Funding & Finance

“Cockroaches” in Private Credit

Jamie Dimon saw the first “cockroach” in October 2025. Tricolor, a subprime auto lender, filed for bankruptcy. JPMorgan took

By Conor Healy

March 23, 2026

Jamie Dimon saw the first “cockroach” in October 2025. Tricolor, a subprime auto lender, filed for bankruptcy. JPMorgan took $170 million in losses.

Dimon warned: “When you see one cockroach, there are probably more.”

First Brands collapsed a month later. $10 billion in debt gone. Then Blue Owl Capital gated withdrawals – investors couldn’t get their money out. Blackstone faced $3.8 billion in redemption requests. Apollo cut payouts and marked down assets.

The “cockroaches” scattered across the $3 trillion private credit industry that spent 16 years pretending it was safer than banks.

Mohamed El-Erian asked a worse question: Are these “cockroaches” or “termites”?

“Cockroaches” scatter when you turn on lights. “Termites” eat the structure from inside the walls. You don’t see damage until the house collapses.

Private Credit Replaced Banks

After 2008, regulations forced banks to stop making risky loans. Mid-sized companies – too small for bond markets, too risky for regulated banks – needed capital anyway.

Private credit firms filled the gap. Blackstone, KKR, Apollo, Ares, Blue Owl. They raised money from pension funds and wealthy investors. They lent to middle-market companies at higher interest rates than banks charged.

The pitch: higher returns than bonds, lower volatility than stocks, loans secured by company assets.

For 16 years nothing broke. Interest rates stayed low. Companies refinanced easily. Defaults remained rare. Private credit grew from nearly zero to $3 trillion.

Then rates rose. Companies couldn’t refinance. The fraud started surfacing.

Tricolor and First Brands Were Frauds

Tricolor ran a subprime auto lending operation. Borrowers with bad credit who couldn’t get traditional car loans. High interest rates compensated for high default risk.

Except prosecutors charged CEO Daniel Chu and COO David Goodgame in December 2025 with inflating collateral values. The fraud ran from 2018 through September 2025.

Inflated values let Tricolor borrow billions from lenders. When the scheme collapsed, lenders ate massive losses. JPMorgan lost $170 million. UBS and Jefferies had significant write-offs.

First Brands Group came next. The auto parts company borrowed $10 billion. Prosecutors charged founders Patrick and Edward James in January 2026 with “double-pledging” – using the same collateral for multiple loans.

Both companies went bankrupt. Both involved fraud. They exposed how little oversight private credit lenders actually had.

Private credit loans don’t trade publicly. There’s no daily pricing. Lenders mark loans at whatever value they choose. This works until borrowers go bankrupt. Then everyone discovers loans marked at 100 cents were worth zero.

Blue Owl Couldn’t Pay Investors Back

Blue Owl Capital marketed private credit funds to regular people saving for retirement. Not just institutions – retail investors.

Pensions and endowments invest for decades. Retail investors panic and pull money when markets drop.

In November 2025, Blue Owl restricted withdrawals. Then, in February 2026, the firm bought back 15% of outstanding shares in one fund to return cash. In another fund, it ended quarterly liquidity payments permanently.

The $1.6 billion OBDC II fund got gated completely. Investors can’t access their money. At all.

Blue Owl’s stock collapsed 67% from peak. The company claims its $300 billion loan portfolio is sound. The stock price says investors don’t believe it.

Everyone Started Gating Funds

Blackstone’s BCRED fund faced $3.8 billion in redemption requests – 7.9% of assets. The firm injected $400 million of its own capital to meet withdrawals. This prevented gating but signaled serious distress.

Apollo-managed funds cut payouts and marked down assets in mid-February 2026. More redemption requests followed.

Firms that honored all withdrawal requests in 2024 suddenly enforced strict limits. Quarterly redemptions capped at 5% of fund value. Investors wanting out must wait months or years.

The private equity firms managing these funds – Blackstone, KKR, Apollo, Ares, Blue Owl – saw combined market cap drop $265 billion from peaks.

AI Made Software Companies Worthless

Private credit lent heavily to enterprise software companies. The loans seemed safe. Recurring revenue. High margins. Predictable cash flows.

Then generative AI arrived. Companies that previously needed dozens of software subscriptions realized AI could replace many of them. Software spending dropped. Revenue for software companies declined.

Companies carrying high private credit debt couldn’t service it anymore.

Retail investors in Blue Owl funds read headlines about AI disruption. They connected the dots. Software companies will fail. Private credit funds hold software company loans. Better get out now.

The redemption wave accelerated. Funds couldn’t sell loans fast enough because private credit loans don’t have liquid markets. You can’t dump them on an exchange. You negotiate sales with other firms who know you’re desperate.

Covenant-Lite Meant No Protections

Private credit firms competed for deals by offering borrower-friendly terms. “Covenant-lite” lending meant minimal financial restrictions.

Traditional bank loans include covenants. If revenue drops 20%, the bank can demand immediate repayment or renegotiate. Covenants protect lenders.

Private credit eliminated covenants to win deals. Borrowers loved it. Less oversight. Lenders accepted higher risk for higher fees.

This worked during growth years. When companies hit trouble, lenders had no protection. Borrowers defaulted without triggering covenants that would have forced earlier intervention.

Zombie companies proliferated – businesses generating just enough cash to pay interest but never paying down principal. When rates rose in 2022-2024, zombies started dying.

Loans Were Marked at Fantasy Prices

Private credit loans get valued quarterly by the firms managing them. There’s no independent verification. Firms have incentive to mark loans generously to avoid showing losses.

Infinite Commerce, a portfolio company, saw its loan marked by BlackRock drop from 100 cents on the dollar to zero in three months. Not gradual deterioration. Hiding problems until they exploded.

Investors suspect many loans are still marked too high. Victor Hong, former investment banking risk executive, told the New York Times: “You’re seeing a crisis of confidence.”

When investors don’t trust reported values, they pull money. Redemptions force selling. Forced selling reveals true prices. True prices are lower than reported values. Losses get recognized. More redemptions follow.

It’s a bank run in slow motion. Private credit funds can gate withdrawals. Banks can’t. In 2008, when depositors wanted out, banks failed overnight. Private credit delays the reckoning.

“Cockroaches” or “Termites”?

Dimon’s “cockroach” metaphor assumed visible problems indicate hidden problems. One bankruptcy suggests more coming.

El-Erian’s “termite” question was more ominous. Termites eat structural supports inside walls. The house looks fine until it collapses.

Private credit has “termite” characteristics. Illiquid loans marked by managers with conflicts of interest. Covenant-lite lending offering no early warning. Retail investors mixed with institutional capital creating mismatched liquidity. Fraud cases revealing zero oversight.

$3 trillion flowed into private credit over 16 years without being tested in a real downturn. 2008 happened before private credit became large. 2020 COVID crash got solved with unlimited Fed intervention within weeks.

Six months into the first extended stress, default rates keep rising as high interest rates hit overleveraged companies. Software sector disruption from AI accelerates. More fraud surfaces as desperate borrowers hide problems.

The “cockroaches” scattered when lights turned on. Whether “termites” are eating the foundations won’t be clear for months or years.

Banks Might Win After All

Private credit won’t disappear. Mid-market companies need capital. Banks won’t provide it under current regulations.

But the golden era ended. Easy money disappeared. Investors demand better terms and real protections. Covenant-lite lending is dead. Retail funds offering quarterly liquidity on illiquid assets won’t work.

Firms will consolidate. Weaker players will fail or get acquired. Blue Owl’s 67% stock collapse makes it a takeover target if conditions worsen.

Pension funds and endowments sitting on private credit portfolios marked at inflated values will recognize losses. Retirees depending on pension payments get hurt. Universities relying on endowment distributions face budget cuts.

Banks might re-enter middle-market lending if private credit retreats. The regulations that pushed lending to private credit in the first place could change if private credit failures threaten the broader financial system.

For 16 years, private credit won by avoiding bank regulations while taking bank-level risks. Now the risks are materializing. The regulations don’t look so bad anymore.

Everyone watches for more “cockroaches.” And wonders if “termites” already ate the structure nobody can see.