Efter festen i onoterat: ”Den gyllene gåsen är död”

As investors seek to retrieve their money, the $22tn industry rejects comparisons with 2008. Regulators aren’t so sure.

Last year, a retired doctor in France’s southern region of Provence received a brochure in the mail from his bank touting a new investment opportunity.

A New York asset manager called Blackstone was offering the 77-year-old the chance to invest €25,000 into its flagship private debt fund. The former doctor called his son to ask: had he ever heard of Blackstone, or private debt?

His son Mathieu Chabran, co-founder of alternative investment group Tikehau Capital, had indeed heard of the powerful pioneer of private markets. But he was floored to discover that a company with $1tn in assets, which has minted over half a dozen billionaires, was seeking new business from novice investors such as his father.

“That’s when I realised that the wealth and growth of the juggernaut US managers was coming from retail channels,” says Chabran, who worries the funds are being mis-sold to unsophisticated investors, often through their financial advisers.

He believes people like his father do not fully understand the risks of investing in funds that are harder to sell out of but which offer the opportunity to invest in private loans, property deals and corporate takeovers, with the allure of high returns.

“Obviously, there is a difference between my father and an Asian sovereign wealth fund in how they underwrite an investment,” says Chabran.

Targeting individual investors has become part of the rise of private capital, the collective term for a range of investments outside public markets, in the wake of the 2007-2008 financial crisis that humbled many traditional banks.

It is a boom that has turbocharged private equity, the sector that specialises in buying companies away from the glare of public markets, in typically debt-fuelled transactions. 

The loans backing those buyouts are often arranged privately and sold to investors, in what is known as private credit or private debt — a $2tn market now under intense scrutiny as investors seek to redeem their savings from such funds.

Chabran’s father is just one of tens of thousands of individuals who have ploughed over $200bn into private funds managed by Blackstone and arch-rivals such as Apollo, Blue Owl, Ares and others. Mathieu Chabran’s own group, Tikehau, is a specialist firm that invests in private credit deals itself.

Over the past two decades, private loans such as those made by the Blackstone debt fund and many others have helped finance a record frenzy in private equity takeovers struck at ever higher valuations, with annualised returns of nearly 10 per cent since 2004.

Large and midsized banks have been happy to lubricate the activity by offering additional financing. Insurance companies, increasingly owned by private capital giants themselves after a wave of takeovers, have also entered the market, putting portfolios intended to provide safe income to retirees into opaque private assets. 

Taken together, private capital, once little more than a cottage industry, has grown into a giant part of the financial system, holding $22tn in assets, largely outside the purview of banking regulators.

But Wall Street has been rattled this year as investors have pulled their money in the face of turbulent financial markets, creating a stampede of redemptions that has caused many private credit funds to “gate” or limit investors’ ability to exit.

As loan portfolios face pressure, regulators, credit rating agencies and financial pundits are beginning to ask whether the private markets boom will lead to a more general crisis.

The industry rejects comparisons with the market meltdown two decades ago, arguing that private credit is much less leveraged than the banks of 2007-2008.

But as the “retailisation” of private capital continues, following Donald Trump’s decision to allow 401(k) retirement savings accounts to invest in such assets, the question is to what extent — and for how long — that will remain the case.

“There are cracks in the foundation of the private debt market,” says Alan Schwartz, executive chair of Guggenheim Partners, a $300bn private asset manager.

“Any time you get increased selling in illiquid assets that don’t have transparent valuations, it can cause significant spasms in financial markets.”

He adds that “while I’m sure there are excesses in the market, I don’t think they’re as deep and systemic” as 2008 — when he led Bear Stearns, the investment bank whose collapse that year largely inaugurated the crisis. 

So far many recent blow-ups in lending markets have been blamed on alleged fraud rather than broader problems, such as US auto parts supplier First Brands and UK property lender Market Financial Solutions. Still, the debacles have raised questions about underwriting standards in hot credit markets.

“When you see one cockroach, there’s probably more,” JPMorgan Chase boss Jamie Dimon said of such scandals last year.

The most immediate problem for private lenders and their private equity clients is the prospect of returns that fall far short of the expectations of the investors who shifted money out of public markets in the hope of large windfalls.

Nearly $4tn in potentially overvalued private equity deals have proved hard to exit amid higher interest rates and geopolitical turmoil. Loans backing these deals have begun to show cracks. 

Banks such as JPMorgan financing the activity are reconsidering their exposures. Insurance experts worry that industry holdings of private assets do not carry sufficient reserves to cover potential losses.

The strain will be most acute for wealthy individuals like Chabran’s father, as well as insurers and the teachers and firefighters who through their pension plans are heavily exposed to private markets. 

Most at risk are private markets’ heavy investments in software companies, the epicentre of Wall Street’s dealmaking boom, which represent about a third of overall activity over the past decade.

“This is an unsettling time for markets and investors,” Michael Patterson, a senior BlackRock executive, told wealthy individuals in the firm’s flagship private credit fund this month. “There’s real impactful geopolitical uncertainty and well-founded anxiety about how artificial intelligence will reshape our personal and economic landscapes.”

Some longtime investors in private markets such as Patrick Dwyer, a financial adviser at NewEdge Wealth, have told their clients to cut their exposures to buyout funds out of fear that the troubles are just beginning. 

“Funds raised before 2022 are totally screwed,” says Dwyer, referring to a bubble in private equity deals struck at dizzying valuations just before interest rates began to march higher.

In his view, private capital firms grew too big too quickly and took in too much money, creating a glut of capital that was invested in ever shoddier deals that now face a reckoning.

“There was too much money, everyone got greedy and they killed the golden goose,” he says.

Decades before Apollo, Ares and Blackstone became giant financial institutions, the early pioneers of private equity were small teams of dealmakers such as KKR founders Henry Kravis and George Roberts.

The stagnant equity markets of that era yielded a plethora of targets they could buy cheaply using debt and then quickly sell off to earn almost immediate profits. Their ambitions were tamed only by the limited amount of bank debt available in that era. 

The emergence of “junk” bonds and highly leveraged buyouts in the 1980s provided them with the credit they yearned for. Michael Milken’s investment bank Drexel Burnham Lambert popularised low-rated financing for corporate takeovers.

Drexel collapsed in 1990 but its executives at the investment bank fanned out across Wall Street, founding firms such as Apollo, Ares and Cerberus.

But it was the 2008-10 financial crisis that provided private capital with its big break.

As regulators curtailed traditional banks’ lending to safeguard the financial system, riskier lending to less creditworthy companies shifted to private capital providers.

Rock-bottom interest rates reduced their financing costs and brought pension funds and endowments to their doors in search of higher returns.

Many such investors began to hold as much as 30 per cent of their portfolios in private markets as fundraising boomed. Some private capital groups came to have market capitalisations that exceeded blue-chip investment banks such as Goldman Sachs.

BlackRock’s Patterson claims the industry has offered less volatility than the wild swings of public markets as well as, in the case of private credit, “more attractive, risk-adjusted returns”.

In 2021, private equity and credit funds raised a record $1.2tn from investors. But as firms became ever mightier, they were presented with the challenge of investing their growing war chests quickly. 

Purchase price multiples soared, roughly doubling in the decade up to the 2021 peak. Investors could raise large debt packages based on non-conventional credit metrics like their equity commitment, or heavily adjusted future forecasts of profits that often never materialised.

Adding fuel to the fire was a flood of new capital coming into the industry from wealthy individuals such as local property moguls in Asia, rich dentists in the US — or retired doctors in Provence.

Although the rise of Apollo, Blackstone and others has proven a competitive threat to banks like JPMorgan and Goldman, the more established lenders have found lucrative ways to profit from private markets.

Banks discovered that regulators were sometimes more comfortable with them extending loans if they were channelled through private credit.

“The way that you lend into private credit is based on a secured basis that gets certain preferable treatment,” Michael Roberts, chief executive of corporate and institutional banking at HSBC told the UK’s Financial Services Regulation Committee last year. 

The bank may have to hold 20 per cent of capital against these loans as opposed to the 100 per cent requirement if it was to lend to the same borrowers directly, he explained.

Moody’s has estimated that banks have lent $300bn to the private credit industry and another $285bn to private equity funds as of June 2025. The US Treasury’s Office of Financial Research reckons lending to private credit funds by banks and other lenders could now be as high as $540bn, while noting that the data showed “leverage risk overall appears limited”.

The regular premiums paid by customers of life insurance and annuity companies, some of which have been acquired by private credit firms, have added to the wall of money.

In theory, life insurance and annuity providers are well suited for the illiquid loans made by private credit groups, since their promises to policyholders stretch decades into the future.

But regulators​, policyholders and even some Wall Street executives are growing worried that the assets backing Americans’ nest eggs could be riskier than ratings suggest.

​Many of Apollo’s loans have been sold on to Athene, the insurer it acquired in 2022, prompting questions over whether such assets are being adequately vetted and priced.​

Regulators are concerned about whether insurers have enough capital to back such loans, and some industry figures have voiced concern about “ratings shopping” — seeking better ratings on such assets from smaller credit rating agencies than more established groups would provide.

UBS chair Colm Kelleher said in November that the phenomenon could create a “systemic risk” to global finance​.

Warnings that a private credit crisis could spill over into the wider financial system are multiplying, with the Bank of England due to carry out a stress test this year to look into such a scenario.

BoE governor Andrew Bailey has said “alarm bells” are ringing over the “slicing and dicing” of loans, with uncomfortable echoes of how US subprime mortgages were repackaged and sold around the world in the run-up to the 2008 crash.

Regulators voice concerns about what they say is the sector’s lack of transparency, weak risk management and interlinkages with banks.

Some in the market express similar fears.

“Is the pain banks are seeing in the business development companies and private credit world enough where they pull back risk in other areas?” says Terry Monis, co-chief investment officer of investment manager ICG Advisors.

“We are in a risk-off environment because of the [Iran] war. There’s fears of stagflation. But it’s never just one thing that causes a turn in the cycle.”

But Blackstone chief Jon Gray says he has “never seen something so disconnected from reality in finance” than the comparison between private credit’s current travails and the financial crisis that shook the world two decades ago.

Like many other industry figures, he emphasises that private markets players are far less leveraged than traditional lenders. Their funds generally borrow one to two times the amount investors contribute, although that figure can stretch above three at some funds. That compares with a ratio of 15 in many banks.

Private capital, even in insurance marketplaces and so-called “retail funds”, is also much longer term and harder to redeem than bank deposits, which can be pulled overnight.

For years, today’s private market giants have been able to withstand pressures from fast-rising interest rates and the turmoil of the pandemic, without collapsing as banks such as Silicon Valley Bank and First Republic did.

“There will be defaults,” Gray adds. “We definitely see there are some companies that will face challenges, but we’re not in a recessionary period . . . How this is creating incremental risk to the financial system, no one has yet explained this to me.”

However, private capital’s difficulties with exiting investments have caused industry-wide returns to plummet since central banks started raising interest rates in 2021. For much of that time, by contrast, public markets soared, buoyed by surging valuations of technology stocks.

Fundraising for private equity deals has now declined by about half from the 2021 peak. Many midsized private equity funds have been unable to raise new capital as dealmakers predict a growing crop of “zombie funds” that will slowly die over the next decade due to their lacklustre returns.

Roughly a quarter of private equity funds raised since 2015 have failed to earn the rate of return at which firms earn performance fees, according to the hedge fund Davidson Kempner. 

The problems are partly structural. Private equity groups have often used a standard template to consolidate assets as diverse as car washes, veterinary clinics and insurance brokerages, often using a single company to accumulate such acquisitions.

Such businesses have proved too complex to sell to regular corporate buyers.

The underlying financial health of private equity-owned companies has also been pummelled by higher rates and geopolitical turmoil. Over 10 per cent of such groups have chosen to increase their debt rather than making their interest payments in cash.

The industry’s outsized exposure to software deals threatened by Al has already added to the malaise.

Scott Goodwin, co-founder of credit investment firm Diameter Capital, says an “AI risk factor” affects over half of the deals made by private equity and financed by private credit over the past 10 years. Such concerns are a result of the industry’s series of acquisitions of software-related businesses in healthcare, financial services and other professional services.

Other investors told the FT they were now also worried about the industry’s investments in wealth managers and insurance brokerages for the same reason.

John Beil, head of private equity at Partners Capital, predicts a wave of asset writedowns for software deals when first-quarter numbers are finalised next month, clouding returns from a sector that was “private equity’s golden trade for the past decade”.

“There is no sugar coating the numbers,” he says. “Private equity has lagged [behind] the public benchmarks by meaningful amounts” over the past five years.

On the debt side, ageing deals have proved problematic for lenders including funds managed by KKR and BlackRock, which have slashed the value of many of their holdings. 

Vehicles that once easily trounced the returns of public market equivalents such as high-yield bonds have begun to mark the value of their assets downwards.

Industry executives warn that ageing loans left in debt funds are of lower quality given that stronger businesses have been easily able to refinance their borrowing in recent years. 

The falling returns have caused a flood of redemption requests at funds sold to wealthy investors.

Such funds have been dubbed “semi-liquid”, since they let people take out a small portion of their money — usually capped at 5 per cent of funds’ net assets every quarter. But many are now limiting withdrawals as the limits, designed to prevent asset fire-sales, are reached.

Former Goldman Sachs chief executive Lloyd Blankfein told the FT recently that a liquidity mismatch had become more likely given the length of time since the last major credit market crash. “When something goes off you’re going to find all the assets that have been carried at prices that can’t be realised in the market,” he said.

The troubles have yet to work their way through the system. Some US pension and endowment funds now face a squeeze that could hurt their ability to give their beneficiaries the income they desire.

Some have been selling stakes in their private equity funds at large discounts on secondary markets and are beginning to dump their credit portfolios, advisers say.

The impact of falling returns and looming losses will also prove a major test of whether insurers that invested in riskier debts have appropriate buffers to withstand any losses.

“There’s going to be a higher rate of business failure going forward because of technological disruption and that’s gonna be a problem for credit,” says Dwyer, the wealth manager who has told clients to exit many private market investments.

He predicts a “day of reckoning for private equity” as firms loaded with overvalued investments capitulate by taking their portfolio companies public, even if it causes their investors to face writedowns.

But, rather than steeling themselves for anything resembling a re-run of the financial crisis, many in the private capital industry appear to view the coming crunch rather like the aftermath of the original 1980s bubble.

Ultimately that crisis left the financial system largely unharmed. Some PE players still active today made their names buying junk bonds at rock-bottom prices from troubled insurers and pension funds.

This time around, some firms, including junk-bond pioneers like Apollo, have built up war chests to capitalise on others’ distress. Even as parts of the world of private capital come under strain, the giants plan to continue their onward march.

“There’s nothing that’s flashing anything other than green right now,” Ares chief Michael Arrougheti said this month, vaunting the profitability of the hundreds of businesses his group lends to, as well as trillions of dollars of collateral.

“For the 30 plus years I’ve been investing in credit, there’s nothing in those numbers that screams credit crisis is coming.”

Additional reporting by Martin Arnold, Lee Harris, Jill R Shah, Amelia Pollard and Robert Smith

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