If it’s not AI, will it be Private Capital Markets that trigger crisis?
Blain’s Morning Porridge Nov 20th, 2025 – If it’s not AI, will it be Private Capital Markets that trigger crisis?
“Private Capital Markets thrive because other markets are run by compliance and over-regulated.”
Markets are less fragile than we think. There are always people watching, waiting and ready to catch bargains. Some risks are in plain sight. But in Private Capital Markets they are hidden – which is why many market players believe the scale of losses might be hidden. Will Private Markets trigger the next crisis? I doubt it.
The markets appear to have survived Nvidia. The most valuable firm on the planet sold lots of chips! It expects to sell many, many more – to the same people who are funding each other to buy more chips! Hooray! (Confused, you will be.) The question, the market should be asking is: how many chips they will be selling the next quarter and the ones after that when the circularity finance bubble pops……?
There is a common theme to investment catastrophe movies – everyone will be looking in all the wrong places for what’s going to cause the crash. Except for the one outsider, the hero, who sees exactly where its coming from. Which is literally the script for The Big Short, the best investment movie ever, including the most gratuitous scene starring the wonderful Margot Robbie in cinematographic history. No one can explain CDOs as well as she can.
I reckon there is more than meets the eye to the hero of the Big Short, Michael Burry, apparently closing his hedge fund. Everyone knows the about to pop AI bubble is the end of everything because it’s so obvious and so predictable.
What if it’s not AI? What if AI is not the coming crisis. Some would like us to look elsewhere.
On the basis the market is always looking for something to worry about…. Interesting news yesterday was a Blackrock private credit CLO that has so underperformed that the world’s largest fund manager is deferring its own fees on the deal. The back-end higher risk tranches are stalled after cash flows were redirected to pay the senior tranches after the CLO failed collateralisation tests. To be fair, the underperforming deal is one of around 30 Blackrock CLOs, and the rest are performing well.
Yet, it still raises shades of Bear Stearns in 2007! Back then the suspension of payments on two Bear Stearns CDO became the first pebbles to tumble down the credit mountain in what became the 2008 Global Financial Crisis. Fears have a habit of multiplying, and thus panic about the collapse of everything seized the market.
Back then it was the realisation many mortgages were unpayable, and that because these had been levered through complexity and ploys like CMO squared and even cubed, concerns multiplied that losses would trigger a contagious global bank run. Sure, enough it happened, and was only arrested by coordinated Central Bank/Treasury actions including bailouts following the collapse of Lehman Brothers. Interesting times indeed. It took about a year from the Bear Stearns wobble till Lehman died – and all through that period markets became increasing fractured, troubled and uncertain – much like today.
Aside from AI, Private Credit is now at the top of the threat board. The concern is a general deterioration in credit conditions means corporate deals, like the ones in the Blackrock CLO, have underperformed and will trigger losses and crisis. Again, there is leverage at play.
The rising concern on credit quality is reinforced by a string of corporate failures – like Tricolour and First Brands. There are a slew of companies in the Blackrock CDO in crisis: a company specialising in home improvements, an educational-software firm, and Private Equity vehicle that’s been unable to shift portfolio companies and is now drowning in debt.
That all backs up the noise around declining credit conditions across the economy (mainly in the US), and how these are about to impact markets… Hence the rising concerns that the next vector of a global financial crisis isn’t just the AI Bubble in plain sight, but the hidden credit crisis developing within the largely hidden, non-transparent and somewhat sleight-of-hand private credit markets…
Or maybe not…
The thing about private credit is its private. We don’t know what is going on internally, so we suspect the worst. Although we don’t know what’s occurring – we can make some educated guesses.
First up is – if there is a Private Credit crisis it will be very different to previous credit wobbles. This time it won’t be banks that bear the full cost – yes, banks are providing Alts Funds with leverage on leverage, but the losses will largely filter down to the institutional investment sector, and into retail where recently we’ve seen well-dodgy private credit constructs sold to retail as “opportunity.”
A full-on bank run on direct credit losses is always a threat, but risk has largely been transferred out of banking (where banks die swiftly from liquidity events) into the investment sector, where there is time to work through losses.
Although there is much rumour and sigh about rising losses and underperforming deals in private credit, that is not showing up in market prices. Anecdotally, (for that is the only way to get information on the private capital markets), the big deals being done in private credit remain highly competitive, with potential buyers bidding them up. Rising credit concerns do not seem to be reflected in rising yields on new deals.
One reason it’s hard to tell what’s going on in Private Capital Markets is the lack of market liquidity – unlike stocks or public bonds, there are few prices to watch. There is a market liquidity problem in Private Credit – every deal is completely bespoke.
Unlike public corporate bond deals which are pretty cookie-cutter and sold on a public syndicated basis, private deals are arranged on a negotiated basis between lender and borrower and will contain all sort of esoteric provisions and clauses – the underlying complexity and provisions of any deal make them far more complex to subsequently sell in open markets. Specialist firms like Windshift Capital will seek to find buyers of seasoned deals, but it’s not a simple sale based on credit rating and outlook, yield and maturity – selling private credit deals is full DD on the firm, the deal, its structure, the legals, the market and the question – why are they selling?
And because each deal is discrete and diverse, it’s difficult to imagine what kind of all-encompassing credit event would cause the whole universe of the private credit market to implode. There are risks – a very high concentration of deals funding AI, data centre buildouts, chips etc. But private credit deals encompass everything from alchemy to zoology deals.
It might be that a couple of high-profile private credit events – big losses, a firm going down on a single bad deal – could become triggers of a wider credit wobble. That may happen and leave most private credit firms intact, even as it ravages the wider credit markets and impacts stock markets. Stranger things have happened.
There is a contagion risk – that a private credit manager must liquidate its entire portfolio because of losses in one sector, triggering perceived losses at other firms, but within closely held, and deftly managed Alts Funds, there is not the same concept of market-to-market risks as there is in banking. Firms still go bust on leverage though.
Private credit managers may actually be exploiting the current concerns, using the perception that lending volumes could fall to push for better pricing and stricter deal conditions and covenants. When borrowers fear access to markets might be constrained, is the time to be pushing up prices and enforcing stricter terms.
Prices don’t say a collapse is coming. And experience teaches that a collapse in Collateralised products does not mean every credit is about to explode. During the last crisis brave investors who stepped in to buy deeply discounted credit constructs got their money back. I suspect Private Capital may wobble but won’t fall over.
By because private capital markets are private – how will we ever know…. ?
Out of time, and back to the day job.
Bill Blain
CEO – Windshift Capital
Author – The Morning Porridge
Partner – Shard Capital
Special Advisor – Spitfire Strategic Capital