Le Krach d’une Génération approche… (avec Vincent Strauss)

In 2008, a credit crisis caused the global economy to collapse. By 2026, while concerns about an AI bubble are widespread, a new credit-related danger is emerging in the shadows. Unlike a tech bubble, which primarily impacts investors exposed to that sector, a credit crisis can infect banks and, by ripple effect, everyone. Private credit, in its simplest form, refers to direct lending between parties without a traditional bank intermediary. This market has seen explosive growth, from approximately $46 billion globally in 2000 to $3.5 trillion today, a 76-fold increase in 25 years. This growth is driven by specialized funds like Apollo, Blackstone, and Ares. Investors have flocked to private credit because, with interest rates remaining abnormally low for an extended period, institutional investors sought higher returns than government bonds could offer. In France, the corporate debt market nearly doubled in one year, from 5.5 to 11.4 billion euros collected in 2025. Even life insurance policies in France now allocate a portion of savings to private credit due to the 2024 Green Industry Law. The allure of private debt lies in its high-interest rates, with investors in private credit funds potentially earning 8-12% annually. While this is more than traditional bank loans, the risk is also higher. Post-2008 financial regulations, such as Dodd-Frank, made risky loans more expensive for banks, creating a void that private credit aims to fill. Private credit offers flexibility and direct financing to the real economy, from SMEs to mid-sized companies. Terms are negotiated privately, allowing for simpler restructuring if a company faces difficulties, and lenders often have direct access to management. On paper, private credit offers high returns, diversification, and easier access for individuals. However, the rapid growth of this market raises concerns reminiscent of the 2007 subprime mortgage crisis, where banks lent to individuals who should not have borrowed. Similarities include the opacity of financial arrangements and artificial financial constructs that generate non-existent profits through valuation games that don't reflect market prices. This allows institutional investors to externalize partially fictitious capital gains and revenues, with their executives also benefiting from percentages of these fictitious incomes. A critical question is the solidity of these new private borrowers. BlackRock, the world's largest asset manager, recently limited withdrawals from one of its $26 billion private credit funds. When too many investors seek to withdraw simultaneously, funds activate "gates," or withdrawal caps, typically allowing a maximum of 5% of the total value per quarter. This prevents forced emergency asset sales at fire-sale prices, which would devalue the fund for all investors. If withdrawal requests exceed the cap, investors receive only a fraction of their request and may be placed on a waiting list. At BlackRock, requests reached 9.3%, nearly double the cap. Morgan Stanley saw 10.9% requests, with less than half honored, and Cliff Water had 14% requests, almost triple the cap on a $33 billion fund. This issue is not confined to American institutional investors. BNP Paribas recently set aside 190 million euros to cover losses from fraud in this market, impacting French savings. Cases like First Brands, an American auto parts supplier, highlight the risks. First Brands financed numerous acquisitions through private credit, securing loans with billions of dollars of invoices. However, a large portion of these invoices were fraudulent, fabricated by the founder, some even sold multiple times. The company ultimately went bankrupt, with an estimated loss of $2.3 billion, and the founder is accused of siphoning billions for personal use. Another scandal involved telecom entrepreneur Brambat, who created fake invoices and falsified email addresses. BlackRock's HPS subsidiary increased its exposure to $430 million, and BNP Paribas co-financed about half, but internal checks in mid-2025 revealed irregularities. Brambat ceased communication, his New York offices were found empty, and he filed for bankruptcy in August 2025. These are not isolated incidents; the list includes Renovo Tricolore and Blue Hall. Jamie Dimon, CEO of JP Morgan, warned that "when you see one cockroach, there are probably others." Jeffrey Gundlach, dubbed the "bond king," has been predicting for two years that the next financial crisis will stem from private credit. The lack of control in this $3.5 trillion market stems from its opacity. Unlike banks, which undergo continuous stress tests, public reporting, and capital reserve requirements (Basel III), private credit funds are exempt from these obligations. Each fund internally values its loans using its own models ("mark to model"). While this may work in normal times, it creates uncertainty about asset values when conditions deteriorate. The US Department of Justice has warned about "creative valuation practices," and the SEC has opened an investigation into the integrity of ratings in the sector. This regulatory vacuum has allowed frauds like First Brands and Brambat to flourish. Opacity is not the sole issue. Pitchbook data shows average loans for mid-sized companies carry 8.7-9.2% interest. This rate comprises a risk-free rate plus a 500-550 basis point risk premium. However, the MSCI World Index for developed market equities has yielded only 10% over the last 40 years, meaning debt, supposedly less risky than equities, offers similar return promises. Recent years have seen a lowering of quality standards for debtor companies, excessive financial leverage, and reduced collateral for transactions. Rising interest rates, lower economic activity, and weaker collateral create a precarious situation. A particularly risky segment is loans to Software-as-a-Service (SaaS) companies. SaaS generates predictable, recurring revenues, making it an attractive borrower. Loans to SaaS companies surged from over $8 billion in 2015 to over $500 billion by late 2025, representing 15-20% of the direct lending market. However, AI agents are replacing expensive SaaS tools at a fraction of the cost, leading to "creative destruction" at an accelerated pace. Software sector stocks plummeted 30% between October 2025 and February 2026, a phenomenon dubbed the "SaaS Apocalypse" by Jefferies investment bank. Private credit has also heavily financed data center construction, with nearly $200 billion in debt raised in 2025 for this segment alone. These data centers rely on the projected explosion of AI demand, but costs are massive, contracts uncertain, and competition fierce, making profitability far from guaranteed. Private credit is thus caught in a double bind: lending to companies destroyed by AI and to infrastructure whose profitability depends on an unproven promise. JP Morgan has already begun devaluing software loans held as collateral, acting proactively to mitigate potential losses. The problem extends beyond software. Private credit also finances private equity, specifically leveraged buyouts (LBOs). In an LBO, a fund borrows heavily to acquire a company, which then takes on debt to repay the fund. The fund reuses this cash to borrow and acquire more companies, creating a cycle of debt financing debt. LBO funds require flexible lenders capable of structuring complex deals quickly, making private credit a key financier. Some private credit funds themselves borrow from banks to amplify their returns. According to the Fed, bank commitments to private credit reached $95 billion in Q4 2024, a 12-fold increase in 10 years. Moody's estimates total bank exposure could be $300 billion today, with JP Morgan alone having $22.2 billion. When banks reduce their willingness to lend against these collateralized loans, the funds' borrowing capacity diminishes, leading to less leverage, fewer loans, and reduced liquidity in the system. When a company cannot pay interest in cash, it may negotiate a "payment in kind" (PIK) arrangement, effectively paying with more debt. This is a "shadow default," indicating a company's inability to service its debt. This practice is prevalent in private equity, where funds often act as bankers to their portfolio companies, offering PIK as a refinancing solution, which is inherently unhealthy. Among companies using PIK, 58% had "bad PIK," meaning it was an unplanned, in-course addition. The shadow default rate more than doubled in four years, from 2.5% in Q4 2021 to 6.4% in late 2025. While official default rates remain under 2%, including all forms of non-repayment, the real rate approaches 5%. The IMF found that about 40% of private credit borrowers spend more than they earn, up from 25% in 2021, explaining why some funds cannot return money. Despite being sold as semi-liquid, with quarterly 5% withdrawal windows, current demand levels could lead to waiting lists of 3-5 quarters. These gates, however, can fuel panic, creating a classic herd effect and a self-fulfilling vicious cycle. The US private credit default rate hit a record 9.2% in 2025, surpassing the 2024 record of 8.1%. This suggests an acceleration of exits, as investors prioritize being first out. Banks likely underestimate their private credit exposure, potentially closer to 10% of the American banking system, which is manageable but will impact private equity financing. Most of these financing funds for companies use variable rates, so rising interest rates have a double negative effect on their balance sheets and operating accounts. Furthermore, geopolitical risks, like a prolonged blockage of the Strait of Hormuz, could trigger a recession, causing private debt funds to "pop like champagne corks." To put this in perspective, private credit today significantly outweighs the subprime market of 2008. Moody's anticipates assets under management will approach $4 trillion by 2030. The larger the system, the more violent the impact of a correction. Despite these warnings, there are reasons not to expect the worst. Post-2008, regulators imposed Basel III, requiring banks to hold more capital reserves. While banks are exposed to $300 billion in private credit, they now have the reserves to absorb losses that banks in 2007 lacked. Jim Grant, a high-level financial analyst, estimates potential losses for the US financial system around $1 trillion, a significant sum but less impactful today due to inflation. Defaults don't always mean total loss. In 2025, 6 out of 8 major bankruptcies resulted in full repayment for lenders. In the remaining two, lenders recovered 70-90%. A rapidly developing secondary market also allows investors to sell their private credit fund shares to other investors, providing an exit for illiquid assets. In 2025, $240 billion was traded in the secondary market for private assets, a 48% increase year-on-year. Specialized funds like Sabat Capital buy these shares, creating self-invented "emergency exits." Furthermore, if the Fed eventually lowers interest rates, companies with variable-rate debt will see their repayments decrease, easing pressure and reducing defaults. SaaS companies are adapting to AI rather than being replaced. First Brands and Brambat might be anomalies, not symptoms of a rotten system. Stronger funds are imposing stricter audits, invoice verification, and mandatory reporting. Shadow defaults could resolve as companies regain positive cash flow. This scenario suggests a correction of 10-15%, painful but not catastrophic, with no systemic contagion, and private credit remaining a viable asset class. This pattern has historical precedent. In the 1990s, high-yield bonds (junk bonds) faced a similar crisis of confidence, with predictions of collapse due to defaults and scandals. The result was a difficult period followed by maturation. Today, junk bonds are an established asset class. Private credit could follow a similar path. However, Stephen Meister, chairman of Partners Group, a $185 billion manager (22% allocated to private credit), warns that default rates could double in the coming years. Historically, the average is 2.6% per year, meaning a doubling would see 1 in 20 companies defaulting, compared to 1 in 40 normally. The real economy is already feeling the shock, with layoffs concentrated in mid-sized companies. The market is restructuring around stronger players, potentially leading to a 25-35% correction. Historical parallels exist: 19th-century railroads and 2000s fiber optics were financed by massive debt from investors convinced of infinite growth. Many lost everything, but the infrastructure survived. Investors lose money, but the credit infrastructure survives in a restructured form. This is the scenario favored by Finary One, which has removed private credit from its allocations, not out of certainty of a bubble, but because the risk-to-reward ratio is no longer convincing. Stephen Meister highlights the fundamental asymmetry of debt: limited gains (only interest repayment) for the lender if the company performs well, but potentially total loss if it performs poorly. While an optimistic scenario is possible, the current risk-reward doesn't justify the gamble. Private credit illustrates that an asset class can be theoretically relevant but practically dangerous depending on the market cycle. The lesson is not to avoid private credit, but to understand what you own. Some funds mask their true exposures by reclassifying loans or presenting illiquid assets as liquid. In these cases, diversification is the only real control. Vigilance in fund selection and alertness to financial figures are crucial. Private credit is neither a cataclysm nor a miracle; it's an asset class with strengths and weaknesses. Staying clear-headed, asking the right questions, and surrounding oneself with trusted experts are essential in today's complex, interconnected, and opaque markets.