Private credit grew by taking on riskier loans that banks shed after Dodd-Frank, making the core banking system safer. However, banks now provide wholesale leverage to these private credit funds with minimal due diligence, creating a new, less transparent concentration of risk.

Grant and Faber note many sophisticated investors admit they don't understand their private credit investments. This lack of transparency and knowledge is dangerously similar to the opacity of mortgage-backed securities (CDOs) before the 2008 financial crisis, signaling potential systemic risk.

PE-backed insurers often transfer risk to captive reinsurance subsidiaries in low-visibility jurisdictions like Bermuda. Once assets are moved to these "shadow reinsurers," U.S. regulators lose all visibility into them, effectively hiding potential risks from the primary balance sheet.

Sheila Bair argues private credit's dangers lie in investor protection, not systemic risk, due to its lower leverage compared to banks. She points to conflicts of interest, valuation opacity, and liquidity issues as reasons why the asset class is unsuitable for retail investors and 401(k) plans.

Unlike the public equity markets, software exposure in credit markets is concentrated in private, not public, companies. An estimated 80% of these issuers are private, and 50% are rated B- or lower, creating a unique and more challenging risk profile due to lower credit quality and less transparency.

Private equity giants like Blackstone, Apollo, and KKR are marking the same distressed private loan at widely different values (82, 70, and 91 cents on the dollar). This lack of a unified mark-to-market standard obscures true risk levels, echoing the opaque conditions that preceded the 2008 subprime crisis.

In private markets, there's a perverse incentive for both private equity owners and private credit lenders to avoid marking down asset values. This "mark to make-believe" system keeps valuations artificially high, hiding underlying financial stress and delaying the recognition of losses.

A consistent 2-5% of Europe's public high-yield market restructures annually. The conspicuous absence of a parallel event in private markets, which often finance similar companies, suggests that opacity and mark-to-model valuations may be concealing significant, unacknowledged credit risk in private portfolios.

A significant valuation gap exists where private credit funds use 'mark-to-model' to value software loans near par. Meanwhile, similar loans in the public CLO market trade at significant discounts (e.g., 70 cents on the dollar). This discrepancy conceals unrealized losses and creates future repricing risk for fund investors.