Private credit has been likened to subprime in 2007. Jeffrey Gundlach has called it the next big crisis, with “the same trappings as subprime mortgage repackaging in 2006”. The bankruptcies of Tricolor Holdings and First Brands Group have prompted earnest essays about looking under the hood. But the mechanism in the argument is misplaced – it is looking at the wrong floor.
What made the Bear Stearns hedge funds catastrophic in 2007 was leverage of an order that no longer exists in the comparable corner of today’s market. The Enhanced Leverage Fund was geared roughly ten to one against subprime equity tranches; when the underlying ticked down, the fund was wiped out, lenders pulled their repo lines, and the parent absorbed the losses. Each link in that chain has been weakened. Registered private-credit vehicles cap leverage at 1.5 to 2 times under 1940-Act rules. Bank exposure to non-bank lenders carries capital charges. Funding has shifted from short-term repo to lock-up structures with quarterly gates. Even severe losses cannot replicate the 2008 transmission.
Yet the parallels are not entirely unfounded. It is meaningful that Jamie Dimon is warning of cockroaches in the credit markets now, just as he warned in 2007 of a freeze taking hold in the debt markets. That earlier warning, in retrospect, foreshadowed the credit crunch. The freeze was the symptom of overinvestment and a material slowdown in a once-hot asset category. The same is true today, with an important caveat. Just as the failure of hedge funds affiliated with Bear Stearns in 2007 indicated rot within subprime assets, the increasing delinquency rate among private credit lenders is reflective of an unsavory environment elsewhere. In short, the disease does not live in private credit. It lives one floor up, in the PE portfolios it was lent against.
Direct lending to mid-market companies is, overwhelmingly, concentrated in the buyouts of PE firms. Delinquencies, PIK toggles, and amend-and-extend exercises are not, in the first instance, evidence of bad lending. They are evidence of distress in businesses. What is clear is that the pool of capital flowing into private credit has peaked. That means sponsors will have less debt to underwrite buyouts, forcing a culling of the PE sector itself. This is perhaps unsurprising - industry participants have been forthcoming that the number of PE funds now outnumbers the count of McDonald’s locations in America.
Crucially, private-credit losses will not amount to zeros. When a portfolio company breaches its covenants, the modal outcome is a workout in which the lender takes equity. Loans get nursed, companies reorganized, and headline default rates kept low enough to defend at the next pension-board meeting. This explains the willingness of Boaz Weinstein to acquire shares in Blue Owl’s non-traded BDCs at a discount of approximately one-third. What will be less defensible is the valuation of the equity stub the sponsor still carries at par on the next page of the same report that, in theory, should be reflecting a pari passu reduction of greater magnitude.
To be sure, PE will not lead the next downturn. The forthcoming wave of public listings assures us it will be a stock-market affair. Instead, the PE sector is certain to drive the second leg downward. Public comparables will reset, sector by sector. Pension valuation committees will look at PE marks struck against EBITDA multiples six months stale and ask the obvious question. The marks will come down. If LPs come to question a valuation model based on EBITDA — a metric unused in the public markets — the write-downs will be massive.
The mistake of 2008 was thinking credit problems would stay contained in credit. The mistake of 2026 may be the inverse: thinking the credit signal is the whole story. Private credit’s wobbles are not the crisis. They are the early read on a PE valuation problem; nobody, on either side of the loan, has any incentive to mark honestly. Crises rarely repeat their entrance. They prefer to use the door nobody is watching, on a floor nobody thought to check.
Charles Lister Smith, PhD
June 3, 2026