Making Hay Monday – November 24th, 2025

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David Hay

Editor

Haymaker

Making Hay Monday

Private Credit

“More money has been lost reaching for yield than at the point of a gun.” -Raymond DeVoe Jr., Wall Street strategist

“Markets change but people don’t.” -Howard Marks, one of the world’s leading experts on bonds and other credit instruments

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Jamie Dimon said recently that in private credit, like in pest control, when you see one cockroach, there are bound to be more hiding elsewhere. That’s about as clear a shot across the bow as you’ll get from a sitting megabank CEO, and he’s probably not wrong. While there hasn’t been a blowup big enough to seriously shake the rafters yet, the warnings are starting to stack up.

Before delving into the signals that are blinking red, it’s worth pausing to acknowledge just how prolific this area has become. Private credit, once a niche domain of direct lenders and distressed debt vultures, has exploded in size since the GFC-era regulatory handcuffs tightened bank lending. The following chart, from one of Team Haymaker’s closest allies, the legendary Grant Williams, vividly illustrates this truly phenomenal phenomenon.

Williams, TTMYGH…

Financial regulatory frameworks (i.e. Dodd-Frank, Basel III, CCAR) all created an aversion to risk on bank balance sheets. Naturally, an army of non-bank lenders rushed in to fill the void. What was once a $300 billion afterthought is now a $1.7 trillion force, soon to exceed $2 trillion if current fundraising trends hold. And that capital hasn’t just come from Wall Street institutions. Pension funds, endowments, sovereign wealth vehicles, and, increasingly, retail investors have all been drawn in by the allure of juicy yields in a low-to-moderate interest-rate world.

But the problem is, unlike banks, which are tightly supervised and stress-tested within an inch of their lives, private credit operates in an opaque realm. It’s less regulated, less transparent, and far more creatively (recklessly?) structured. Many funds rely on subscription credit lines, net asset value-based lending, or payment-in-kind adjustments that effectively allow borrowers to dodge cash interest payments. In other words, credit stress can be masked under a cloak of accounting hocus pocus.

When you add in mark-to-model valuation practices, where funds price their portfolios internally, often with inputs that only a consultant’s spreadsheet can decipher, the risk of mispricing becomes acute. As Grant Williams recently quipped, it’s like letting students grade their own homework. Consequently, things can look fine on paper long after they’ve gone sour in reality.

This isn’t just an academic concern. As private credit has become more systemically entangled with banks’ funding loans, insurers co-investing in deals, and retail channels offering semi-liquid products to yield-starved clients, it’s moved from the fringe toward the heart of the financial system. So when trouble brews in one corner, it more than likely will have a domino effect. If this sounds familiar, that’s because it is, thereby validating the above quote from Howard Marks.

In that respect, private credit resembles other infamous fault lines from financial history: the special entities that banks used to hold risky assets without showing them on their balance sheets of the 2007-08 crisis, the S&L junk bond frenzy of the early 1990s, and even the portfolio insurance schemes of 1987. It all works, the music plays, and everyone’s dancing, until it suddenly doesn’t.

Federal Reserve Board

Grant Williams, in his October edition of Things That Make You Go Hmmm…, explored something eerily adjacent. He wrote not solely of credit markets, but also of brands, and how reputations are slow to build and quick to break. His thinking applies just as easily to capital structures, when he notes that trust is not typically eroded by catastrophe, but by accumulation. A single high-profile blow-up doesn’t destroy a brand, it’s the pattern of behavior that does it. The same can be said of the private credit machine. A default here, a dividend cut there, and suddenly the illusion of consistency is exposed for what it is: a model-driven façademasking illiquid risk…