I remember standing in the lobby of a swanky hotel on Orchard Road, watching a man who owned three factories and a yacht struggle to keep his hands from shaking. He had just received a notice that his investment in a high-profile private credit fund was "gated." He could see his millions on the screen, but he couldn't touch them. He thought he was being the smartest guy in the room by lending money to medium-sized businesses for a juicy 12% return while the rest of the world was struggling with 4%. He felt like a king until he realized he was actually just a pawn in a game of shadow banking. Most people think private credit is a safer, more exclusive version of a bank loan. It is not. You are essentially acting as a lender of last resort for companies that the big banks are too smart to touch.
Private credit is basically a neighborhood loan shark operation dressed up in a bespoke suit. Instead of a guy named "Knuckles" following you around, it is a fund manager in a glass office. The structure is simple: you give your money to a fund, and they lend it to companies that are too small, too risky, or too weird for a traditional bank. Because these companies are desperate, they agree to pay high interest rates. You get a slice of that interest, and the fund manager takes a fat fee. It sounds like a win-win. But here is the catch that the brochure hides in the fine print: banks have thousands of employees and decades of data to figure out who will pay them back. Your fund manager has a small team and a lot of pressure to put your money to work as fast as possible.
A public bank is a massive Olympic-sized pool with lifeguards, clear water, and strict rules. Private credit is a secluded pond in the woods. It looks peaceful, and the water feels warmer, but you have no idea how deep the mud is at the bottom. As long as the weather is nice, everyone enjoys the swim. But the moment the economy cools down, the pond starts to dry up. Suddenly, you realize that the "liquidity" you were promised was an illusion. You can jump into the pond easily, but trying to get out when everyone else is scrambling for the shore is impossible. You are stuck in the mud while the "lifeguards" are busy protecting their own fees.
I spent years in a London hedge fund watching how these deals are baked. I have seen managers get so desperate to hit their targets that they lend money to businesses that are effectively zombies. These are companies that only exist to pay the interest on their previous loans. It is a giant game of "keep-away" with reality. I once sat through a pitch where a manager bragged about his 0% default rate. I almost laughed out loud. A 0% default rate in private lending does not mean you are a genius; it means you are hiding the bodies in the basement. You are probably extending more credit to failing borrowers just so they do not officially go bust on your watch.
The biggest lie you are told is that you are earning an "illiquidity premium." The industry wants you to believe that you are getting extra money simply because you agreed to lock your cash away. But in reality, you are often taking on massive credit risk without the transparency of the public markets. In the stock market, if a company fails, you see the price drop in real-time. In private credit, the manager tells you the value is whatever they say it is until the day the whole thing collapses. You are flying blind, trusting a pilot who gets paid more if they pretend there is no turbulence.
I advise you to look at who is actually borrowing your money. If the borrower is a private-equity-backed company that is already buried in debt, you are not a sophisticated investor. You are the "exit liquidity" for a much bigger player. I have made this mistake myself in the past, thinking I was getting a "secured" deal only to find out that there were five other lenders ahead of me in line during the bankruptcy proceedings. I ended up with pennies on the dollar while the "smart money" walked away with the assets.
You need to stop focusing on the monthly distribution and start looking at the "PIK" income. That stands for "Payment-In-Kind." It is a fancy way of saying the borrower could not afford to pay you in cash, so they just gave you more IOUs. If your fund has a lot of PIK income, it means you are being paid with monopoly money while the fund manager collects their management fee in real cash. Does that sound like a fair trade to you?
Are you holding this fund because you believe in the resilience of the mid-market economy, or are you just addicted to the steady 10% line on your statement? If the major banks are pulling back from these companies, why do you think you know better? The next time you see a "guaranteed" yield in the private space, ask yourself: if this was such a safe bet, why did they have to come to me to find the money?
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