Michael Burry, the investor who famously bet against subprime mortgages before the 2008 financial crisis, is now turning his attention to the private credit market. Minerva Investment Management, a fund linked to Burry, plans to launch later this month with a strategy that profits when private credit loans go bad.
The fund is betting that the opaque nature of private credit loan books could be hiding stress, even as official data shows defaults in the sector are already climbing. According to Fitch Ratings, US private credit defaults hit 6.3% in August—a level that has caught the attention of investors and regulators alike.
What is private credit?
Private credit refers to loans made by non-bank lenders to companies that typically cannot access traditional bank financing or public bond markets. These loans are often used by mid-sized businesses for growth, acquisitions, or refinancing. Unlike publicly traded bonds, private credit loans are not listed on exchanges, and their terms and performance are largely undisclosed.
This lack of transparency is exactly what Burry and his team are targeting. In the run-up to the 2008 crisis, Burry's fund, Scion Capital, profited by buying credit default swaps on subprime mortgages—essentially insurance policies that paid off when homeowners defaulted. His story was popularized in the book and film The Big Short.
Now, Minerva appears to be applying a similar playbook to private credit. By taking short positions—bets that an asset's value will fall—the fund stands to gain if private credit defaults rise further or if the market reprices the risk embedded in these loans.
Defaults are rising, but from a low base
The 6.3% default rate in August is a notable jump from the low levels seen in recent years. During the era of cheap money, private credit boomed as investors chased higher yields than those available in public bond markets. But with interest rates having risen sharply, many borrowers are now struggling to service their debt.
Higher rates mean higher interest payments for companies that took on floating-rate loans. For businesses with weak cash flows or heavy debt loads, the pressure is mounting. The default rate, while still below the peaks seen in past downturns, is moving in the wrong direction.
Fitch's data is one of the few public windows into a market that is notoriously secretive. Because private credit loans are not rated by agencies in the same way as public bonds, and because lenders are not required to disclose their portfolios, the true extent of stress is hard to gauge. That opacity is precisely what makes the market attractive to short sellers like Burry, who believe the official numbers may understate the problem.
What it means for investors
For everyday investors, the rise of private credit is a double-edged sword. On one hand, private credit funds have offered attractive returns and diversification, often with lower volatility than public markets. Many retirement plans and institutional investors have poured money into these funds in recent years.
On the other hand, the lack of transparency means that risks can build quietly. If defaults continue to climb, investors in private credit funds could face losses, and redemption requests could spike—a dynamic that has already been seen in some funds. For example, redemption requests at Ares Private Credit Fund eased in the third quarter, but the episode highlighted how quickly investor sentiment can shift.
For those who do not directly invest in private credit, the ripple effects could still matter. Banks and other financial institutions have exposure to private credit through lending relationships and investments. A sharp downturn in the sector could hit their earnings and, in a worst-case scenario, tighten credit conditions for the broader economy.
A contrarian bet with precedent
Burry's track record gives the fund instant credibility among some investors, but short selling is a risky business. Markets can stay irrational longer than short sellers can stay solvent, and private credit funds have historically been resilient, with low default rates and strong recovery rates on defaulted loans.
Moreover, the private credit market is not monolithic. Some lenders are more conservative than others, and many loans are backed by collateral. A broad short bet on the sector could be diluted by the fact that not all private credit is equally vulnerable.
Still, the launch of Minerva is a signal that some sophisticated investors see cracks forming. As one analyst put it, "When the smart money starts betting against a market, it's worth paying attention—even if the bet doesn't pay off immediately."
What to watch next
Investors should keep an eye on a few key indicators. First, the default rate itself: if it continues to climb, that would validate the bears' thesis. Second, the performance of private credit funds, especially those with heavy exposure to riskier borrowers. Third, any regulatory moves to increase transparency in the private credit market, which could change the dynamics for both lenders and short sellers.
In the meantime, the launch of Minerva adds a new layer of scrutiny to a market that has grown rapidly in the past decade. Whether Burry's bet pays off remains to be seen, but his presence alone is a reminder that in finance, what you can't see can hurt you.
