Markets have spent recent weeks fretting about private credit. A spate of bankruptcies and fraud allegations will do that. Given extended valuations, low cash balances and extreme leverage, the real surprise isn't the market volatility it sparked, but its lack of follow-through.
We think blaming our forthcoming hangover on private credit, however, only tells part of the story.
The recent cases grabbing headlines (First Brands, Tricolor, Cantor Group) don’t appear to have been private credit deals but rather bank loans gone bad. But before private lenders start popping champagne corks, they should note what these cases actually reveal: booms mask problems that economic fragility exposes. That fragility is here now, concentrated in the bottom 80% of earners. And growth-hungry lenders, private credit amongst them, likely have far more exposure to struggling borrowers than they may realise.
At the same time, this is not a 2008 canary in the coal mine. The Global Financial Crisis happened because leverage was extreme and capital buffers non-existent. Today's problem is different: it's about credit selection and exposure to a weakening segment of the economy, not systemic undercapitalisation.
So, what happened?
First Brands, an auto parts maker, filed for bankruptcy protection last month with over US$10 billion in liabilities. Tricolor, a subprime autolender, collapsed shortly after. And this month, two banks sued Cantor Group funds, alleging fraud on nearly US$160 million in commercial real estate loans. None appear to have been borrowing from private lenders. In fact, all three had strong banking sponsorship.
What all three cases have in common are allegations of control fraud, a virulent form of agency risk where insiders exploit their position at the expense of lenders. Banks usually insulate themselves fairly well from such risks. Perfected security and control over cash collection accounts are considered the starting point. All three borrowers appear to have gotten around those bedrock principles. This shows a stunning lack of diligence on the part of banks.
It's the economy…
So why are these cases surfacing now?
What brings all episodes of fraud to their end state is economic weakness. Questionable schemes emerge during booms, when lenders grow complacent and money flows freely. They collapse during downturns, when the constant flow of new capital and refinancing that keeps them alive dries up.
We have two clear and interconnected signs flashing red: jobs and housing.
Year-to-date, employment growth in the US has been dominated by the healthcare industry. This picture is, of course, as much about non-healthcare slowdown as it is about out-of-control growth of healthcare demand.
Figure 1. Healthcare dominates job creation as a percentage of total new non-farm jobs
Source: Bureau of Labor Statistics, as of 30 August 2025.
Problems loading this infographic? - Please click here
But we cannot help but note that the ongoing government slowdown is a battle over healthcare spending. Since the Federal government picks up 40% of all spending on healthcare (up from 20% in 1967), controlling spending, when it eventually happens, is not consequence-free. These jobs are more vulnerable than the headline figures suggest.
Slowdown in housing
Meanwhile, a fascinating, albeit still novel, data set on new residential rental rates has turned lower (violently) indicating significant oversupply of housing. This will pull down owner's equivalent rent (OER), a major component of the Consumer Price Index. More importantly, it signals that borrowers with real estate exposure are under pressure now.
Figure 2. New tenant rental rates suggest oversupply of homes
Source: Bureau of Labor Statistics, as of 30 June 2025.
Problems loading this infographic? - Please click here
In short, the American economy is in a sort of recession. At present, the pain is being felt by the bottom 80% of earners. The top 20% remain insulated from financial pressure thanks to an equity market, of which they own a staggering 86.9% of all listed equity and mutual funds, powering net worth higher. The other 80% are overindexed to an oversupplied real estate market.
Companies that sell goods or services to the lower eight American income deciles, or who lend to, own, lease or construct real estate, are experiencing something like a recession today.
Two speed credit
Of course, on the other side of the ledger, corporate managers that have lived through the last two decades have become extremely cautious. Margins are protected at all costs. New investments are scrutinised heavily to ensure they exceed risk-adjusted cost of capital. Accordingly, we live in two distinct credit worlds. One is highly professional and spectacularly well managed whilst the other is populated by opportunistic operators of varying quality.
Lending business models dependent on growth (non-bank lenders) or susceptible to market share loss (smaller banks) will likely find themselves having greater exposure to the latter category than they intended. Some banks got caught first. Others are likely next.
All data sourced from Bloomberg unless otherwise stated.
Author: Matthew Moniot, Managing Director, Co-Head of Credit Risk Sharing, at Man Group.
You are now leaving Man Group’s website
You are leaving Man Group’s website and entering a third-party website that is not controlled, maintained, or monitored by Man Group. Man Group is not responsible for the content or availability of the third-party website. By leaving Man Group’s website, you will be subject to the third-party website’s terms, policies and/or notices, including those related to privacy and security, as applicable.