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10-09-2024, 10:10 AM
(This post was last modified: 10-09-2024, 03:00 PM by Duskerdawn.)
Have been reading alot of articles on it and the feel like it's the next biggest investment bomb/ponzi (i.e. similar to subprime mortgage meltdown in 08/09)...
https://www.bloomberg.com/news/features/...epage-asia
"Rowan, who’s widely seen as the pioneer of private equity’s push into insurance, argues the premium comes from private credit’s illiquidity, or the difficulty of selling it quickly, not its risk of default."
I think the main issue of Private Credit although it has "low risk of default" is that there is no price discovery which causes more severe defaults when they happen.
Additionally the reason for growing demand is due to messaging and also incentive structure of private credit sales.
What he doesn't tell you is that for every dollar of investment brought into Private Credit often pays out a higher amount of commission/kickbacks. The incentive to sell them is what brings about the premium. As munger indicated "show me the incentives and I'll show you the outcomes".
In addition to the above, if you search the keywords "private credit + payment-in-kinds (PIK)" and understand that PIKs is just a form of accounting magic to book profits for debt that is not paid. You will be able to see the ponzi structure where Private Credit books accounting profits from interest that is not paid and the fund pays out from the new investors into the funds.
While I note that not all Private Credit funds are Ponzi schemes, a large number of them have the above elements and have the same symptoms of swashbuckling salesmanship similar to the pre-08/09 marketing of MBS.
Hence, it's once place I wish to call out and hope to bring attention to and if you have any additional points to add, please do.
Edits to above 10 sep - corrected some minor misinterpretion.
https://www.bloomberg.com/news/features/...epage-asia
"Rowan, who’s widely seen as the pioneer of private equity’s push into insurance, argues the premium comes from private credit’s illiquidity, or the difficulty of selling it quickly, not its risk of default."
I think the main issue of Private Credit although it has "low risk of default" is that there is no price discovery which causes more severe defaults when they happen.
Additionally the reason for growing demand is due to messaging and also incentive structure of private credit sales.
What he doesn't tell you is that for every dollar of investment brought into Private Credit often pays out a higher amount of commission/kickbacks. The incentive to sell them is what brings about the premium. As munger indicated "show me the incentives and I'll show you the outcomes".
In addition to the above, if you search the keywords "private credit + payment-in-kinds (PIK)" and understand that PIKs is just a form of accounting magic to book profits for debt that is not paid. You will be able to see the ponzi structure where Private Credit books accounting profits from interest that is not paid and the fund pays out from the new investors into the funds.
While I note that not all Private Credit funds are Ponzi schemes, a large number of them have the above elements and have the same symptoms of swashbuckling salesmanship similar to the pre-08/09 marketing of MBS.
Hence, it's once place I wish to call out and hope to bring attention to and if you have any additional points to add, please do.
Edits to above 10 sep - corrected some minor misinterpretion.