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Hi everyone, welcome back to Be Rich. Today I want to talk about Howard Marks who has just released his memo on the 9th of 2026. If you are an investor of any kind, you need to understand what he is saying. Not because you own private credit, most of you probably don't because the pattern he's describing is the same pattern that has destroyed retail investor portfolios every single cycle in the last 100 years.
So, the memo is called what's going on in private credit. I'll put the link in the description. I suggest you read it yourself. It's 11 pages. Every page is worth your time. Do remember you're investing it in yourself. Let me break down what I've understood, what Marks is actually saying, and more importantly, what it means for you and me.
First, we always have to get some context. Private credit is essentially non-banking lending. After 2008 financial crisis, banks got poorer, they got regulated, and they pulled back from lending. Someone had to fill in that gap. Investment managers stepped in. They started making private loans directly to companies.
This is called direct lending. And here is something Marks was very careful about. Private credit and direct lending are not the same thing. Direct lending is one part of private credit. Most of the headlines are screaming private credit crisis, and really about direct lending specifically. That distinction really does matter, and he really highlights it very well.
Now, direct lending started well in the early 2010s. There weren't many lenders at the time, so one who shows up early were the one who demands high interest rates, strong protections, solid loan documents. Their returns are genuinely attractive back then. And then, what happened? Everyone saw those returns, institutional investors piled in, hundreds of new managers entered the space.
Capital, as always, floods the market. When too much money chases the same opportunity, of course, standards drops. That's not a theory, it's as simple as old gravity. Lenders start accepting lower yields, weaker protections, thinner safety margins. Some managers were clearly motivated to put capital to work fast because that's how they earn their fees.
I've spoken about this many times. Motivation, incentives, like Charlie Munger says. And here the number is what should stop you in your tracks. In the last 15 years, roughly $2 trillion of direct loans have been made. The entire private credit sector is now about 150 billion, which is just 20 years ago.
$2 trillion deployed in the market where most managers had never seen a real credit cycle. Think about it. Now, where did a lot of this money go? Software companies, naturally. Private equity firms decided that software companies with subscription revenue and sticky customer base were perfect candidates for leveraged buyouts.
Recurring revenue, predictable cash flows, moats. Ooh, it all sounds so right, doesn't it? So, they bought these companies at 20 times EBITDA, loaded them with debt, and told lenders their recurring revenue made it very safe. Software debt ended up being 20-30% of direct lending market. That's a massive concentration in a single sector, thesis.
Then, of course, what happened? AI happened. Over the last 2 years, two artificial intelligence significantly reduced the need for human to write code. The markets didn't react much in 2024 or early 25, but Anthropic released a powerful coding model in November 2025. More AI tools followed in January, somewhere in early Feb 2026, since investors collectively woke up.
They looked at these software companies sitting under mountains of debt and asked a simple question. What if AI disrupts us, the very business model that justified the leverage? What if it disrupts it? Equity valuations dropped, cushion protecting lenders got thinner. Suddenly, software debt was all in the news.
Now, here is where it gets really interesting. A lot of direct lending money had been packaged into vehicles sold to retail investors. Non-tradable BDCs, business development companies, marketed as high yield with low volatility, steady returns, income generation. Sounds perfect, right? But these are private loans.
They don't trade on an exchange. There is no daily market price, so volatility looked rather low because there is no market to reflect actual price discovery, actual risk. Marks says this directly, and I think it's one of the most important lines in the entire memo. Risk and volatility are not the same thing.
These loans had the same credit risk as a high yield bond or a broadly syndicated loan. It just wasn't showing up in price until it did. When investors got nervous about software debt, they tried to redeem, they tried to get their money out, and they hit the gates, redemption limits, queues. You cannot get your money when you want it.
This creates a self-reinforcing cycle. If you see the others can't get out, what do you do? You put in for even more redemption the next time. Just in case, you never know. The redemption limits have worked as designed so far. Managers avoid fire sale, but as Marks says, it would be perfectly understandable if investors reacted negatively to being told they can't access their very own money.
Now, let me zoom out because this is where the memo becomes something much bigger than private credit. Marks lays out the anatomy of every investment bubble that has ever existed. It's wonderful, you should read it, like I said. Something new appears. It has a grain of truth. Early investors always do well.
Others see the success and get envious. Capital floods in. Possibility gets confused with probability. No one asks, what is safe to pay the price. Standards collapse, and then flaws that everyone ignored in the good times become impossible to ignore in the bad times. He quotes Mr. Buffett himself. The first, the innovator, then the imitator, then the idiot.
Innovators in direct lending made excellent returns in 2010 to 14. By 2024, the product was being sold to retirement accounts. Now, I want to be honest about something. Marks is talking about his book here, Oaktree Underweighted Direct Lending. They kept their software exposure minimal, and now they are positioned to buy distressed assets at a much better price.
This memo is partly an investor letter saying, we were disciplined when others weren't, and the opportunity is ahead of us. That doesn't make the analysis wrong, but you should have always know the incentive behind any piece of writing, including me, including why I'm doing these videos. There's another layer to this memo, and I think that's equally critical, the interest rate story.
Private equity grew up in a 40-year period of declining interest rates from 22% in 1980 to nearly zero by 2020. Marks calls this the most impactful event in the financial world in the last 50 years, and I think he's absolutely right here. When the rates fall, assets become more valuable. Borrowing becomes cheaper.
If you buy assets with borrowed money, falling rates give you the double bonus. That is exactly what private equity does. So, when the Fed raised interest rates from zero to five and a quarter percent in 2022, capital structures that were built for a zero rate world simply broke down. Portfolios, companies now face higher interest cost, lower coverage ratios, difficult refinancing, falling exit valuations.
Distribution to limited partners dries up. LPs are who committed capital based on expectations that distributions are now overextended. They can't commit to new funds. The virtuous cycle that empowered and powered the private equity for a decade becomes a vicious one. Marks closes the memo with a parallel his colleague Bob O'Reilly drew.
He says the situation today looks a lot like the late late 1980s and early 1990s. Back then, there was a new financial innovation, high yield bonds, and many investors had overindulged in it. A war in the Middle East spooked the market. Investors could not sell it fast enough. Substitute direct lending for high yield, add AI as a technology disruption, and another Middle East conflict, which is always there for us.
We are on the buffet table, you know that. And we have the same dynamics playing out. But here's the important part. High yield survived that cycle. It didn't just survive, it thrived. Direct lending will probably be fine, too, but may have to go through a real credit cycle to get there. So, what does this all mean for you, and of course, me?
If you are not into private credit, and if you're not into BDCs, this is not your direct problem. This is a second-order effect matter. Credit tightening slows economic activity. Private equity stress means fewer exits, fewer IPOs, less liquidity in the system, and eventually, PE fire sales creates cheaper acquisition targets and for those who are patient enough to wait.
Then again, but the real lesson from this memo, I would say, is not about private credit at all. It's about what happens when investors confuse novelty with quality, and when they confuse low volatility with low risk. When they confuse the past returns with future uncertainty. Every cycle, every pattern, different instruments.
This is what Howard Marks keeps saying. Marks refers references a book. He says in the it's the best in investing, and the what one of the best he's read in years, 1929 by Andrew Ross Sorkin. I've read that book, and I also recommend it. He concludes it's worth carrying with you always. The story of 1929 is not about the rate or regulation, it's about the human nature.
No matter how many warnings are issued, people will always find new ways to believe that the good times can last forever. My brother keeps saying this often, too. They will dress up hope as certainty, and they will have collective fever. Humanity again and again loses its head. That is what the memo is really about.
Not about private credit, not about software debt, not about B disease. It's about the permanent feature in human psychology that makes every bubble possible and every crash inevitable. The only protection I can suffice we can offer is the boring stuff. Own quality business, no leverage, at a reasonable price, in amounts that you can hold through the entire cycle.
So, we come back to our famous different coffee way of doing things. Small amounts consistently into things we understand through every season. As I say on Twitter, watch the facts and not the statements. I hope you found this video informative and entertaining, and I do highly recommend that you read Mark's memo, and I'll try and bring Anand in and have a discussion with him once I get some time from him.
Like I said, election cycles are ongoing here in Tamil Nadu, so he's been really busy. But, if I do get some time with him, I will definitely have a conversation about this and more. Thank you for being with me on Be Rich again. See you tomorrow. Thank you.
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