The GFC taught The Big Short’s Greg Lippmann one lesson – he thinks markets have forgotten it

Private credit and leveraged corporate lending have accumulated vulnerabilities that could make markets more fragile than current valuations imply.

• US private credit has grown to more than US$1 trillion within an approximately US$4 trillion non-investment-grade market, while rapid growth has weakened lending standards.
• Australian private credit is structurally different because it is more often property-backed, but the US model of lending directly to businesses has not yet been tested at this scale in a recession.
• Institutional and retail vehicles face different risks: long-term locked-up capital is generally more carefully managed, while retail products may offer flexible liquidity that mismatches the underlying assets.
• Antipodes had short positions in private-credit and private-equity managers, which benefited when software-financing concerns hit those stocks; the managers argue that excessive leverage, rather than AI disruption itself, was the main problem.
• AI capital expenditure is estimated at roughly 3% of US GDP and is increasingly debt-financed, potentially creating competition for borrowing between hyperscalers and the US government and increasing pressure on Treasury yields.
• Corporate borrowers now have fewer lender protections: covenant-light loans rose from about 25% before the GFC to more than 90% recently, while lower-income households have received roughly 42% of their income growth from government spending and the wealthiest 20% have received 52% from equity-market effects.

Takeaway: Investors should treat private credit, leveraged corporate debt and rising-rate exposure as connected risks, favour careful underwriting and active credit selection, and consider hedges with sensitivity to private credit while recognising that well-constructed credit portfolios can still provide income and reduce volatility.