MARKED TO FANTASY

Private equity and private credit have grown from a niche asset class into a shadow financial system controlling more of the American economy than most people realize. The industry deployed $593 billion in 2024 alone — a 78% year-over-year increase.

Private credit AUM hit $2 trillion in 2024, up 17% year-over-year, with Morgan Stanley projecting $5 trillion by 2029. The money machine has never been bigger. The question is whether the assets behind it are real.

The PE business model is built on deployment, not performance. Firms collect 2% management fees on committed capital regardless of returns. On $9.4 trillion, that's nearly $188 billion per year in fees before a single dollar is returned to investors.

Build the model. Get the deal done. Book the fee. The money is made in the doing, not in the being right. Add-on deals now represent 76% of all PE-backed buyouts — buying small companies at 5-8x and bolting them onto platforms valued at 12-15x. The “value creation” is paper arbitrage.

The headline default rate of 2.1% is fiction. When you count distressed exchanges, PIK conversions, and amend-to-extend deals that never show up in the official numbers, the real rate is 6.4% — more than 3x the reported figure. In 2024, distressed exchanges were 5x conventional defaults.

First-lien recovery rates collapsed from 76% in 2022 to 39% in 2024. The “senior secured” claim is meaningless when the collateral is leased property with bolted-in equipment. Covenant-lite deals jumped from 4% to 21% in two years. Mega-deals over $500M: 50% lack financial maintenance covenants entirely.

Continuation funds hit $75 billion in 2024 — a GP sells a company from one fund to a new fund that the same GP manages. New fees, new carry, same asset. The CFA Institute published a report questioning the ethics. ADIC (Abu Dhabi) sued Energy & Minerals Group over an $800M self-dealing continuation vehicle.