are actually worth less than zero.

Another problem for private credit is they have investments, at a massive scale, into the formation of the AI industry in the United States.  Sometimes that takes the form of financing data center buildout, or the improvement of existing data centers such as their water supplies, HVAC upgrades, etc.  Other times it's a direct lend for the upgraded GPU chips going into the data center.  But any and all debt tied to data centers can now be considered a huge risk, as the US AI industry faces a number of problems...

First, we've all seen the NIMBY push against data centers, more and more Americans are protesting the construction of these technological behemoths in their regions.  Many counties, cities, and states have placed moratoriums on any new construction permits of data centers.  Second, data centers are running into water and electrical access that will physically not allow the data center to come online.  Third, it's becoming obvious that the investment of over $2 trillion into the AI complex will never be able to be repaid by all the free users of AI, the number of corporate, government and consumer accounts will not even begin to repay the money that has been poured into the industry.  Finally, we see the Chinese AI companies coming in fast to compete with the US-based AI complex, offering prices that are sometimes 90% off of the US prices.

When added all together we can see that private credit is probably facing some massive losses.  Private equity has made some seriously irresponsible loans into a lot of B2b and consumer businesses, most of which are not built to withstand any setbacks.  And the lending into the AI complex might be even more scary in the short-term.  The problem with the AI loans is not just that the debts cannot be repaid, but that the AI builders are continuing to look for ever more financing today, in late 2026, and even more debt will be required in the planning for AI projects in 2027.  

Private credit has utilized all sorts of funding sources themselves, including trusts, endowments, retirement funds, family offices, and traditional banks.  All of these big investors are expecting a certain rate of return for their investments (which in turn the private credit firms lent out their customers) - good chance that not only will these loans not be providing any rate of return but they may suffer big haircuts, and that's going to be the real question for private credit.  Will the losses be 20% or 30%, or will it be more horrendous, like 70% losses.

Unlike Las Vegas, the disaster in private credit will not remain in private credit.  The losses will spill out to the rest of society in a variety of ways, potentially affecting retirees, charities, future investments, tax receipts, in many ways that will be unforeseen.