The Next Landmine: Buried in Private Credit

Someone who lived through Lehman's collapse says he's smelling something familiar. On the morning of September 2008, when Lehman Brothers filed for bankruptcy protection, a group of traders sat at their desks on Wall Street, staring blankly at the numbers on their screens. They hadn't been unwarned—a year earlier, someone had pointed at those CDOs and said, "This stuff is priced fake." But the market was making money, and no one wanted to listen. Larry McDonald was one of those traders. Eighteen years later, he's been saying the same thing everywhere: Private credit is this cycle's subprime. --- ## I. What is Private Credit, and Why Are So Many People Buying It Private Credit is essentially loans provided by non-bank institutions, with borrowers typically being small and medium enterprises or entities unable to finance in public markets, and lenders being private equity funds. Sounds like a professional term, far from ordinary investors. But in fact, in recent years through financial advisor channels, private credit products have systematically entered high-net-worth families' allocation lists—marketed as "8-10% annual returns," "low volatility," and "quarterly liquidity." The global private credit market has grown from less than $500 billion in 2015 to nearly $2 trillion in 2025. This isn't a small number—it's something comparable in scale to the subprime market back then. Money has flowed in fast for two reasons: **First, yield hunger in the low-interest-rate era.** Over the past decade, government bond yields in major global markets have languished at low levels. High-net-worth individuals and institutional investors, seeking returns above inflation, have been forced to accept less liquid, more complex assets. Private credit filled this gap. **Second, commission-driven sales chains.** Private credit product sales commissions are significantly higher than traditional stock or bond funds. Financial advisors have strong incentives to push these products to clients—even when clients don't fully understand what the underlying assets are. These two factors combined to create massive capital mismatches. --- ## II. Structural Risks: Three Knives Already Hanging Overhead McDonald's core judgment is that private credit shares three highly similar structural flaws with 2008 subprime. **First Knife: The Ratings Are Fake.** One of the core mechanisms of the subprime crisis was rating agencies slapping AAA labels on junk assets. The private credit market is replaying this scene—just in a different form. Since underlying loans have no public market pricing, fund NAVs are self-valued by managers, known in the industry as "Mark to Model," while critics directly call it "Mark to Myth." UBS analysts have broken the sell-side "united front," publicly warning that private credit's valuation system suffers from systematic overvaluation that could trigger concentrated revaluations when default rates rise. **Second Knife: Liquidity Mismatch.** Promising investors "quarterly liquidity" while underlying assets are 3-7 year loans. As long as markets remain stable, this contradiction won't surface. But once panic hits and redemption demands exceed the 5% monthly cap, investors will find themselves trapped in a box they can't exit. In 2022, Blackstone's BREIT fund (non-traded real estate trust, similar structure to private credit) triggered redemption limits, becoming the market's first warning about liquidity mismatch. The private credit market is even larger—once a redemption tide starts, the impact will be more severe. **Third Knife: Insurance Companies Are the Biggest Takers.** MetLife, Aetna, and other institutions have systematically bought private credit assets in recent years to earn returns above public bond markets, using them to support annuity and life insurance product return promises. This means private credit risk has spread beyond private funds into millions of ordinary people's insurance contracts. This is exactly the transmission path of the subprime crisis: risk spreading from "professional investors" to "ordinary people who don't know they're bearing risk." --- ## III. Why Now is the Critical Time Window The subprime crisis had an overlooked timing pattern: from risk accumulation to risk exposure, an external shock was often needed as a trigger. The 2007 US housing price decline was that trigger. The 2026 trigger is forming. The Fed has maintained high interest rates for the past two years, significantly raising corporate borrowing costs. Private credit's underlying borrowers—large numbers of SMEs and leveraged buyout entities—are facing refinancing pressure. According to Goldman Sachs research, 2025-2027 is the concentrated maturity peak for US leveraged loans and private credit, exceeding $1.2 trillion. Meanwhile, the US economy is showing stagflation signs: slowing growth, persistent inflation, modestly rising unemployment. In this environment, rising corporate default rates are almost inevitable, and once default data jumps significantly, private credit's valuation system will face mandatory revaluation. Liquidity crises don't need market crashes to trigger—just investors wanting to exit simultaneously. --- ## IV. Where is Money Flowing Smart money in the market has already started voting with their feet. The Nasdaq 100 index, after hitting historic highs in late 2025, has shrunk from $34 trillion market cap to about $30 trillion—not just valuation correction, but the result of active capital reallocation. The direction is clear: migrating from "crowded" tech stocks to "scarce" real assets. Energy, industrial metals, agricultural resources—assets masked by growth stock glamour over the past decade are regaining pricing power. Resource stocks' share of the S&P 500 has risen from historic lows of 9% to 13%, and McDonald believes this trend could extend to 20-25%. The logic behind this is stagflation. In stagflation environments, traditional asset allocation models fail—growth stocks suffer from downward growth expectation revisions, bonds suffer from inflation, only real assets gain relative advantage due to supply constraints + inelastic demand. Copper, natural gas, oil, gold—not speculation, but fundamental allocation under the stagflation narrative. --- ## V. Implications for Chinese Investors Chinese high-net-worth individuals' overseas allocations have in recent years seen considerable proportions flowing into USD private credit and alternative assets, through paths including: Hong Kong private banks accessing USD private credit funds, QDII funds holding indirectly, insurance savings products absorbing. All three paths are related to the above risks to varying degrees. What needs to be done: - **Ask clearly what the underlying assets are.** Any product labeled "fixed income" or "quasi-fixed income" needs careful examination of whether the underlying includes private credit or leveraged loans. - **Look at liquidity terms.** Quarterly redemption, annual redemption, lock-up periods—these terms don't matter in calm markets, but become lifelines during redemption tides. - **Reduce over-concentrated tech positions.** This isn't saying tech has no value, but when one direction is "crowded" to over 30% of S&P 500 market cap, any disturbance causes stampedes. - **Consider foundational real asset positions.** Energy ETFs, gold, industrial metals—not all-in, but structural hedging under stagflation expectations. --- ## Conclusion: Those Who've Heard It Once, Hear It Easier the Second Time Larry McDonald says among the top credit investors he's met, some predict "someone will go to prison for this." This statement is emotional—almost no bankers actually went to prison in 2008, so don't read it as prophecy. But when he says "I smell something familiar"—that statement deserves serious attention. The most expensive thing in bear markets is the belief that "this time is different." Every time someone says "different," they eventually find the similarities are often greater than the differences. --- *This article is based on public reports and analysis, and does not constitute investment advice.*