The Real Casualty of the Next Market Correction Won’t Be Big Tech. It Will Be Private Credit.

When people ask me what worries me about the Magnificent Seven, my honest answer is: not much, and certainly not their balance sheets. Debt at that tier of the market barely registers on my list of concerns. These are companies with fortress balance sheets, enormous cash generation, and the scale to absorb a downturn without blinking.

The real vulnerability sits one or two rungs down the ladder, in the smaller companies racing to build out data center capacity. Many of these firms have taken on leverage that looks reasonable only if the current AI infrastructure boom continues uninterrupted. If, or more likely when, the broader market delusion around this buildout corrects, these are the businesses that will get caught out, simply because they borrowed too aggressively against an assumption that didn’t hold.

It’s a pattern we’ve seen before. Shale oil producers borrowed heavily when crude was trading at $120 a barrel, building out capacity as if that price were permanent. When oil fell to $70, many of those same companies found themselves in bankruptcy court. The lesson wasn’t that shale was a bad business; it was that debt taken on at the peak of a pricing assumption becomes lethal the moment that assumption breaks. I suspect we’re watching a similar setup unfold in data centers today.

Which raises the more interesting question: who exactly is lending these companies the money?

There’s a widespread assumption that private credit investors must be sophisticated, that the complexity and exclusivity of the asset class implies superior judgment. I don’t buy it. In my experience, private credit behaves less like a group of independent, discerning underwriters and more like a herd. Capital flows toward wherever the rest of the private credit world is already flowing, and conviction gets mistaken for consensus.

This isn’t unique to private credit. Hedge funds, private equity, and private credit have all followed the same arc: a disciplined, niche strategy scales far beyond its natural size, and quality erodes as a result. Thirty years ago, hedge funds genuinely earned their fees, outperforming passive benchmarks by three, four, even five percentage points through genuine skill. Today, the average hedge fund looks more like an expensive mutual fund, trailing passive investing by roughly a percentage point and a half. Private equity has followed a similar trajectory.

Private credit started as a legitimate, useful niche: financing for borrowers shut out of traditional bank lending due to regulatory constraints. That was a sound business. But the industry didn’t stay in its lane. What was once a $100 billion to $500 billion market has ballooned toward $20 trillion. Growth at that scale doesn’t just dilute returns, it invites carelessness, draws in bad actors, and turns a disciplined business into a sloppy one.

Here’s what makes private credit especially dangerous: unlike equity, it has no upside to compensate for the risk it’s taking on.

If someone wants to argue that overreach in private equity isn’t a systemic concern, I understand the logic: those are equity investors who signed up for volatility and, crucially, participate in the gains if things go right. Private credit doesn’t have that safety valve. Lenders take on the downside of risky borrowers without a share of the upside if those bets pay off. That’s a structurally fragile position, and it’s precisely the kind of imbalance that turns isolated defaults into broader contagion, because unlike an equity loss, a lending failure tends to pull other counterparties down with it.

Of every part of the market I’d worry about when this delusion unwinds, it isn’t the equity holders or the AI companies themselves. It’s the private credit lenders. I can at least make sense of an overconfident entrepreneur pouring capital into AI equity: the upside justifies the risk-taking, even if the bet is wrong. I struggle to make the same case for a lender whose only possible outcome is getting interest payments back, and who has no claim on the value created if the bet succeeds.

That ship, admittedly, has sailed. There are now billions upon billions of dollars committed to this space, much of it from lenders who don’t seem to fully grasp the first principle of the business they’re in: the goal of lending isn’t to lend more, it’s to lend at a fair rate given the risk. Every lender should be asking why they’re the one writing the check when others aren’t. If you find yourself consistently acting as the lender of last resort, it’s usually a sign you’re pricing your capital too cheaply relative to the risk you’re taking on, and that mismatch is the reckoning I expect private credit to face.