Private credit is lending that happens entirely outside the traditional banking system — and right now, it might be sitting on a ticking time bomb. Steve Eisman, the investor famously immortalized in The Big Short for predicting the 2008 banking collapse, is sounding the alarm on private credit and its dangerous overexposure to software companies being disrupted by AI. The risks are real, the data is being hidden, and retail investors are already trying to get out.
What Is Private Credit and Why Is It Risky?
At its simplest, private credit is when companies borrow money not from a bank, but from a private fund or non-bank lender. It sounds straightforward, but the reason it exists — and the reason it's now a problem — traces directly back to the 2008 Global Financial Crisis.
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Steve Eisman explains why private credit's opacity makes systemic risk impossible to measure until you're already inside the crisis
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After the GFC, regulators rightly cracked down on banks. Tighter capital requirements, stricter lending rules, more oversight. The problem? The demand for borrowing didn't disappear. It just moved. Companies that couldn't get financing from traditional banks turned to private credit funds instead, and the industry exploded in size.
Here's the core criticism: the post-2008 banking regulations didn't eliminate risky lending. They just shifted it from somewhere transparent — the banking system — to somewhere opaque. That's literally what the word private in private credit means. We can't see what's happening inside these funds until something goes wrong. And as Steve Eisman put it bluntly, an entire generation of private credit executives have mistaken the absence of a credit cycle for personal genius.
Who Are the Biggest Players in Private Credit?
You probably already know the names. Blackstone. Apollo. KKR. Ares. Carlyle. These are the giants of the alternative asset management world — firms that originally built their reputations in private equity by buying companies, improving them, and selling them for a profit.
But over the past decade, these firms spotted something obvious: when you're buying companies with debt, why let the banks earn all the interest? So they built private credit arms alongside their private equity businesses. Now, in one part of the house, private equity buys companies. In another part, private credit lends those same companies the money to get bought.
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The circular structure: private equity buys companies while private credit lends to those same companies
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If that sounds circular, it's because it is. These firms raise massive pools of capital from pension funds, insurance companies, and increasingly retail investors, then deploy it as loans to businesses — often smaller, more leveraged businesses that traditional banks wouldn't touch. Higher risk means higher interest rates, which is why private credit has offered such attractive yields. But those yields come with strings attached that are only now becoming visible.
There's also a detail that makes this messier: private credit funds don't just raise money from retail and institutional investors. They also borrow directly from major banks. So the regulations that were supposed to stop banks from making risky loans have really just added a middleman. Banks lend to private credit funds, who lend to risky companies. The risk hasn't gone away — it's just wearing a different outfit.
What Is the SaaS Apocalypse and Why Does It Matter?
The immediate trigger for the current crisis is what's being called the SaaS apocalypse: a brutal sell-off across the software industry driven by fears that AI will either cannibalize revenue growth or outright replace entire software platforms.
Think Salesforce, Adobe, Snowflake, Atlassian, Shopify — all under serious pressure. But it's not just the big public companies. It's the hundreds of smaller private SaaS businesses that private equity firms snapped up between 2018 and 2022, when software was the hottest investment on the planet.
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Steve Eisman breaks down the leverage comparison between private credit today and the major banks heading into the GFC
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Here's the problem Steve Eisman flagged directly: roughly 25% of all direct lending loans in private credit are to software companies. These aren't the large, profitable, well-known tech firms. These are smaller, more leveraged, lower-quality software businesses bought at peak valuations — and they're now facing a world where AI could fundamentally undermine their business models.
If these companies see their cash flows shrink because of AI disruption and then have to refinance their loans at today's higher interest rates, many of them simply won't be able to pay. When you're talking about one in four private credit loans, that's not a niche problem. That's a systemic one.
What Does Steve Eisman Actually Say About Private Credit?
Steve Eisman is one of the most credible voices on this topic — not because he's contrarian for sport, but because he's been right before when almost everyone else was wrong. In a recent interview, he laid out his thinking clearly.
He acknowledged that as recently as last year he wasn't sure whether private credit posed systemic risk because the data simply isn't available. That opacity is itself a warning sign. But as more information has come out, his concern has grown. He specifically pointed to the take-private deals done between 2018 and 2022, noting that those businesses are generally smaller, lower quality, and were purchased at far higher valuations than even the large public tech names that have since crashed.
John Zito, a top executive at Apollo — one of the biggest private credit players on the planet — recently admitted publicly that he is no longer confident about what will happen with technology portfolio companies. When insiders at the biggest firms start talking like that, it's worth paying attention.
Why Are Investors Rushing to Exit Private Credit Funds?
Because private credit loans aren't publicly traded, they're illiquid by nature. Historically, institutional investors accepted that trade-off: lower liquidity in exchange for higher yields. But as private credit firms have aggressively courted retail investors, they've had to create the appearance of liquidity by allowing quarterly redemptions — typically capped at 5 to 7% of total assets.
Now that the software exposure has been revealed, investors are sprinting for the exits — and hitting those caps hard:
- Blackstone's BCRED ($82B fund): Received a 7.9% quarterly redemption request. Cap is 5%. Requests went unfulfilled.
- Cliffwater Corporate Lending Fund ($33B): Investors requested 14% redemptions. Only 7% was honored. Half left stranded.
- Morgan Stanley North Haven Private Income Fund ($8B): 10.9% redemption request. Only 5% honored.
- BlackRock HEND Fund ($26B): 9.3% redemption request. Capped at 5%.
This is the illiquidity trap in real time. People want out, the funds can't let everyone leave at once, and the investors who got in most recently are stuck holding the bag while they wait.
Are the Big Banks Actually Exposed to Private Credit?
This is the question that determines whether this stays contained or becomes a broader systemic problem. And the honest answer is: yes, banks are exposed, but probably not at GFC levels.
Steve Eisman's view is nuanced here. He acknowledges that because private credit funds borrow from banks — typically at around 2:1 leverage — if private credit takes significant losses, those losses will flow back to the banks. That's real. That's a genuine transmission mechanism.
But here's why he doesn't think this is 2008 all over again: in the lead-up to the GFC, when you added back all the off-balance-sheet exposure the major banks were hiding, their real leverage ratio was closer to 40:1. Private credit BDCs (Business Development Companies) are capped at 2:1 leverage since 2018. That is not the same house of cards.
The comparison matters. A 2:1 leveraged structure absorbing losses is painful but survivable. A 40:1 leveraged structure absorbing losses is a total collapse. That's the difference between a serious bruise and a broken spine.
Could Private Credit Trigger Another Financial Crisis?
Based on what we currently know, the honest conclusion is: probably not at GFC scale, but it's going to hurt — and hurt badly for anyone directly exposed.
Private credit firms are already being caught massaging their data. The Wall Street Journal investigation found that firms like Blue Owl, Blackstone, Ares, and Apollo were misclassifying software loans under adjacent sectors — healthcare, financial services — to make their software exposure look smaller than it actually was. Blue Owl reportedly disclosed only half its true software exposure. That's not a good-faith disclosure. That's damage control.
When the institutions managing your money start hiding what they're invested in, the trust erosion that follows can be just as dangerous as the underlying losses. As Steve noted, once trust is broken in a financial system, it's very hard to restore.
The bottom line: private credit will almost certainly take significant losses if AI continues to disrupt smaller software companies and those companies struggle to refinance at today's rates. Investors — retail investors in particular — will feel that pain. Banks will absorb some of it too. But the leverage levels today are fundamentally different from 2008, and that matters enormously for how far the damage spreads.
This isn't the big short happening again. But it's not nothing either. And the fact that we're only finding out how bad it is now — after the money's already been deployed and the exits are already jammed — is exactly the risk that critics of private credit warned about from the beginning.
