A $2 Trillion Time Bomb Is About to Explode (Worse Than 2008)

Recently, investors asked to withdraw their own money from one of BlackRock's investment funds, and they outright said no. But it wasn't just BlackRock. The same thing happened at Apollo, Ares, and Blue Owl, three other giant investment firms that manage money for everyone from individual investors to pension funds. These are some of the biggest names in the world of finance, and one by one, they slammed their exit door shut, and thousands of people suddenly realized the money they thought was theirs wasn't really theirs at all. This is all happening because of something called private credit, which is a $2 trillion ticking time bomb, and the countdown has just been triggered by AI. This is shaping up to be bigger than the entire subprime mortgage market that blew up and was one of the key triggers leading to the 2008 financial crisis, and almost no one can see it this time around. I've been investing for the best part of 40 years now, and I've seen this sort of thing play out time and time again. So in this video, let's break down what private credit is, why it's such a big problem, and what you can do to protect yourself. Think about the last time you borrowed money. Maybe it was a credit card, car loan, or even a mortgage. Either way, the chances are there was a bank involved, which means you knew the interest rate, and there were pretty clear rules about when you had to pay it back. But there's another lending system that most people have never even heard of. Instead of banks lending money to companies, giant investment firms like BlackRock, Apollo, Ares, and Blue Owl can raise money from investors and lend it directly to businesses. It's called private credit, and I'll be the first to admit it sounds incredibly boring until you realize this market has exploded to around $2 trillion. Some of the biggest investment firms in the world are piling into it, and ordinary investors are increasingly having exposure to the firms and funds involved. The easiest way to understand it is to imagine borrowing money from a family member instead of going to a bank. You agree the amount, the interest rate, and when you'll pay it back between yourselves. Private credit works on a much bigger scale. So instead of your uncle lending you $5,000, investment funds can lend companies hundreds of millions of dollars. And because these loans are privately negotiated, we generally don't hear anywhere near as much about them as we do with publicly traded debt. For years, this market was mostly ignored, but recently, it's absolutely exploded. And whenever trillions of dollars move into a part of the financial system that most people barely understand, there's one question worth asking. How did it get so bad? And to answer that, we have to go back in time. You probably remember the financial crisis in 2008, even if you were just a kid, because, well, you know, the banks collapsed and nearly took the whole world down with them. I remember it well. And during the crash, the stock market lost more than $29 trillion of value in just 17 months. So when the dust settled, regulators put the banks on a very short leash, and rightly so. They basically told them, you nearly destroyed the global economy, so from now on, play it safe and stick to the boring stuff. And to be honest, the banks were quite happy to do that because the boring stuff is predictable and easy to scale. But because the banks went back to their safe little corner, they left an entire group of borrowers, such as mid-sized companies, with nowhere to go. Of course, everything was all right for the big companies because, let's be real, they always find a way. But the factory that employs a few hundred people or a software company just finding its feet were essentially told, no, we can't lend to you anymore. This left us with two groups of people, the companies that needed money but had nowhere to go, and the investors that had lots of money and wanted a better return on their capital. And I can't stress enough how hungry these investors were. Back then, interest rates were on the floor, so a normal safe bet like a government bond was paying next to nothing. Then along comes private credit, dangling eight, nine, and sometimes even 10%, and suddenly, everyone wanted in. So as you can imagine, private funds looked at the gap that the banks had left and walked straight in, with no regulators breathing down their necks. It's quite ironic, really, that the 2008 crisis was caused by the banks. We then made rules to stop all the risky lending, and the problem was just picked up by private funds and moved somewhere no one was watching. But hey, who am I to blame them for filling the gap in the market? But over the next decade, that market went from somewhat niche to a $2 trillion ticking time bomb. Imagine there's a good business that's worth around $100 million and a private equity firm wants to buy it. You'd probably assume they'd just pay the $100 million for it. But a lot of the time, what they actually do is put in maybe 20 million of their own money and borrow the other 80. However, it's not them that owes the $80 million. It's the company, because they buy it using the company's own future as collateral. It's called a leveraged buyout. And if you think that sounds a bit like buying a house then telling the house it has to pay the mortgage, well, yeah, it's more or less exactly that. Once they own the company, they can then borrow even more money via the business and pay that borrowed money straight to themselves as a reward. It's called dividend recapitalization, but that's just an unnecessary way of saying they get paid and the company gets the bill. Whether the company sinks or swims, the firm that bought it tends to get paid either way. They charge a fee for doing the deal, a fee for running the place, and then they can pay themselves huge dividends of borrowed money way before anyone knows if it's actually going to work. Now, most of the time, you never hear about any of this because it happens quietly and the companies just limp along. But every now and then, it goes so badly that people get hurt. You might remember Toys R Us. I used to take my son there when he was little and he absolutely loved it. Well, he probably still would if they were open, but don't tell him I told you that. Anyway, Toys R Us didn't necessarily die because kids stopped wanting toys. It died because it got bought, loaded up with billions in debt, and eventually, the weight of that debt crushed it and around 33,000 people lost their jobs. And before you think that's just an old story from years ago, almost the exact same thing happened just last year with a car parts company called First Brands that most people have never heard of. But it grew into a giant by borrowing money to swallow up other companies. Then in 2025, it collapsed basically overnight, owing more than $11 billion, and it turned out a big chunk of that borrowing had been tucked away where even its own lenders couldn't see it. The founder is now being sued by his own company for allegedly making billions of dollars disappear. But the problem for the wider economy is that when there's so much money chasing deals, you start running out of good companies to lend to. And because people are naturally quite greedy, you instead just start lending to worse businesses and tell yourself, it'll be fine. For years, none of this really mattered because money was basically free and interest rates were in the gutter. So even a not so healthy company could afford its debt. And then everything changed. The interest rates on these loans isn't fixed, it's variable, which means it moves up and down with whatever the central bank happens to be doing at the time. When rates are nearly zero, it can feel like a bit of a gift, but when rates climb, it's a completely different story. Imagine a company sitting on that $80 million of debt we talked about earlier. When money was cheap, it was maybe 4 million a year in interest, which is obviously annoying, but somewhat manageable. Then interest rates go up and on that exact same loan, the interest bill jumps to $8 million a year. Nothing about the business has changed. They're not making any more money to deal with the increase in loan payments, but the cost has doubled. And for a lot of businesses, that can be the difference between making a profit and drowning. But if that was the whole story, we'd be able to see the damage when companies default and miss payments, which is why the firms lending the money came up with something called PIC, which stands for Pay In Kind. It sounds confusing, which is most likely intentional, but all it really means is that when a company can't afford to pay the interest on its loan, they can pay it with more debt by essentially telling the lender, let's sort it out later and I'll owe you even more. On paper, everything looks fine because the loan isn't in default, but underneath it all, the debt is growing like damp hidden behind a freshly painted wall. There's also a second trick called distress restructuring, which really means rewriting the terms of a failing loan so it never shows up as a missed payment. Some sources reckon around two thirds of last year's private credit defaults were dressed up exactly this way. This is where it gets interesting, as roughly a quarter of the money these funds have lent out has gone to software companies like subscription tech firms, which are the exact companies now being disrupted by AI. Their valuations are falling off a cliff and it's got so bad that some people are calling it the SaaS apocalypse and I can see why, because most software as a service platforms can be vibe coded in a basement at a fraction of the cost and the default rate in this market just hit a record 6% according to Fitch and Morgan Stanley has warned it could climb towards 8%, particularly as AI disruption puts more pressure on these software companies. Now 6% might not sound that scary, but you have to remember this is just a number they're admitting to. The real question is how bad actually is it underneath? Because as I've said, there are various ways for them to manipulate these figures. So even if the whole thing is falling apart, how would you ever see it? Well, luckily it turns out there's a window. So let me give you a peek inside. While the loans themselves might be private, a lot of the firms making the loans are publicly traded companies like Blue Owl, Apollo, Blackstone and KKR to name a few. These are the giants of the private credit world and their shares trade on the open market to people like you and me every single day. So luckily for us, when the private stuff starts to go bad, the people running these firms can't easily hide it in a report. They can use the paying kind trick and delay the bad news of course, but they can't control what other investors are willing to pay for their stock. A lot of these funds will tell you exactly what they think their loans are worth by publishing their net asset value, which is the value of everything they own. And right now, investors are basically refusing to accept it, resulting in them trading at heavily discounted rates when compared with the value they claim to have. That gap is real people saying, no thanks, we think these loans are worth a lot less than you're telling us. And that's the whole point. They can try and hide a bad loan, but they can't hide their stock price. The Blue Owl CEO actually stood on stage telling investors his fund has, and I quote, lots and lots of liquidity and had met every single withdrawal request it had ever received, then limited withdrawals two weeks later. And it wasn't just panicking amateurs trying to pull their money out. A lot of it was big institutions and family offices, essentially the kind of people who do this for a living. I've always been of the opinion that when the people with the best information are heading for the exit, it can tell you quite a lot if you're paying attention. So that's our first window into what's really happening. However, you could argue that a falling stock price is just some rich investors having a bad year. And if I'm being honest, that's fair. Apart from the fact that this money doesn't just stay in the world of private credit, it's actually wired directly into the banks that you trust with your own savings. Instead of just lending out their own money, these private funds also go to the big regular banks and borrow from them so they can lend even more. But why should you care about that? Well, even if you've never put a penny into private credit, this means the banks holding your savings, giving out mortgages and lending to businesses are all connected to this mess. So far, the banks have lent these funds close to $300 billion. And what do you think the funds put up as security for those loans? Often, it's the same shaky loans we've been discussing. And this isn't just me guessing. Deutsche Bank has already disclosed around $30 billion of exposure to this issue. The Federal Reserve is going around directly asking how much private credit debt and loans they're exposed to. And the boss of JP Morgan says losses are already higher than they should be. When a man who has every reason to keep everyone calm tells you the losses will be worse than people think, you should definitely listen. Look, I'm not saying your bank account is suddenly in danger. However, the problems that started behind the closed doors of private funds don't necessarily stay there. Now, I know in the grand scheme of big banking, these numbers aren't exactly draw dropping, but at the same time, the losses are higher than they should be. So if this problem continues, it could lead to issues in the very place you keep your money. A lot of people are comparing this to 2008 all over again. And I understand why. Because 2008 was linked to risky loans. So it's safe to say we're seeing some similarities. But let me give you my honest take as someone who invested and built wealth throughout the entire thing. In 2008, there was this crazy spider web of side bets and credit default swaps layered on top of mortgages. So when one thing fell over, it took 10 other things down with it. If I'm being real, that web mostly isn't here this time around. And the banks are definitely in a much better position than they were back then. But, and this is a big but, this private credit malarkey could still hurt us badly, just in a slightly different way. In 2008, the damage ran through houses. And this time, it's around 3,700 companies employing nearly a million people. And the time bomb is ticking. It's known as the maturity wall, which is basically the deadline for paying back all these loans. And $2 trillion of this debt has to be paid over the next couple of years. This leaves the companies with two choices, to refinance it, which means take out a new loan to replace the old one, or go bust. And refinancing only works if someone's willing to lend to you at a rate that you can actually afford. After being ambushed by the rapid advances in AI, a lot of these companies are already limping. Some can only just about cover their payments as it is, and others aren't really paying at all. So asking them to refinance the whole lot at today's much higher rates, is a bit like asking someone who's already struggling to pay off their credit card in one go. For a lot of them, it just isn't gonna happen. 2008 was about the value of your house on paper. Private credit is about whether these companies can make their next loan payment, and what happens to the people that work there if they can't. How bad it will really be depends on how quickly it happens, and how many people lose their jobs at the same time, which leads me to the question that actually matters to you. Now, there's no way to predict with 100% certainty if and when all of this is gonna come crashing down, but there are a few things you can do to stay informed and come to your own conclusions. Firstly, keep an eye on the asset manager stocks like Blue Owl, Apollo, BlackRock, and KKR. You don't need to buy or trade them, but maybe just add them to your watch list so you can see what's happening. If those stocks start falling again, and especially as a group, that's a good sign that the private loan rot is coming back into the view of the public. Secondly, watch the discounts to net asset value on these funds. It's a bit more complicated, but when these funds are trading well below the value they claim their loans are worth, that's the market telling you it doesn't trust the official story, and the wider that gap gets, the bigger the problem. And thirdly, keep an ear out for the word refinancing. If you start hearing a lot of companies can't or are struggling to refinance, that's them hitting a wall and finding out there's no door, which could lead to a total collapse. If you wanna understand why stocks are at record highs despite the economy being broken, then I'm gonna leave that video right up there, but don't click on it just yet. Make sure to subscribe if you wanna stay ahead of everyone else, okay? I'll see you over there.