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Today's episode is brought to you by the Tucrium Corn Fund, ticker c o r n. Let's get into it. Joined today by Nick Nemeth, financial investor, researcher, and author at Mispriced Assets. Nick, welcome to Monetary Matters.
Thanks, Jack. It's good to be here.
You write about a lot of topics. I think I first stumbled upon your work, the work that you've done on private credit and alternative assets. So private equity, real estate, but primarily private credit. And you have a piece out called the smart money is the subprime this time, and you have some very, very bearish things to say about the private credit industry. You say this doesn't look like 2008. This looks like 1929. So first, what are we talking about here? Just remind our viewers what private equity private credit is. Why are you so concerned? What's the issue here?
Yeah, I just wanted to start off and say I'm not a permabear. I've made money this year. I write about longs. A certain segment of my audience is very interested in the systemic risk I've identified that I think is going to be the end of this cycle. And I think the end of this cycle, because it's been a long cycle, basically one, I don't count twenty twenty, I don't count twenty twenty two, is going to be uglier for numerous different reasons. It's kind of like a marriage of built up risks with private credit being the trigger for a massive blow up that's not going to start in the banking syst
Tell me about that. What do you mean?
I mean, we're talking about subprime taking down the economy at $1,200,000,000,000 There's a trillion dollars of private credit, broadly private credit. The concerning part is the direct lending, which is when a private equity company takes debt out, kind of like a mortgage, in order to buy a business. Now, this can be done well, but they're running leverage at seven times EBITDA that's adjusted. So EBITDA, your audience definitely knows this. I go into podcasts and it's less initiated. That's fake earnings. That's what Warren Buffett would call fake earnings. And then they make it doubly fake
Yes. So the way private equity works is they buy companies with debt and then they sell them for a higher value, and that has worked wonderfully for many years. I think the last year where there were exits, so private equity selling their companies at scale was 2021 or maybe 2022. Since then, the Fed has raised rates and they haven't been able to sell the companies, the IPO window, which may be open now. They haven't been able to exit these companies at all, so they haven't been able to pay their investors back. So how have they paid their investors back? By borrowing money. Then you have the
So the dividend recaps is actually a very interesting wrinkle, and that's when you can't exit. So you kind of just push down the creditors. I don't know why creditors ever put up with that, honestly. But then you take debt out in order to pay yourself. You're not selling the company, but you're kind of derisking on the equity side.
I actually don't even know if I don't think creditors really care if a dividend recap is happening.
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