Is Private Credit About to Collapse? ($1.7 Trillion at Risk)

We're starting to see some headlines. BlackRock marked down their net asset value by 19%.

Is private credit cracking? KKR just wrote down almost up to 20% of part of their portfolio.

Absolutely. I still believe in it, just with a big asterisk.

Welcome back, Future Billionaires. Today we are talking about private credit, and there seems to be a crisis brewing. We have clients and investors asking what is happening and what does it mean for their investments. Private credit today is a $1.7 trillion market and growing, and most investors really understand how it works. Recently, there have been some high-profile funds that have hit trouble, signaling stress in a largely unregulated market. And so today I sit down with Chief Investment Officer at Aspen Funds, Ben Fraser, to get his take on what's really happening and how he is investing in private credit. Stay to the end and we discuss how to evaluate private credit for your own personal portfolio and the key red flags to be aware of before investing. Let's dive in. Ben, let's start with a very simple question to set the preface for this show. Describe to us or define for us, what is private credit?

Yeah, so it's a very broad category actually, and we can break it down a little further, but it's most basic level, private means it's not public, right? So these are non-traded investment funds generally. So it's not public debt or credit like you would imagine. Bonds is the most commonly traded public credit, government bonds, corporate bonds, et cetera. And then credit is just another word for debt, but it can mean a lot of different things. And this is where some of the confusion comes many times. It can mean debt secured lending. It can also mean preferred equity or mezzanine debt, which is kind of the other end of the spectrum, which are generally not secured investments, but they're called structured credit. So there's structured payment schedules. They have to make a certain amount of interest payment every month, et cetera. So it's like debt, not exactly debt. So credit's kind of this overarching term that encompasses all these categories.

Let me ask you a better question. You know, for someone who may be new to this, maybe it's easier to ask, like, what is it not like? So how does it differ from, let's say, a traditional bank loan?

Yeah, well, I think, you know, a lot of, a lot of people know private equity, right? And so private credit is kind of the the younger brother of private equity, right? So, private equity is private investments, many times through funds, that go and invest in businesses as equity in the hopes that those businesses grow, the equity becomes more valuable, they can sell it to the next buyer, and they make a return. That's very similar to public equity, right? Where you're investing in a company and you hope that company grows in the stock market and you sell that at some point. So, it's It's very similar, but it's private, right? So these are private markets. They're usually large funds that are investing in these types of deals. As it relates to other types of lending, it's kind of this emerging part of the lending world that is non-bank, right? And so part of the growth of private credit has been from a lot of the pullback in lending from traditional banks. There's a lot of reasons why this has happened. We've talked about it. A lot, but really since 2008, there's been an aggressive amount of regulation that has happened. You might have heard of the Basel III and the Basel IV Accords. These are regulations that put a lot more pressure on banks to, one, have higher credit quality, and two, require them to do a lot more reporting, and it's burdensome, it's costly. And so what's happened actually on the the bank side of this, there's been a massive consolidation of banks. It's very difficult to operate as a small bank. So it's caused a lot of consolidation of the traditional banking system, which means there's fewer players, there's more larger players, and they're generally going to be a little more vanilla in what they lend in and lend on because of the constraints of being a larger entity. So, what's happened is it's created this gap of financing that private credit, non-bank lending has come into play. And it really encompasses two big categories, which is again, another helpful distinction for people is private credit can mean either real estate credit or business credit. And what most people refer to when they say private credit is actually business credit, lending to businesses.

Okay, so great. So let me summarize. So private credit is a type of debt or credit, as the name would say, but it is private in the sense that these are typically non-bank lenders, businesses, or investors that are offering credit debt to other businesses or other, you know, operators because of the pullback from actually traditional banks. Would you say that's a good summary of kind of what you just said? Okay, great. So to your point just now, let's talk about like, give us an example. You know what we said, this is a— I mean, this is a massive asset class now, right? This is a $1.7 trillion asset class. And growing, right? I mean, I think most experts would say this is going to probably grow to a multi-trillion-dollar asset class by 2030. There's, there's data to back that up. Give us some examples then, like of where we've seen the rise of private credit in the market today. If someone— for most people, retail investors investing in private credit, what are they actually investing in? Can you give us an example?

Yeah. So there's really a lot of reasons why the growth has happened. I mentioned one, right? So the pullback of traditional banks have left this big gap of capital need in the market. The other is, you know, over the last few years we've seen a rising interest rate environment, right? So we've seen interest rates go up, and that means that lenders are actually making more interest. So it is attractive as an investor because you can charge higher rates of interest, means your, your return is, is going to go up. And because this asset class has become much more institutionalized, meaning a lot bigger players are investing in it, like the big pensions, the endowments, the life insurance companies. All this capital demand that is looking for consistent yield has been driving a lot of capital growth into this space. And at the same time, private equity has also pulled back. There's kind of been this slowdown of private equity investment, even though private equity is a much larger asset class. I believe it's $4 or $5 trillion. So, it's a few times larger, but the growth has slowed down a little bit the past few years, just given some of the interest rate challenges, right? Because a lot of— on the equity side, you are the borrower of the debt. It's more challenging to get the returns you want at higher interest. So, it's slowed down private equity, which has allowed this private credit type of investment to come in. And as example, A lot of what's being driven on the business side of demand for the credit is, "Hey, if I'm a business owner, I'm growing my business. I'm a software company in Silicon Valley. Normally, I would go and get a private equity investment, venture capital investment into my firm to grow it. Well, now I can go and get debt." What that benefits for me are I don't have to give up equity to do that. So, I actually keep more of my, my business. I own more of my business and it's actually cheaper, all things considered, even though I am generally going to pay, you know, double-digit interest rates. Um, but it's cheaper than equity if I'm on a grow, a big growth curve. And so a lot of, uh, the demand from the borrowers has driven the, the growth of this because in their minds it's, it's cheaper than the equity they've been giving up.

Yeah. And it seems like it's, you know, to summarize that a little bit to the, the rise of this asset class, you know, other than like there's a need in the market, it's also because investors over the last several years have been able to generate alpha or yield, you know, above market returns, really in probably a more— would you agree— kind of a lower risk profile, meaning they're closer to the senior, or they are the senior in many cases. And so they're able to generate what we've seen, 9, 11, 12, maybe even higher than that returns while being in first or second position, which is very attractive to investors in kind of a volatile market. Would you, would you say that's a good summary of that?

100%. Yeah. And that's why the institutional demand has been there, is because it's a very attractive risk-adjusted return. And meanwhile, you know, equity has taken a hit because it generally is inversely correlated to interest rates, right? The higher cost of debt Usually the lower multiples and the higher debt service costs you have. And so, while equity has kind of struggled and languished the past few years, both in real estate and in business credit, private credit has kind of emerged as this great in-between. You get some really great strong returns, some double-digit yields, plus you have priority. Sometimes you have collateral. And so, it's been very attractive. When there's also been this flight to safety from an investor standpoint, right? A lot of investors see some of the stress in the market, so they want to shift their allocations toward, you know, safer, quote unquote, investments to preserve capital.

Makes sense. Okay, so then let's get into why we're recording this episode today, because now that we've kind of defined what private credit is, I hope that was helpful for everyone. Let's actually get into the conversation of like, they're starting to have some cracks.

Yes, for sure.

We got an email. I got an email from a loyal investor of ours, you know, said, hey, with the private, you know, we'll talk about our private credit fund here in a minute. But, but starting to address some of these concerns, is private credit cracking? We've seen large headlines. KKR just wrote down, you know, almost up to 20% of part of their portfolio. We've seen BlackRock, you know, post, you know, very similar write-offs as well. There's, there's some larger names that have deployed billions of dollars into this space and You know, private credit was the right— it was the sexy thing. And now they're starting to see some cracks. Can you just give me your opinion of what's happening? Is this the collapse of private credit that, you know, a lot of naysayers have been saying, or do you think this is just kind of a resetting? Give me your opinion of what do you think is happening?

Yeah, absolutely. So we're starting to see some headlines. Pop up here and there. You mentioned a couple of them. One of the most notable that I had seen was last quarter, Q4 of 2025, BlackRock, one of their funds, their BDC funds, their private credit funds, marked down their net asset value, their NAV, by 19%. So basically, if you had $100,000 invested in that fund, In one quarter, all of a sudden that $100,000 is basically worth $80,000. Right? And so it's really concerning for investors that thought everything was hunky-dory. Hey, things are going great. It's a great asset class. Holy cow. The value of my investment is 20% lower than I thought it was. And we're seeing these kind of things pop up across the board. On top of that, because there's now been some concern, there's been much more redemption requests. Most of these funds, even though they're private, have some type of liquidity programs, provisions that allow investors to get out in normal circumstances, but we're starting to see several large funds shut down liquidity, and they're not offering the liquidity that a lot of investors thought were there. So it's kind of um, only exacerbated the concern of, okay, I'm getting write-downs, but I can't get my money out. I thought I could. So what is really going on? Are there much bigger things at play? And we can get into what's, I think, causing a lot of this, but those are really the big headlines, the big things that we're seeing people concerned about.

Well, let's talk, yeah, what is causing it. I mean, you know, these companies have made very, very large investments into industries and other companies, you know, like what is happening? I mean, what— why all of a sudden is BlackRock have to write down 20% or KKR doing the same thing? You know, what are you seeing? Explain some of that. I mean, it would seem, as we just said, and the whole reason people flooded to this is because private credit was less risky, right? And so to have a 20% drawdown in a quarter, it's like that seems a lot more volatile than what this asset class was promised. How does that even happen?

Yeah. I think this also plays into one of the biggest knocks on private investments. They're not perfect. We think they're pretty awesome, private alternatives. But one of the biggest knocks that investors say is sometimes it's not always transparent about the values because it's not marked to market daily like the stock market. The challenges that are kind of popping up have really been challenges for the past few years, but these funds are now only starting to make these write-downs recently. One of the things you can look at, I was doing some research the other day, the increase of non-acruable positions, meaning the amount of positions in a fund or portfolio that are behind on their payments or are not meeting the original business plans or of, uh, so the borrowers who actually the, the private companies gave money to, they are behind on their payments, they're in default.

Yes, per se. Yeah.

And that started happening, uh, about a year and a half ago. Uh, we started seeing some pretty significant increases, but it's a leading indicator, right? Because just because someone gets behind the payment doesn't necessarily mean that the value of that loan is impaired, doesn't necessarily mean you take a write-down. But it is concerning. And so it's these fissures have been in there for a little while. And as this credit cycle has just gone on, a lot of these companies just couldn't make it out. And now we're seeing these write-downs happen. But what's really happening, if you break down and dig into where is the stress coming from, a lot of it is early-stage companies and generally software-related or tech-related companies. So these are businesses, and yes, you're investing as a lender to those businesses, but if you're lending to a tech company, I used to be a commercial banker, so this is what I did for a job for a long time. What's your collateral? Nothing. Not much. Maybe some IP, maybe servers somewhere, but there's nothing that you can go and take back like you can with real estate and have a piece of real estate or some collateral that you can go sell and protect part of your position. And so what's happening is as a lot of this capital has flooded the market, it's made the competition for private credit very, very high, and they're all going after the same companies generally, right? A lot of Silicon Valley, a lot of tech-related, a lot of these big institutional, the capitalized funds, they're not very creative in their deployment. And I was looking at some other research on the cross-pollination of all these different funds pretty much all own the same things, right? So it's a very high concentration of types of borrowers and types of companies in these funds, And so as these companies are not making it, they're either going under or they're having to sell at a loss to a competitor or something else, that's going to flow through to the lender. So even though you are a lender, because you're lending to businesses and technology businesses that don't have a lot of assets, you're taking a lot more risk. And I think this is where some, some investors maybe just assume, hey, I'm in credit, I'm a, I'm a, I'm a debtor, I'm a lender, um, I'm just in a safe position, I'm not going to lose money. But it's all a matter of understanding what you're lending on and what you're lending.

Well, to your point, I mean, if they were doing software investments 2 or 3 years ago, I mean, look at what's happened over the last 2 or 3 years. I mean, we have Anthropic, we have OpenAI, and so of course the valuations of those companies, if they're even still around, of startup software companies, that landscape has completely shifted, right? So I think in some ways, like, these larger companies are being forced to maybe come to grips or just be honest about where their portfolio is in relation to a lot of that. You know, another thing that's really interesting, Ben, we sat at a large conference late last year and we were in the room with some very, very large pension funds, uh, groups with, you know, tens tens of billions of capital that they manage. And private credit still seemed to be kind of the gem of the room. And a lot of people were still talking about it. But I find what's interesting, and I think for especially our investor crowd to be aware of, is that because there has been so much demand for private credit, that actually puts a strain on the system because now BlackRock, KKR, Blue, you know, uh, Blue Owl, these large companies, they don't say no to the money, right? It's not like they're like, oh, oh, we're shut off, like we've hit capacity. No, that's not at all what we've seen. In fact, it's like they just figure out more and more ways to deploy that, which is, you know, as a chief investment officer, you know, good deals are harder to come by than, than money. And would you agree that that's part of the issue, is like the never-ending hunger of the large alligators of private, you know, of private equity are gobbling up more and more capital and got to find more ways to place it. And that is also part of the issue.

100%. And we mentioned the very beginning, this industry has grown. It's grown a lot, right? The demand for this type of capital has grown from the borrowers, but the amount of capital that is wanting to invest in these types of deals and funds has grown at a much faster rate. And so there's just a much larger amount of capital looking into a fixed pool of assets. And so what's happened is a few things. One, to your point, you have to go find somewhere to lend it, to invest it, and you're generally going to start going to tier 2 and tier 3 borrowers that maybe you wouldn't have before. And then the second consequence is, well, if I do want to have higher quality in my portfolio, I have to get very competitive on my yield. So all of a sudden, where you were being able to charge, say, 12%, 13%, 14%, 15% interest rates, now you're having to charge 10%, 9%, 8%. All of a sudden, you're not that much more expensive than a bank, but you're taking way more risk and your cost of capital is still pretty high. And so now what you do, I'm going to go get some leverage on my fund. I'm going to go get some financial engineering, and you're trying to keep things going the way they've been. But the better thing is just don't take the capital and don't reduce your quality of the investments you're doing. And so it's a natural thing that happens in these kind of cycles, right? Because everyone invests Everyone's thinking the same thing. And at this conference, it was so funny to me because everyone's saying the exact same thing. And they're all like, "Yeah, we know private credit's stressed and yields have gone down. It's hard to find good deals, but what else are we going to do?" It was almost like the sense that I got. And it's like, we're getting 9% interest rate now. We were getting 12, 13, 14 a couple years ago, but I would almost argue you're taking more risk now at 9% as a lender than you were at 12% a couple years ago. And I also think too, a lot of these funds that were making loans in 2021, in 2022, which was the peak of the market in a lot of ways, both in real estate, but also in the economy, because that's when interest rates were really low and inflation was going crazy. Well, higher interest rates affects everybody, not just real estate investors. It affects businesses as well, because we haven't seen the same economic growth the growth that maybe we would hope for. The cost of service, the debt has gone up substantially. This cycle, this correction cycle has been a few years. If you're not well capitalized, if you didn't have a huge moat around your business, hey, AI is coming and disrupting a lot of things. We're seeing that early stages already. There's just a lot of extrinsic risks to the business cycle that are causing a lot of these these companies to kind of go belly up.

So let's shift the conversation to how Aspen, you know, is viewing private credit today. We have a private credit fund, of course. You know, is the— is your thesis as a chief investment officer that we still believe in private credit? And how are— how are you navigating these challenges today?

Yeah, yeah, the short answer is absolutely, I still believe in it, uh, just with a big asterisk. We'll talk about the asterisk, but At the end of the day, we named our fund Private Credit because that's what a lot of people understood. It was like, "Hey, I can get nice yields with some lower risk." But again, it's so important to understand what you mean when you say private credit. What are you actually investing in? And so our focus is in real estate, and we generally invest as preferred equity and mezzanine debt into commercial real estate that is new acquisitions, not recapitalizing old struggling positions. And so, if I'm looking at, is there still an opportunity in the marketplace? I look at a few things. One, what's the borrower demand? Are we still getting a lot of requests, incoming requests for this type of capital? The answer is, Unequivocally, yes. I mean, there's more than we've ever seen. And then the other side of the question, so that's the return side of the equation. Now, what's the risk side of the equation? Because there'll be a lot of capital demand, but the risk, the market's getting so aggressive that the risk isn't worth what you're getting. And I look at the types of deals that we're still able to invest in, and it's Awesome. I mean, cash flowing day one, not having to go take these big swings on a value-add program, buying an asset at a 25% discount to the last investor that bought it at the peak of the market. In a lot of ways, in real estate at least, the cycle is starting to reset, meaning the new entrants into the real estate market are buying at new, better values, lower values. They have a strong upside case, and we're coming in, in a much lower position from a total LTV standpoint, which is one of the ways to measure the risk. And so I look at it from our perspective. When we went to this conference, we heard all this hubbub about, "Oh, there's too competitive. There's not enough deals. The yield has gone down so much." In my mind, I'm thinking, it's like, not for us, not for us. And part of it is we're operating in this kind of lower middle market. The rooms we were sitting in was kind of the institutional market where it's all these billions of dollars that are all chasing the same deals, and inevitably it's going to drive down yield. But when you can be smaller, be more nimble, be more agile in finding the opportunities, and we can write smaller checks, right? We'll write a check as small as a few million dollars. And there's just not as much capital competition at that level. And so the lower part of the market, there's just way more opportunity and we could be way more selective. And because we're not writing billions of dollars of deals every year, we have a lot more runway to go grow because we're operating in this smaller part of the market, not competing against the really big funds. And so from my perspective, I still think it's a golden age. I think it's, uh, it's incredible time to be investing in credit for the risk-adjusted return.

So for clarity, you have no need, it seems like, or we have no need to readjust our portfolio, re— you know, essentially, uh, write down any assets for that matter, in the sense of what you— what the same— the, the issues of some of these larger funds. What you're saying is We've not seen that on our end, mainly because of the asset class that we've been lending against.

For sure. For sure. And I think this is another point. One of the challenges of the private markets, again, is transparency and understanding where things are at today, right? Because sometimes you have to dig a little deeper. And I think this is why it's so important to understand not only What the fund is investing in, in private credit, but in any type of asset class, but also how is it being valued? Because we do the same thing. We have audited financials. We have to prove the value of the assets at least annually. And so we're trying to create good methodology that gives a real-time value But when you're investing in these types of investments, inevitably you're going to have write-downs. That's just a part of the game because sometimes businesses go out of business. Sometimes real estate doesn't work out. But the point is you don't want to just kick the can down the road and put your head in the sand and hope that everything works out a couple years later, and then you have a much bigger problem to deal with, with big surprises. So I think it's important to understand when you're investing in you know, private fund, um, that, that is doing some type of NAV calculation, really understanding what that means, how are they doing that, how often, and, and just trying to have a good sense of that.

Yeah. So let's get into a section where, you know, folks are considering private credit or may want to consider private credit for their portfolio. Let's kind of do a little wrap around, help someone think about this from a— you know, we talk about the billionaire portfolio model and having private credit. So you just mentioned understanding how NAV gets calculated in a private credit fund. For someone evaluating private credit, are there other key things to watch for in a fund?

Yeah, for sure. I think, like I said earlier, one of the early indicators is increases of non-acrual positions, and non-acrual just means not paying, right? So, so tracking the health of the, the payments coming into the fund. The other thing that, that private credit funds can do, which can be a little bit of sleight of hand, so you have to really dig into it more, is what's called payment in kind, PIK or PIK. What happens is a fund can charge interest to a borrower, but if they don't have the ability to pay it in cash, they'll just accrue that to the balance of their loan. Instead of, "You owe me $10,000 for last year interest, but you don't have $10,000 to pay me in cash, so I'm just going to add $10,000 to the million dollars that you owe me." I'm going to record that as income because from an accounting perspective, you can record that as income. So you want to look at how much of the portfolio is paid in cash and how much is paid in kind, payment in kind, PIK. If that number starts to go up, that's another indicator. And then really understanding how NAV is derived, probably a little too technical for this conversation, but Understanding what are the methods that they are using? Do they have third-party corroboration of these numbers or are they just marking these values themselves? Because there can be some conflicts of interest. And so you want to make sure that there's outside input to these values that are being derived and in a somewhat reasonable timeframe.

For, you know, our avatar, qualified investor, $1 million to $10 million net worth, you know, do you recommend private credit for their portfolio? And if so, where does that fit and how much?

Yeah, absolutely. You know, we talk about it in, in our book Invest Like a Billionaire. Um, it's a core allocation for a lot of the ultra-wealthy because it does fit this kind of middle part of the portfolio where you get some current yield, you get some current cash flow You get some nice risk-adjusted returns relative to what you can get in the bond market, for example. Bonds, maybe you're getting mid to high single digits. Private credit, you can sometimes get high single digits to low double digits net returns. So you're getting a little bit more return. You just take a little bit more risk. So I think it should be a core allocation. Just like with any type of allocation, timing matters. Where the economy's at and of the vintage of the deals you're investing in. But I do think it should be a core allocation of any portfolio.

5 years from now, do you think the private credit asset class is bigger or smaller?

Absolutely bigger, probably by a large factor. This is not going away. I think there will be some road bumps over the next few years. There's a lot of these funds that invested a couple years ago are now kind of having to make these adjustments, but the demand for the capital is there and it's only going to grow. Banks are continuing to consolidate. They're continuing to have pulled back from what they once were doing. And so this is going to be here for a long time. I don't know if it'll ever be as big as private equity, but I could see it getting close.

So after everything we've discussed, are we on the verge of a private credit collapse or is this more of a normal market correction?

I think it's more of a market correction. I think the headlines are overplaying a lot of the concerns here. Reality, we actually saw this happen in 2022 with BlackRock when they shut off redemptions from their fund and it was a big hubbub and then it fizzled out. I think we're going to see some price more write-downs. We're going to see some more liquidity concerns and constraints. I don't think it's a massive collapse. I think it's going to be a correction. And I do think it really matters where you're in the industry, right? If you're in, you know, real estate, it's very different than in business private credit.

And if someone wants to learn more about Aspen's thesis on private credit or view that offering, where should they go?

I don't know, you tell me.

AspenFunds.us is probably a good place. We have all of our offerings on our page there at AspenFunds.us. Ben, awesome conversation today. Hey, thanks for listening. If you enjoyed this episode, you want to explore more from iLab, head over to Invest thelikeabillionaire.org. Let's keep the conversation going. See ya.