Private credit risks and systemic concerns (with Lizzy, Tom)

3/16/2026 9:34:52 PM	short term cautious up	6 days later	+3.14%	+1.57%
12/11/2025 4:34:08 PM	medium term cautious down	21 days later	-0.17%	+0.08%

Asks if there will be more redemption requests climbing in private credit.

Lizzy

Alberto Gallo

The core of private credit is a broken promise: double-digit returns with low risk. In reality, returns have been mid to low single digits even in good times. 10% of companies are paying in kind, 40% have negative free cash flow.

You are betting on a giant lever that has been pushing up the capex effort for AI, but all you are gaining is a few basis points. You're not getting the upside.

Asks if it's healthy to clear out retail investors.

Lizzy

Alberto Gallo

Retail investors should not have been there in the first place due to lack of disclosure. There are many ways to delay losses and reduce transparency. At some point, the bill comes when inflation is high and the Fed needs to hike.

What AQR calls 'volatility laundering'.

Asks if there is potentially a systemic risk from private credit.

Tom

Alberto Gallo

Regulators conclude it's not systemic yet, but the risk is through the insurance sector, not banks. Life insurers, controlled by the same private equity firms, have trillions in balance sheets. Private credit is around $2.5 trillion, similar in magnitude to subprime in 2008.

Asks if higher inflation and rates derail the AI rally more substantially.

Tom

Alberto Gallo

Credit is priced for perfection with the lowest spreads in 30 years. You want to be nimble. If the economy is too hot (inflation above 3%, Fed hikes), you lose. If too cold (AI successful but job losses), firms go out of business.

You are essentially selling a put option and a call option by being long credit at 7-8% yield. It's not a great thing to be locked into this sort of investment right now.

Asks what the bigger risk is: the inflation story or the debt tied to AI.

Lizzy

Alberto Gallo

The bigger risk is the economy getting hotter in the US. Deregulation will add $2 trillion of bank balance sheet size. There are institutional attempts to prolong the cycle and expand credit supply, overheating the cycle.

After elections, things might change and we might have less fiscal spending.

Asks if we are underestimating how bad the default cycle will be.

Lizzy

Alberto Gallo

It will be bad in private markets. Most credit growth in the last 10 years happened through private markets. Private fund notional size went up 3-5x to $2.5 trillion, a lot of adverse selection. 40% of that in the US is tech and negative free cash flow.

All the firms that couldn't fund in public markets, the firms that were a little bit more opaque or levered, went to private funds.

Asks about the implications for Europe.

Tom

Alberto Gallo

Europe is at the largest short positioning in 15 years due to geopolitics. Spreads are tight everywhere, but there are unloved assets. Europe has been left behind, which gives a cushion. On down days, European credit is pretty stable.

Investors have gone very long Trump and MAGA and all the assets linked to that policy. Europe has been a little bit left behind.

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