- The rise of non-bank lending has generated a dangerous opacity due to the lack of transparency in valuations and the laxity of covenant-lite contracts.
- Technological disruption driven by AI and tightening interest rates are causing an increase in defaults and business bankruptcies.
- There is a critical disconnect between private asset valuations and the public market, which creates liquidity pressures for large asset managers.
Looking at the current financial landscape, we see that private lending has gone from a niche market for a select few to a trillion-dollar behemoth. After the major shock of 2008, which left traditional banking services reeling, a void emerged that was quickly filled by hedge funds and private equity firms. This evolution of the lending ecosystem has allowed billions to flow to businesses without passing through the rigorous filter of conventional banks, creating a dizzying growth that is now beginning to show signs of slowing down.
The point is that this growth hasn't come without a price. For years, investors have been lured by very attractive returns, but now it turns out that the risk was greatly underestimated. We're not talking about a one-off problem, but rather an accumulation of structural imbalances that, combined with a tense geopolitical context and rising interest rates , are testing the resilience of a model that has never truly been subjected to a serious stress test since the subprime mortgage crisis.
The dangers of direct lending and the lack of transparency
One of the hottest issues is so-called direct lending. This is where funds lend money directly to small and medium-sized enterprises (SMEs). The problem is that covenant-lite loans have become very common ; these are essentially contracts with very few restrictions. This means the lender has no idea of the company's true financial health until it's too late, creating an opacity that alarms regulators.
Furthermore, we find that many of these strategies are based on internally reported prices rather than the true market value. This creates an illusion of stability; everything seems to be running smoothly until a crisis hits and the illiquidity premium compresses , leaving investors trapped in assets they cannot sell quickly without losing a fortune.
A clear example of this unease is the BDC, or business development companies. These entities, which are publicly traded but invest in private credit, are trading at significant discounts to their net asset value , demonstrating that the market no longer believes the managers' optimistic valuations.
Warning signs: Corporate bankruptcies and fraud
You don't have to look far to see that things are looking bad. Recent cases like that of Tricolor Holdings, which specialized in subprime auto loans, have exposed the fragility of the system. This company declared bankruptcy after accusations of fraudulent activity and hidden liabilities , shaking the private lending funds that had injected millions based on guarantees that were perhaps just empty promises.
On the other hand, First Brands Group showed us another side of the coin: accelerated growth fueled by debt. When they tried to refinance $6.000 billion, the deal fell apart due to a lack of transparency regarding their profits. The most curious thing is that while the company was sinking, some funds like Apollo Global Management were shorting its debt , making money as the bond value plummeted to ridiculously low levels.
The impact of Artificial Intelligence and technology
We often forget that technology can cripple a company's bottom line. The rise of AI has created an unforeseen technological risk that particularly affects software companies. Many private equity funds bought these companies at exorbitant prices a few years ago, but now AI is transforming the sector and rendering obsolete business models that once seemed secure.
It is estimated that more than half of the transactions financed with private credit in the last decade have this AI risk factor . This means we are facing a potential wave of asset write-downs, as the use of AI in financial results could reveal that companies will not be able to generate the cash flow necessary to pay the high returns promised to investors.
Systemic risk or simple market correction?
This is where the experts clash. On one side, figures like the Governor of the Bank of England warn of disturbing parallels with the 2008 subprime mortgage crisis, particularly regarding how these assets are packaged and sold. On the other side, giants like BlackRock and Blackstone argue that the system is far more robust because they are less leveraged and operate with much longer time horizons.
The episode with the HPS Corporate Lending Fund at BlackRock is a perfect example of this tension. It wasn't a collapse of the firm, but a liquidity problem. By limiting withdrawals, the asset manager avoided a massive sell-off that would have destroyed the fund's value. Although it might seem like a "bank run" to some, technically it's a measure to protect the solvency of the assets under management, since private loans aren't sold with a click like an Apple stock.
Where to go next: Safer investment strategies
With direct lending under intense scrutiny, the trend is to seek refuge in assets with tangible collateral. Currently, asset-based finance (ABF) and senior commercial real estate debt appear to be the most sensible options. These markets offer tangible collateral backing and have a much lower correlation with corporate profits, which are the hardest hit by rising energy costs and tariffs.
The key today is to stop focusing on nominal returns and start valuing balance sheet strength and cash flow stability. The market is beginning to reward fundamental analysis and differentiation , penalizing managers who simply allocated capital without analyzing whether the underlying business was viable in the long term.