Is Private Equity the New Subprime?

Why the Next Financial Crisis Could Be Slower—and Deeper

In 2006, the Wall Street Journal asked me to assess the risk brewing in alternative investments. I wrote that it was "a financial accident ready to happen.” Months later, the floor gave way. Today, I see a similar pattern—different instruments, new channels—but the same core weaknesses. This time, the danger skews toward private equity and its periphery. And the unwind, if it comes, might not be a crash. It could be a grind.

The Core Argument

Private equity (PE) isn’t subprime mortgages, but it shares dangerous traits: high debt, rising interest rates, and growing ties to everyday investors.

A crisis here wouldn’t be a 2008-style crash. It would be a slow drain on wealth—delayed cash distributions, shrinking portfolio values, and locked retirement savings.

What Makes PE Different (and Still Risky)

Translation: PE avoids sudden collapses but creates slow-burn risks. If rates stay high and exits stall, losses compound quietly.

Retailization: Private Risks Enter Main Street

What Happened: Rules changed, allowing complex private investments into retirement accounts (401(k)s, IRAs).

Where You’ll See It:

• Target-date funds adding 5–15% private assets

• “Interval funds” with quarterly withdrawal limits

• Insurance products fund private deals

3 Hidden Dangers for Savers:

1. Locked Savings: Funds can block withdrawals (“gates”) or limit cashouts (“caps”) in crises.

2. Stale Prices: Values update quarterly—selling in a crash may use inflated numbers. Losses hit later.

3. Fee Drain: 2–3% annual fees vs. 0.1% for index funds gut long-term returns.

Policy Shifts: Opening the Floodgates

Recent rules made it easier to put private assets in retirement plans. This:

• Reduced liquidity (allowing withdrawal limits)

• Masked fees (complex layered costs)

• Delayed transparency (values lag reality)

Slow Grind vs. Sudden Crash

Most Likely: A prolonged “grind” of delayed distributions and falling values.
Could Accelerate If:

• A major PE firm fails

• Insurers reduce PE funding

• Multiple funds block withdrawals simultaneously

• Housing markets crack (PE ties to rentals deepen this risk)

Early Warning Signs

How Investors Should Prepare

1. Demand Liquidity:

   • Hold cash/T-bills you can access instantly.

   • Avoid “semi-liquid” assets (assume $0 liquidity in crises).

2. Stress-Test Private Holdings:

   • Check debt maturities (especially 2026–2028).

   • Model lower exit values.

3. De-Risk Housing Links:

   • Don’t assume rising rents will offset losses.

4. Reset Expectations:

   • Plan for mid-single-digit returns. High-fee bets will disappoint.

Bottom Line: Not Subprime, Still Dangerous

2008 Subprime

• Fast bank-led crash

• Daily pricing crashes

• Mortgages hurt households

Today’s PE Risk

• Slow wealth erosion

• Quarterly pricing hides losses

• Locked retirement savings hurt

The Threat: PE won’t explode—it will erode. Losses will emerge through:

• Delayed retirement distributions

• Withdrawal limits when you need cash

• “Smooth” NAV declines that surprise later

Final Advice: Hope isn’t a strategy. Hold real liquidity, limit new commitments, and treat this as a marathon. If exits close, they may stay shut for years.

(Sources: State Street Global Advisors, Morningstar, SEC filings, Federal Reserve data)