‘We're going to have a crash’: private credit risks exposed

Investors are facing potential financial losses as the Baffler Group collapses and now exposes hidden risks in private credit. So are they truly aware of the dangers lurking behind the high yields? For more, I'm joined by Dale Gillam from Wealth Within. Good to see you, sir. This is another big high-profile collapse. Oh, look, it is. It's huge because they're doing a lot of that sort of lower-cost housing that the government really does want. I mean, we're seeing these companies building thousands of units and things are just stalled. So what's gone wrong? Well, basically, because we've seen, obviously, the Ray Haynes Royal Commission and the whole investigation into the banks, the banks have pulled back all this sort of funding and made funding for these sorts of projects. So everybody's moved to private credit. And when you're looking at private credit, it's another form of the subprime mortgage market, so to speak. It's a different type of credit. But basically, they're asking private individuals to invest money into these projects. Are you getting worried? I just finished listening to Aaron Ross Sorkin's audiobook about 1929 and the lead-up to the Great Depression and the crash of 29. And the similarities are there, but it's also quite terrifying when we've got a point where bond yields are now worrying everybody about the government's ability to continue to borrow. No one seems to want bond yields like they used to. They're all starting to worry. Then you've got the collapse of large organizations and the shift towards private credit. You've got the opening up in the United States and the deregulation of a lot of these big banking institutions, which is what generally leads to this once things start to run out of control in the hope that the economy will take off. Then you've got the AI hype, concerns that it's a bubble as well. Put it all into a pot. What do you get? A crash. I've been saying for three, four years that we're going to have a crash before the end of this decade. You know, we're now halfway in the third quarter of 2026. That's the problem, right? The whole Cassandra idea of constantly saying there'll be a crash, there'll be a crash. We've been hearing it for a while. There hasn't been. Why? It'll happen because of all the things you're talking about. When investors are chasing high yields, which they're doing with private credit, because they're going, oh, I can't get it out of the banks. Banks are great at putting up your home loan rate, but not really good at putting up your investment rates. They don't want to know about that. So people are chasing high income yields. We're seeing the stock market being with all this algorithmic trading and hedge funds. It's a whole different market that we're seeing now than what I saw 20 years ago. And investors are uncomfortable with that. So they're going for private credit. I've got friends that do actually invest in private credit. And we've been saying, do you actually really understand what you're doing? And that's the point is they don't. And they go, yeah, but it's secured by property. And I go, but property is not liquid. No. And at the moment as well, there aren't exactly buyers out there rushing to take it off the hands either. So what happened at Baffler Group? Is that being replicated with other organisations or is it distinct to them? Well, what Baffler Group is doing is what a lot of these sort of developers do. They're setting up what they call special purpose vehicles. So they're just a company that owns the land and does the development. So they're siloed out. So if that one goes belly up, they can still keep going others. But what they're funding it with is private credit. So you're getting individuals chasing a higher yield and they're generally funding these sorts of projects. But if the project is in trouble, how do you sell it quickly? How do you get your money back quickly? You put administrators in, they close up that special purpose vehicle. The developer can still have all the other ones if they haven't gone broke. But that development could go broke. So if this spreads, what happens? Basically what happens is we get a really credit squeeze because people are trying to get out of these. They can't. And we've got all these companies. Similar to the GFC? Yeah, that's what I'm saying. Where I'm going with this is the government, obviously under Rudd, then decided to have a government guarantee to prevent essentially a run on the credit. Do you think that will be necessary? They won't do it. If they're talking about the big four banks, they'll protect them because they have to protect them. Private credit? Private credit, I don't give a damn. And the government's really good at pretending that they're looking after you as an individual, but they're not. They're looking after the big end of town. Did property just get out of control? Did the kind of high yields attract careless investors in a similar way that we saw that led the GFC? Oh, it does. High yields in anything, stock market, we see stock market booms and busts all the time. People chasing Bitcoins. Or races in. As soon as you start seeing something move really far, then what happens is the amateurs get into the top, not the bottom. The smart money was in years ago in the stock market. The smart money was in private credit years ago. It's not getting in now. It reminds me of this line in that book I was referring to in 1929, where some of the old school investors knew that something was about to happen when they saw the street sweeper was buying stocks. And these days a street sweeper would buy stocks, but back then it was a really new thing. And the idea of amateurs getting involved, as you've just said, is when things start to go sour. Is that what we're seeing at the moment? Yes. We're not seeing the euphoria that we used to see, like we saw in 2007. It's completely, as I said, the market's different right now. There's a lot of pessimism at the moment. There's a lot of people holding back. They're not buying homes. The government's getting exactly the opposite of what they wanted. And still head and sand, and not admitting that there's a problem. Oh, absolutely. They haven't admitted there's a problem for years. The government policies are hurting businesses really bad. They're hurting homeowners really bad, and they're hurting investors really bad. What's interesting is Labor generally likes to hurt businesses, because that's what their voter base generally likes to see. But not property. Property is something that Labor voters own property as well. They don't generally run businesses, but they do own property. Are you surprised that they went down that path and they've attacked something that has a massive impact on renters? The prices are going up. On people who own investment properties, that's going up as well. Are you surprised they've gone down that path? No, because I don't think they investigated enough. They were trying to hit trusts, and rich people owning lots of houses and renting them out. So they do a move, but they didn't really follow it through. It's like the dominoes keep going past what they thought they would, and I don't think they did enough research. At what stage will they do a Paul Keating when it comes to negative gearing and say, uh-oh, this isn't working as intended, let's do a backflip? Because he did it. He did do it. And I think to me, and I was only saying yesterday to somebody, I said, Albo won't be here for the next election. He'll have to go. And there might be a backflip before that, because people are still not happy, and they're getting absolutely smashed by One Nation at the moment, and the Liberals are doing better, but they're still not doing what they should be doing. Angus Taylor, no-one's listening, but it's interesting because they seem to be saying this is a problem with the major parties, the uni-party system, if you will, and that's why they're heading towards One Nation in the hope that they will look at this. But One Nation's policies when it comes to property and superannuation announcements this week, what do you make of them? Well, I actually haven't seen those ones, but I know, to me, I think they're a party that actually listens to people. So if people get on board with them and become members, I'm not a member of them at all, but they will listen to that. So I think that's what they've been famous for, is listening to the people on the ground. They've marketed themselves as the party for and of real people. And they should be, because we're not getting that with the uni-party, and that's what we're not getting. We're getting parties that are not even listening to us, and I think whether it's One Nation or whether it's one of the other parties out there, the more independent type of parties, I think we've got to come to some sort of confluence of decision and say, well, what's good for the economy, but what's good for everybody else as well? Because there's a bit of a balance. It's tough being in government, because you've got to make those tough decisions. I just think that the government at the moment is just making all the wrong decisions, because they're alienating so many different people. I mean, if you have a family trust, as a business owner, I've got a family trust to run my business in for protection, but now I'm a criminal because I'm avoiding tax. And I don't avoid tax. I pay more tax than most people. I pay a ---- load more tax than most people. Well, the amount of tax that people are being told to pay is criminal, if you think about it. It's sending businesses broke. You speak to small businesses and start-up founders, as we do every day at Ticker, and the vibe is that my profit is just being taken as tax. It does. And then, you know, with the attack on trust, if you have a trust, you could be paying 60% tax. Like, that's seriously what you'd be paying, around 60% tax. Now, that's criminal in my book, that they waste lots and lots and lots of money. We've seen it in Victoria, with the big build in Victoria. We've seen it in so many things that the federal government are doing. We can't even have roads that don't have potholes in them. You know, you drive along the highway and it feels like you're on a roller coaster. So let's just bring it back, talking about private credit, talking about the concerns of a crash, as you say. What do you think investors need to be mindful of at the moment? Well, many investors invest with emotions, they're chasing high returns, and if you think you're doing that, then you need to look at, well, what is the risk behind that? And that's what I find a lot of investors don't do, whether it's the stock market, which I'm the expert at, and I tell people, it doesn't matter what happens with the stock market, as long as you have a plan. If it goes up, you've got a plan, if it goes down, you've got a plan. What's your entry strategy, what's your exit strategy? So if you're using private credit to get a higher yield, don't put all your eggs in one basket, spread them out over multiple private vehicles that you're doing, that you're funding, so that you can spread that risk. But also know how you're going to get out, and to me, don't go long-term in private credit. If you're doing 30 days, 60 days, 90 days, that's not so bad, because you're going to get your money back within 30, 60 or 90 days, but don't go into longer-term ones at the moment. That's what I'm thinking. Dale Gillen, appreciate your advice as always. Thank you. Thanks.