Money Manager Capitalism and the Growth and Spread of Ponzi Finance, Private Market Version

Private debt and equity markets have been a funding source for nascent and credit constrained businesses for several decades. Following the 2008 financial crisis, an economic environment characterized by low interest rates, cautious banks, and tighter financial regulations--together with money managers on the hunt for higher yielding assets--provided a fertile ground for the rapid growth of the private debt market. The defaults of two major borrowers in 2025, the growing concerns about the sustainability of AI businesses, and the ongoing wave of redemption requests, have all led to worries that private markets may be a source of financial instability. The current dominant view has brushed these worries aside by arguing that the private debt market is small, that private debt deals have a lot of equity buffer (leverage is low), that covenants attached to private debt allow for the quick correction of problems in a way that promotes the long-term success of businesses, and that low default rates reflect the inherent soundness of private markets. This paper challenges such a narrative. Private markets are major contributors to the growth and spread of financial fragility. The financial practices that preceded the Great Recession are once again becoming more common: loose underwriting and credit rating; the growing use of interest refinancing; the growing use of opaque asset-pricing methods; the rise of financial engineering that hides leverage, embeds leverage, and generates ephemeral liquidity; and a policy environment that promotes deregulation, desupervision, and deenforcement. Together with the growing interdependence between private debt markets, private equity markets, banks, and money managers, these dangerous financial practices generate a financial environment in which fraud can grow quickly and financial instability can materialize.