We are about 18 years into the post-2008 credit cycle. Historically, major credit cycles tend to last around 13 to 20 years. By that timeline alone, we are in the late stage.
But the more important question is not timing. It is structure.
Every credit cycle ends the same way. A new part of the financial system grows rapidly after the last crisis, usually in areas with less regulation, more opacity, and strong demand for yield. Lending standards slowly weaken, leverage builds up, and risk gets pushed into places that do not look dangerous until rates rise or liquidity disappears.
In the early 2000s, that market was subprime mortgages and structured credit.
Today, that market is private credit.
Private credit has grown from almost nothing after the Global Financial Crisis to roughly $1.7 to $3.5 trillion today, with direct lending alone around $2 trillion. The structure should sound familiar. Covenant-lite loans, payment-in-kind structures, manager-marked valuations, and heavy exposure to private equity-backed companies. Much of this lending exists outside the traditional banking system, but it is still deeply connected to banks, insurers, pensions, and retail capital through funds and financing lines.
The risk is not that every loan defaults. The risk is that these assets are illiquid and marked to model, not market. Prices look stable until they suddenly move, and when they move, they tend to move all at once.
Public markets may already be signaling this. The largest publicly traded private credit managers are down roughly 25 to 40 percent from recent highs. That may be equity investors pricing in future markdowns in the underlying loan books.
If markdowns remain small, the system can probably absorb the losses. If markdowns reach 25 to 40 percent, the losses could reach $500 to $800 billion across direct lending alone, with knock-on effects across private equity, banks, insurers, pensions, and eventually employment and small businesses.
There is also a second-order effect that most people are not paying attention to yet. Many of these same private credit assets are now being tokenized and used as collateral in DeFi. If private credit valuations fall, those tokenized assets will fall with them, which could trigger liquidations and stress in parts of the crypto market tied to real-world assets.
The full paper walks through:
The post-World War II credit cycle timeline
The parallels between subprime and private credit
Why private credit valuations may be misleading
Two scenarios for the next credit unwind
How this could affect banks, private equity, and the real economy
Why tokenized real-world assets may face their first real stress test
