Millions of people who had never heard the word \u201csubprime\u201d (a term for loans given to borrowers with weak credit histories) watched their savings halve.<\/p>\n
And of course, it famously came to be known as the Subprime Mortgage Crisis which then turned into the Global Financial Crisis (GFC).<\/p>\n
If you zoom out, the situation today has some similarities. Oil prices are rising because of the conflict in the Middle East, which is likely to push inflation higher. The US Federal Reserve (America\u2019s central bank, equivalent to our RBI) may raise interest rates in response.<\/p>\n
And once again, credit has expanded rapidly, but not inside regulated banks this time. It has grown in something called private credit.<\/p>\n
What is Private Credit?<\/h2>\n
After the 2008 crisis, banking regulators around the world introduced stricter rules. This led to US Banks pulling back from lending to smaller, mid-sized businesses, which were seen as riskier.<\/p>\n
That gap created an opportunity for a new class of lender: Private Credit Funds. <\/strong>These are investment funds run by large asset management firms, not banks, that raise money from big institutional investors (like pension funds, insurance companies, and family offices) and lend it directly to mid-sized businesses. Because they are not banks, they are not subject to the same regulations.<\/p>\n Here is an infographic explaining how Private Credit Works<\/p>\n For investors who put money into these funds, the returns looked very attractive, typically between 12-18% per year. The loans were also structured as senior secured debt, meaning in the event a borrower defaults (fails to repay), the lender has first claim on the company\u2019s assets before anyone else gets paid. Over fifteen years, the private credit market grew from roughly $300 billion to nearly $1.8 trillion.<\/p>\n A large portion of private credit flowed into software companies, particularly the SaaS (Software-as-a-Service) segment. Think of companies whose products you access online on a subscription basis, like project management tools, accounting software, or HR platforms.<\/p>\n And on paper, these looked like ideal borrowers. SaaS businesses have predictable subscription revenue, high customer retention (switching to a competitor is painful), and healthy profit margins. So private credit piled in. Lending to SaaS companies alone grew over 60 times in a decade, reaching $500 billion by the end of 2025.<\/p>\n Private Credit lent either directly to these software companies or to large investors (Private Equity players) who bought out these software companies. As competition heated up among private credit funds to deploy their capital, lending standards slipped. Loans got bigger, covenants (the conditions borrowers must maintain) got looser, and companies that might not have qualified earlier started getting funded.<\/p>\n AI changed the equation for software companies completely.<\/p>\n Software businesses built their value on humans needing their products to do tasks be it coding, workflow automation, data processing and a lot more. When AI tools started doing those tasks itself, the business model of hundreds of these companies became fragile overnight.<\/p>\n The actual panic began in late January and early February when the new agentic AI tools were launched by Anthrophic. If AI could do most of the work that software firms were charging for, what happens to the revenue of those firms? And if the revenue dries up, can they repay their loans?<\/p>\n Once that uncertainty set in, investors who had put money into private credit funds started rushing to withdraw their investments.<\/p>\n Many of these funds had promised quarterly withdrawals. When fear hit, everyone tried to leave at once. The funds couldn\u2019t sell their underlying loans fast enough. So they did the only thing they could. They capped withdrawals.<\/p>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!M_39!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fc6d0f734-5262-4d6c-888a-fec3a06c3c96_680x716.png)
<\/picture>\n![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!FoSN!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fd86705ab-16ae-4ed8-9ae9-6fdc51626faf_648x481.png)
<\/picture>\nWho Did They Lend To?<\/h2>\n
The Crack Nobody Saw Coming<\/h2>\n
![\"\"](\"https:\/\/substackcdn.com\/image\/fetch\/$s_!WU36!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep\/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fa3857e49-4572-4661-84c6-bfc98803e1fb_680x531.png)
<\/picture>\n