Private Credit Explained: Inside the $40 Trillion Market No One Fully Understands
Introduction
Private credit is everywhere right now.
Every week—sometimes every day—there’s a new headline:
Redemption pressure
Software exposure
Liquidity concerns
Systemic risk fears
But most of these conversations miss something fundamental:
They’re only talking about a small slice of a much larger system.
To understand what’s actually happening, you need to zoom out.
What Private Credit Actually Is (Beyond the Headlines)
Most media coverage focuses on:
Direct lending
Private equity buyout financing
High-yield corporate loans
That’s roughly a $1–2 trillion segment.
But the real picture is much bigger:
Private credit is closer to a $40 trillion ecosystem.
It includes:
Mortgages
Commercial real estate loans
Equipment financing
Aircraft lending
Inventory finance
Trade finance
These aren’t new innovations.
They’ve existed for decades—just outside public markets.
Why Private Credit Is Suddenly in the Spotlight
The recent concerns center around one thing:
Software Exposure
Over the last few years:
~1/3 of private equity buyouts were in software
Hundreds of billions in capital are tied to this sector
Now AI is changing the equation.
The risk:
Software can be rebuilt quickly
Barriers to entry are collapsing
Pricing power may weaken
Example:
A basic application can now be built in minutes using AI tools.
That raises a critical question:
If software becomes easier to replicate, what happens to its valuation—and the loans backed by it?
The Reality: Not All Software Is Equal
It’s tempting to assume:
“AI will destroy software businesses.”
But that’s overly simplistic.
There’s a spectrum:
High-risk software:
No moat
No proprietary data
Easy to rebuild
Lower-risk software:
Deeply embedded in enterprise systems
Regulated environments (e.g., aviation, finance)
Complex integrations (ERP systems)
These systems are:
Extremely difficult to replace—even with better technology.
So the real question isn’t:
“Will software fail?”
It’s:
“Which software is vulnerable?”
Apollo’s Model: Why It Looks Different
Most people think private equity firms:
Buy companies
Add leverage
Exit for profit
But Apollo operates differently.
Less than 10% of its business is traditional private equity.
The majority is:
Lending across multiple verticals through 16 origination platforms
The Core Strategy: Build an Origination Machine
Apollo’s edge isn’t just lending.
It’s scale.
Key idea:
To find the best opportunities:
You need to evaluate 10–20x more deals than you actually fund
That requires massive infrastructure
Thousands of people sourcing + underwriting
Result:
A wide funnel → selective capital allocation → better risk-adjusted returns
Why Companies Borrow Privately (Even When It’s More Expensive)
A key question:
Why would a company borrow at higher rates privately instead of public markets?
The answer:
Customization + Certainty
Private credit offers:
Flexible structures
Drawdown-based financing
Inventory financing solutions
Long-term capital planning
Example:
A company planning $5–10B in capex:
Public markets → raise capital repeatedly
Private credit → secure capital upfront
That’s not just financing.
It’s risk management.
The Hidden Risk: Liquidity, Not Credit
Most people focus on credit risk (defaults).
But the real danger is:
Liquidity risk
This is what causes systemic crises.
Example:
Long-term assets
Short-term liabilities
If funding disappears → collapse happens fast
This is what triggered:
Bank failures
Market panics
How Apollo Thinks About Risk
Their framework is simple but strict:
1. Liquidity first
Assume no new funding ever comes in
Can the business survive?
2. Diversification
Across sectors, assets, geographies
3. Credit quality
Majority investment-grade exposure
4. Duration matching
Assets and liabilities aligned
This approach is intentionally conservative.
They underwrite as if a crisis is always coming.
The Controversy: Redemption Limits
One of the biggest criticisms:
Investors want liquidity
Funds cap withdrawals (e.g., 5% per quarter)
When redemption requests exceed limits:
Only partial withdrawals are honored
This creates backlash.
But structurally:
These are illiquid assets by design.
Letting everyone exit at once would:
Harm remaining investors
Break the system
So the real tension is:
Liquidity expectations vs reality.
The Transparency Myth
Private credit is often called:
“Opaque”
But that’s not entirely accurate.
In many cases:
Insurance vehicles disclose every loan
Details include borrower, size, maturity
The issue isn’t lack of data.
It’s:
Complexity and accessibility.
What Happens in the Next Credit Cycle?
The key question:
Where does the system break?
Likely pressure points:
Software-heavy portfolios
Funds with weaker underwriting
Liquidity-mismatched structures
But importantly:
Risk has shifted away from banks
More risk sits in less-levered funds
Which means:
The system may bend—not necessarily break.
Final Takeaway
Private credit isn’t one thing.
It’s:
A massive, complex ecosystem of capital flows.
The current fear cycle is focused on:
Software
AI disruption
Redemption pressure
But the deeper reality is:
Risk is unevenly distributed
Structure matters more than headlines
Liquidity is the real fault line
If you understand those three things:
You understand where the real danger—and opportunity—lies.
Until next time, this is Steve Eisman, and this has been The Real Eyes Playbook. .
If you’d like to catch my interviews and market breakdowns, visit The Real Eisman Playbook or subscribe to the Weekly Wrap channel on YouTube.
This post is for informational purposes only and does not constitute investment advice. Please consult a licensed financial adviser before making investment decisions.
