The Compound
It’s Only a Bubble If You Panic | TCAF 214
10/24/2025, 1:01:02 PM
Economic Summary
- Private credit has grown substantially but headline figures can be misleading; Moody's-derived estimates cited ~300bn but a more accurate usable figure discussed was ~96bn, representing only about 4% of the broader non-bank financial credit universe, implying limited immediate systemic risk tied solely to private credit.
- Dispersion of returns varies widely across alternatives: venture and growth equity show huge manager-driven dispersion, while direct lending is more diversified with many small loan positions, meaning single losses typically have minimal portfolio impact.
- Illiquidity and fund structures (gates, limited redemption terms) make private funds resistant to run-style panics but also prevent investors from rapidly de-risking, which can exacerbate losses during a recession or credit cycle.
- Private equity faces a 'DPI' (distributions to paid-in) problem where firms are holding assets and not returning capital, creating a clog in realizations; acquisitions made in 2021 at high valuations increase downside risk for both private equity and connected credit.
- Banks like JPMorgan (JPM) and Wells Fargo (WFC) are exposed indirectly by lending to private credit providers; this intermediary role increases interconnectedness but does not necessarily equal direct balance-sheet loan losses for the banks.
Bullish
- Top private credit managers delivering double-digit returns.
- Secondaries present buying opportunities amid distressed private-assets selling.
- Private credit offers an illiquidity premium versus public credit.
Bearish
- Rapid inflows risk deteriorating underwriting and lower future returns.
- Illiquidity in private funds prevents quick exits, amplifying downturn losses.
- Private equity asset clogging (low DPI) may suppress distributions and liquidity.
Bullish tickers
BXBREITHYG
Bearish tickers
WFCJPMBDCS
BX
Bullish
Blackstone's private credit and private equity reported strong recent gains and record assets, supporting a positive outlook.
Bearish
Competition and poor underwriting across the industry could pressure returns for alternative managers including Blackstone.
JPM
Bullish
Acting as a lender to private-credit firms can be a profitable franchise for JPMorgan through fees and lending spread capture.
Bearish
JPMorgan has indirect exposure by lending to private-credit lenders, increasing financial-intermediation risk.
WFC
Bullish
None provided in the transcript about Wells Fargo specifically.
Bearish
Wells Fargo was cited with sizable exposure (discussed as ~$60bn) to private debt firms, raising concerns about concentration risk.
HYG
Bullish
Public credit (e.g., HYG) offers liquidity that advisors can use to quickly de-risk client portfolios.
Bearish
Public high-yield markets face spread compression and credit-quality shifts as private credit absorbs riskier paper.
BREIT
Bullish
Gating mechanisms worked in past episodes to prevent forced sales, and BREIT continues trading after earlier stress cooled.
Bearish
Semi-liquid real estate vehicles faced gating and stress when redemption demands forced valuation pressure.
People mentioned
Ben CarlsonShanali BasakJosh BrownMichael BatnickJohnDuncanNicoleRobStan DruckenmillerJamie DimonMatt LevineMark LasryTony JamesDolly Parton