The Dividend Cafe - Is There a Private Markets Crash Stewing?

Episode Date: February 27, 2026

Today's Post - https://bahnsen.co/4u0yp3O David argues there is growing, often uninformed media hysteria about private asset markets that affects everyone and conflates many separate issues into one negative narrative. David says the Dividend Cafe aims to deliver truth in a discernible, actionable way by parsing distinct “stories,” including AI’s potential impact on software firms and related loans, liquidity dynamics and loan quality in private direct lending, limited partners versus investors in private asset management companies, the implications of offering private-market investments to retail investors, and capital-markets “indigestion” from many sponsors trying to sell companies amid limited buyers. Bahnsen criticizes financial media for blending these topics to drive clicks and ratings, creating hype while obscuring important distinctions and actionable understanding. 00:00 Media Hysteria Setup 01:41 Why Nuance Matters 02:15 Ten Stories Not One 04:28 Media Incentives And Clicks 05:46 The Catchall Narrative 07:24 Closing Take On The Hype Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to the Dividend Cafe. I am your host, David Bonson. I'm recording on the last Friday of February in New York City where the last Monday of New York City saw a nasty blizzard, but it is now just utterly beautiful, still very cold, but a world of difference. from where we were just four days ago. But speaking of blizzards, we are going to talk today about some of the distress, and I will call it hysteria. Existing right now in the media,

in different components of public sentiment around what I'm going to call private asset markets, and you could look at it as alternative asset managers, but that might sound a little too niche. That might sound a little bit like something that doesn't impact a lot of people. And what we're talking about impacts everybody. There is this broader concern that one of the things that I think has been one of the most innovative and productive and helpful capital market innovations in my lifetime to de-risk systemically.

Our financial system, and I'm going to explain this in a moment, is right now in the midst of this sort of crossfire of hysteria. In a lot of cases, extremely uninformed critique. but in all things, a sort of sentimental shift to the downside that I think needs to be unpacked, understood, and that is what the Dividing Cafe exists to do to unpack and provide further illumination. With that said, let's jump in Diven Cafe and talk to you a little bit today about the current conversation in private asset markets. How do I say this? I do this for a living, Okay. My job involves having an understanding of nuances in things that often are not readily, easily discernible. Nobody should expect that most people off the street are going to walk around being able to compartmentalize and differentiate some of the things we're going to go through.

But it is my job and I ought to be able to do it. I happen to think a lot of people in financial media should be able to do it as well. but probably for a different reason. But what I think you have going on right now is this sort of pile on where a lot of different things are being conflated together. And I'm going to make a few statements. I'm going to read actually from my own Dividing Cafe

because I want to capture what I believe is about 10 different stories that all are being pulled in as if they are one and the same to some degree. First of all, I'll be very cool. I think there is a story about where AI may or may not impact certain software companies. I think there is a story about how particular loans to software companies will perform, given the potential AI disruption. I believe there is a story around the liquidity dynamics of investment products made up of direct lending loans, that is, private loans that are extended outside the banking system.

I believe there is a story about the quality of loans outside the banking system, the demand for those loans, the demand for such credit by borrowers. I think those are all separate things from one another. I believe there is a story about how limited partners, which are the investors, in investment products of private asset managers do, whether it's private equity or private credit. I believe there is a story about investors in the management company of a private asset manager, how they do. I believe there is a story about the wisdom, nuances, ramifications of making private market investments available to retail investors. And I believe there's a story right now around indigestion in capital markets as it pertains to the imbalance of sponsors looking to sell companies versus the capacity for strategic companies. versus the capacity for strategic companies or other financial sponsors to buy such companies.

So I want to get past this particular section, but I've identified what I believe was when I wrote it. I think it was 10 different stories. I'm sure that I could add four or five more to it, but I'm also sure that these are 10 different stories, not one single story. And so the desire of the financial media to treat all of this together

is doing, I think, a huge disservice to the investing public. It is blurring categories. It's confusing. But it also is failing to deliver truth in a discernible and actionable manner. My burden, my job, my goal, I don't want to be melodramatic, but I think it's a passion of mine, is to deliver truth in a discernible and actionable manner in this dividend cafe. And so this subject requires me to offer some clarifications. The stories out there that have all been consolidated together, that hasn't happened to try to make things simpler for people.

That would be a generous reading of it. I think they're not being parsed out properly. I think they're being blended because it helps create hysteria and hype. And hysteria and hype drive clicks and ratings. and this is the incentive structure, the business model, if you will, of the financial media. Some of those stories might be bad stories. Some of them might be good stories, but at the end of the day, they're not one story, and that, I believe, is the important part. So right now, I'm going to again read straight from a different cafe because I just think I want to capture not a satirical summary,

but a simple summary of what I think is the sort of catch-all media coverage right now on this topic. A lot of private market companies have lent money to software companies, and AI may do things that make people not need those software companies anymore. And if that happens, those loans may not get paid back. And also, the private credit companies have raised money from investors and made these loans, but if these investors ask for their money back and these loans are in trouble, they may have to give them less money than they lent out because the value would be less than it was. Oh, and also, why are managers in asset classes like private credit and private equity making their

investments available to regular people? Insurance companies and pension funds have long-term timelines, but regular people use their money to buy boats on a whim. And so now the liquidity might not be there. Oh, and also, there were two companies that no high-profile asset manager had lent money to last year that went bankrupt, but still some people, people lent them money. And are there more cockroaches out there? Oh, and also we found competitors of these asset managers who said these investments might be in trouble, but didn't say what investments or what managers, but it sounds really bad.

And also, a lot of these companies have bought equity of companies that they have not been able to sell yet. And there are a lot of sellers, but less options to buy. And in the meantime, they keep raising money. But did we mention AI and software and also that they're ill-liquid strategies, they're not liquid, and some investors may not like that. I think my only problem with this diatribe is that I'm making it more articulate and sensible than I think the media is actually making it. But this sort of po-pery of various struggles and issues and concerns all being blended together with a, shall we say, accent to the dramatic is very, very charitably true as a description of the current lay of the land.

So here's where I want to start. The fundamental nature of loans made to software companies and the business prospects those companies and the threats they may or may not face from AI, all of this stuff matters. But before I get to it, I want to make something abundantly clear. There is no world in which the liquidity profile of private direct loans, and I've written in this the past about real estate, private real estate investments, private equity investments, should be treated as if the liquidity is supposed to be real time. Now, even I think less than real time, but more than what is realistic to the nature, the duration

profile of the asset class is a major disservice. Now, I believe that there are wealth advisors, financial professionals out there that have done a bad job at communicating the reality of limited liquidity or illiquidity of some of these assets. I also, though, think that some investors have said, I understand this building or company or loan or fund is not readily available for sale, but I don't need the money and I have a long-term time horizon. But then upon hearing something like that their spouse wanted to buy a boat or that they heard something on TV like private credits in trouble,

then decided that they did have a desire for liquidity. And that could be fine, it could be good or bad, what have you. But my point being that the expectation of liquidity is different than a comment on the investment itself. If somebody positioned an investment wrongly, if someone bought an investment wrongly, that has nothing to do with the underlying quality of the investment itself. particularly a diversified pool of investments. I'm going to get to that in a moment.

So I'm going to say three things that I think are perfectly compatible with one another here. An investor who needs liquidity, and what I'm meaning by that is an easy ability to buy and sell at then current market prices, should not buy assets that do not offer such assured liquidity. Really complicated stuff there. Number two, an investor who's told there will be liquidity. when there may not be was lied due, and lying is unacceptable. Number three, there are many investors with patient timelines

who are great lenders to borrowers for various private market needs, that the liquidity profile works for both borrower and lender. So what I said earlier about me believing in an asset class is under attack that I think does affect everyone to the extent that I believe there have been a lot of loans, a lot of credit extended, First of all, it's a good thing for credit to be extended to those who will productively deploy the borrowings. When companies are borrowing money and putting it to work in a way that ends up being productive in the economy, that's a good thing. It employs people.

It builds profits. It builds goods and services that customers buy. This is not rocket science, although rocket science might be one of the sectors involved. However, there is another sense in which the productive extension of credit can be beneficial to the whole society, and that is that it is done outside the bank depository system that is not always the ideal place for riskier lending to be done. There is what we would call a maturity mismatch or a duration mismatch in that what is. is the duration of the money that has been sent to banks to lend out? It could be one second. Somebody could put money in their bank account and walk down the street and pull it out in an ATM machine. Depositor money is by definition low duration, but they just assume to some degree

that there's enough deposit money they'll stay in the system and they put fractional reserves on those deposits. Yet then the lending that can and should be done needs to fit within a certain risk profile and have a risk weight attached to it that's appropriate. And it also is generally, but not always, the lion's share of bank money is going to be collateralized by an asset, most frequently mortgages.

But it could be commercial mortgages too, and then there can be business lending as well that has different degrees of, shall we say, credit enhancements. Okay. Now, what private credit is, is lending that is being done where the capital is coming from investors. And those investors are what I refer to as risk takers. And that is also, by the way, a synonym. It's a basic part of the definition, okay? A risk taker now is not systemic in the sense that they are not, it is not a deposit of the underlying banking system where people are holding all their deposit monies that they buy groceries from. My point, I don't want to belabor this,

but when we talk about private credit, we are not talking about systemic risk. We are talking about risk to the people who have taken the risk. And I view that as a very good thing. And I believe that for the most part, it has proven to be a very viable asset class. It's not one without losses. It's not one without risk. It is not one without certain. distress events that could happen. But this is something that I cannot say fervently and emphatically enough that when the media makes hay out of certain defaults or busted loans, it's essentially lying through their teeth with impunity. Because those busted loans or distress events or negative things didn't happen? No. But no one has ever invested in private credit, structured credit,

corporate credit, mortgage credit, or any spread-based lending, without there being a reality of default. And the media knows this. Default rates are presumed to be at a certain level, and that level is not 0%. And that's been true of high-yield bonds, of bank loans. Last time I checked, a first lien mortgages since time eternal. We know this to be true. Some assets are lent with greater security and collateral than others. Some are going to have easier or better recovery rates if there is a distress event. There's different risk levels and yields that are going to reflect that, but that's the key. The security of the loan is going to be reflected inversely in the yield. Now, first of all, this is not complicated or mysterious and it's certainly not new. How do risk takers deal with that risk

of loss through diversification. What a crazy concept, something public equity investors have known and done forever. Now, in macroeconomic distress events, just like generally all stocks go down in a full recession, a full bare market, in certain macroeconomic distress events, it is very possible that you have a larger than normal level of loans that are struggling. The reason for this is tautological. If borrowers were not struggling to pay back, it wouldn't be a period of macroeconomic distress that is part of the very definition. In periods of reasonably healthy economic moments, you're still going to have some defaults, though, event-driven, company-specific, there could even be fraud events. We've had a couple of those. And diversifying against those is how investors that have a

risk-taking capacity for such lending deal with this. The notion that a couple, there's a Lincoln Divida Cafe to an event with this company called First Brands and a company called Tri-Color, every private credit manager that we have spoken to of a high profile did not lend to them, but there were certainly syndicated bank loans that had gone to them, and they've proven in at least one case to be a fraud. The other is a busted event and may end up being fraud. I don't know. But my point being taking a couple examples and saying, oh, boy, is this a sign of things to come, is no different than looking at a mortgage that goes bad and saying, should we stop mortgages, a stock that goes down and saying, should we stop the stock market? It's utterly insane. And the defalry could go higher.

But the point of this is that through the right underwriting and the risk taker, knowing the risk of what they're taking, those things are remediable and certainly have proven to be so historical. You can make it this time as different argument, but you can make it this time as different argument about anything, including the sun coming up. My point is when we talk about credit risk and when we talk about liquidity and then suggest that these things don't belong with retail investors, I believe we're saying something, first of all, highly condescending and patronizing, but we also are missing the point. liquidity risk should be understood by the risk taker. And it is true that a lot of the risk takers, investors that make for very good LPs in these private credit funds,

insurance companies, pension funds, and often very high net worth investors have a total understanding of a capacity for that illiquidity. And if somebody doesn't, they shouldn't be invested in it. And a financial intermediary shouldn't be presenting it to them. But I still want to reiterate that is nothing to do with the asset class itself. It has to do with the use of it. Okay? And so we can make all the analogies we want that there are certain food items that are

really good, but someone who's allergic to those food items or doesn't like those food items or it's bad for their particular diet or whatever the case is, shouldn't eat it. I mean, I just can't understand the desire to paint with the broad brush of saying this thing can be inaccurately or inappropriately used, therefore it shouldn't exist. It's a very illogical argument. And I would say the same thing about the risk profile, that people who have the appetite for risk and the liquidity nature of this are looking for a particular premium. And if that premium didn't exist, they wouldn't be offering double the yields of the risk-free rate. So you are in a conscious tradeoff of risk reward. And we have heard for decades and certainly years that it was

unfair that current regulatory apparatus kept smaller investors from getting access to good private investments. So then to the extent some of these things have various forms of which they can be accessed, and we now come and say, oh, you can't expect these dummies to understand that there might be a liquidity problem. It's totally disingenuous. Now, that's not to say, some have not misused it or missold it. But then let's get our criticism right. Okay, I want to move on. Let's talk about the actual investment solutions themselves.

Again, from today's written dividend cafe, some software companies are going to be disrupted by AI. Some will be disrupted, but will adjust, pivot, avoid. Some will be disrupted and not adjusts, but still pay their loan payments because their loans are underwritten with massive protections and loan to valuations, and loan-to-value cushions.

By the way, this is what I think is probably the worst case for the majority of the companies that might be exposed to this. Some will not face disruption at all, but rather opportunity will use the technology as a feature in their underlying business. Their value proposition will prove to have always been, not the coding itself, but the customer service, the implementation, the consultation, the integration,

and other components that transcend the mere software application or coding therewith. But in each outcome, I just said, there are probably numerous sub-outcomes. And with each sub-outcome, there are thousands of examples, nuances, particulars. The idea that software is dead, maybe the dumbest thing I've heard since the AI moment began. And there are a lot of contenders for that award. Now, the loans are underwritten to certain earnings. they're senior to the equity. They have recovery options in the case of default.

It is just a non sequitur of perverse proportions to go from AI's disrupting software to private credits in deep trouble. Which, by the way, the narrative did not just stay as, oh, massive defaults are coming. What happened was they poisoned the well with non-correlated talk

of a couple bad loans out there that weren't really even. in the private credit system, but then immediately pivoted to that illiquidity problem and then stirred this up in a way that made it sound, oh, there's this massive problem in the private market space. There may be issues for investors who want liquidity, you can't get it in certain investments. There may be bad loans out there in certain investment products, but the way in which this is all conflated together is not right and obviously overly hystericalized. I do not know if hystericalized is a word or not, but I just used it and I'm not

taking it back now. There is something called business development companies that are baskets of loans that then pass along the interest collected to investors and they can be trading on an exchange or not publicly traded, but they are registered with the SEC as an investment product and you can argue that the underlying loans do not have great liquidity. So when they're publicly traded, investors are buying and selling from one another, and those investors are going to have sentiment that moves things way up, way down. They can put leverage on it. A lot of crazy stuff can happen.

Some of these investment solutions, products, baskets are better than others. They're definitely very different, different leverages, leverage rates, different pick exposures, different sector allocations, different loan sales. selection and the underwriting is done very differently. Often the managers then are going to have different, let's say, talent or capacity for managing recovery processes. But the loans themselves also can be very different. Companies with 10 to 50 million in EBITDA or companies with 300 to 500 million of EBITDA. In other words, you put a multiple on that. You might be talking about a $100 million company and you might be talking about a $4 billion company. So it is

monolithic. Do I think the media knows this? I do. Do I think there's a difference between a publicly traded PDC that you can go sell immediately, but perhaps in a very bad price because you're buying and selling other people and what you're buying and selling is illiquid underlying assets versus one that is not trading and is set up as an interval fund with different liquidity and redemption assurances? It is just so dishonest to treat all these things the same. But it's an easy narrative to do. I'm going to get to the point of wrapping us up here. I've gone longer than I intended. There is absolutely prudence in being cautious, investing in the space. And our company, we're relentless about the caution we take. We understand we're a risk taker and the clients we put in

this have a degree of risk and we do all sorts of mitigation of the risk, primarily through diversification. But the fact of the matter is that there could very well prove to be some bad investments that come out of this period. My argument here is that that has nothing to do with the overall space of private market investing, whether it be debt or equity, going into operators of businesses that are seeking to productively deploy capital. What I would say is that the conflation of different narratives, which individually, some of which are wrong on their own merits, like the AI software thing, I believe, lacks appropriate accuracy and specificity, but all of which are wrong to be conflated together, okay? This is creating a sentiment right now that is, yes, absurd, but it also is

very exciting because sentiment shifts that create dislocations can become very opportunistic as long as one appreciates that the timing could be much longer than you think. I'm not saying it won't end in two to three days, but I'm most certainly not saying it will. But what I am saying is that out of sentiment shifts, dislocations happen. And I would hope in the other side of this particular investor media sentiment moment, that maybe one day we can have a conversation about the right way for private loans to be underwritten, right mechanisms for recovery, what structures should exist that optimize alignment between the investor and the manager.

I'm going to get to that in a second as we conclude. There's all sorts of questions. I have a list of which, in a nutshell, at Dividend Cafe. But as a basic conclusion to the matter, when you are the creditor lending money to a borrower, then those creditors are going to look out for their best interest. And when you are the borrower, the company, the operator, you're going to look out for your best interest, as you should and as the creditor, you should. And when you're a limited partner and an investor, you could be insurance company or Mr. and Mrs. Smith, investing in a private equity

deal or investing in a private credit fund, you're going to look out for your own interest. And when you're the general partner, the one making the decisions, selecting the loans, dealing with the companies, you're what referred to as a sponsor or a private asset manager, you're going to look out for your own self-interest. But if you plan to be around for another few months or years or decades as that latter category, the general partner, the private asset manager, then guess what? Unlike creditors and borrowers who only incidentally have overlapped common interest, they are often adverse with one another, just by nature of the respective hats they're wearing, if you are a general partner, your limited partners are,

their interests are your best interest, unless you don't plan to stay in business or gather assets again from investors. The creditors, the borrowers, all the various actors, Their best interests are pretty aligned with yours when you have a multi-year, multi-generational objective. Getting to the right alignment of incentives is the key here. And this is what's being missed in the present incentive divide, incentive debate, sentiment, hysteria. A long-term focus and a short-term media investor sentiment moment are not in alignment. Some of us are thankful for that.

Some of us are looking for the long-term focus while others are focused on the short-term sentiment. And there is in that Delta a great opportunity in this moment. Thank you, as always, for listening, watching, and reading the Dividing Cafe. Please go to Divencafe.com. If nothing else, just to read the two quotes of the week from Michael Milken, the original teacher of mine, about capital structure, which is really the essence of what we're talking about here today.

Have a wonderful weekend, and I look forward to being back with you in the Dividendon Cafe next week as we go into the beautiful month of March. Take care. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy ourselves securities. No investor process is free risk.

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