Private Credit Is the Fuse, Insurance Companies Are the Bomb with Nick Nemeth

Summary

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Podcast Summary

The Compound and Friends

Episode: "Private Credit Is the Fuse, Insurance Companies Are the Bomb"
Featuring: Downtown Josh Brown (Host), Nick Nemeth (Guest, Author of 'Mispriced Assets' Substack)
Date: April 6, 2026

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Episode Overview

In this episode, host Josh Brown welcomes Nick Nemeth, an outspoken analyst of the private credit market and its growing connection to the U.S. life insurance industry. Nemeth makes a provocative case: that private credit—now a multi-trillion-dollar asset class—acts as the “fuse,” while the $10 trillion life insurance industry, increasingly exposed to this risk, is the “bomb.” The discussion deeply explores structural weaknesses in how private credit is valued and highlights the systemic danger posed by these risks spreading to the insurance sector.

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Key Discussion Points & Insights

1. The Nature of Private Credit Risk

• Explosive Growth and Underlying Issues

  • The private credit market has ballooned from “essentially nothing to multi trillions”—a rapid growth that raises questions about the quality of underwriting and the accuracy of reported valuations.
  • Private credit returns look artificially smooth because assets are “manager marked”—their value is reported by the fund managers themselves, rather than marked-to-market.
  • Quote (Nick Nemeth, 07:01):

    "It's based off of assumptions that are borderline insane."

• The Marking Problem

  • Many loans, especially to software companies, may be grossly overvalued compared to distressed public peers.
  • Funds like Blackstone’s BCRED and BXSL are cited as underreporting exposure to software—Nemeth estimates up to 35% if leverage is taken into account, which amplifies risk.

• Pervasive Underwriting Issues

  • The problem isn’t limited to just software or a few isolated industries; aggressive leverage and questionable credit metrics are found across the private credit spectrum.
  • Quote (Nick Nemeth, 10:08):

    "The underwriting across the board is crazy. They're running seven times leverage on EBITDAs that are sponsor marked."

2. The Game of Illusions and Complacency

• Volatility Laundering & Valuation Smoothing

  • Private credit funds avoid market volatility by marking their own books, which can mask growing risk until liquidity dries up.

• Complacency While Money Flows

  • Many see frequent refinancings and repayments as evidence of safety, but Nemeth warns that these cycles work only “when there’s money pouring into the asset class” (13:51).
  • When inflows reverse, defaults may be forced into the open.

• Lack of Institutional Pushback

  • Even large investors continue to invest, perhaps due to groupthink or because “everyone’s making money.”
  • Quote (Nick Nemeth, 15:01):

    "It's in everyone's best interest to not push back."

3. Public vs. Private Valuations: The NAV Illusion

• Discrepancies in Value

  • Publicly traded BDCs (Business Development Companies) holding the same or similar loans as private funds trade at significant discounts (20–25%) to reported NAV, revealing skepticism among public market investors.

• Why Do Investors Ignore Discounts?

  • Many continue to favor “smooth” private valuations over volatile public prices, perhaps out of “delusion” or aversion to price swings.

4. The Scale of Leverage & Systemic Risk

• Stacked Leverage Throughout the System

  • Not only are operating companies highly levered, but the funds themselves and their CLO vehicles add further leverage—sometimes exposing investors to as much as 9–10 times leverage.
  • Quote (Nemeth, 24:30):

    "They're running, running seven times leverage... It's really nine times if you take away their 'synergies.'"

• It’s Systemic Because It’s Ubiquitous

  • With widespread adoption, Nemeth rebuts the idea that risk is “not systemic” just because exposures are outside traditional banks.

5. The Life Insurance Industry: Where the Risk Lands

• Massive Balance Sheets, Slim Margins

  • U.S. life insurers hold about $10 trillion in assets—their surplus capital is only $658 billion, a mere 6–7% buffer.
  • Some are “levered 17 times. Lehman was levered 30 times right before bankruptcy.” (28:22)

• Reinsurance: The False Backstop

  • Many insurers rely on the same small pool of reinsurers, often offshore and less regulated; there is little transparency into the real assets backing up these guarantees.
  • Quote (Nemeth, 32:58):

    "They've made it invisible. Every single time anyone has asked anything, they freak out... meanwhile the few looks that we have into this reinsurance, there’s basically nothing—more liabilities than assets."

• Regulatory Blind Spots

  • U.S. regulators face restrictions in seeing what’s happening in offshore reinsurance accounts, which could pose huge risks if insurers face losses on their private credit exposures.

6. What Triggers the Crisis?

• Redemptions as the Fuse

  • Large, sustained withdrawal requests (like the recent 41% figure at Blue Owl) could force funds to realize losses and bring hidden risks to light.
  • Downgrades of insurer-held private credit could also force deleveraging and stress the system.

• What to Watch For

  • Nemeth: “The thin line separating calm from chaos is continued inflows to the asset class via financial advisors.” (35:05)
  • If inflows stop and redemptions surge, the spiraling effect could force revaluations and expose cracks throughout both private credit and insurance.

7. Practical Takeaways for Investors

• Caution with Complexity

  • Nemeth and Brown advise investors to be skeptical of products whose main selling point seems to be “this time it’s different.”
  • Quote (Josh Brown, 36:46):

    "If this is so good, why aren’t the Saudis buying this whole thing? What do you need my clients for if this is so unbelievable?"

• Value of Cash, Simplicity, and Due Diligence

  • In Synch: Both speakers recommend holding more cash and questioning the “specialness” of private offerings.

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Notable Quotes & Timestamps

• On Marked Valuations:
  "It's based off of assumptions that are borderline insane." — Nick Nemeth (07:01)

• On Underwriting:
  "The underwriting across the board is crazy. They're running seven times leverage on EBITDAs that are sponsor marked." — Nick Nemeth (10:08)

• On the Purpose of Private Credit:
  "If you could get public market debt, if you could go to the public markets, you would do it." — Nick Nemeth (06:39)

• On Complacency:
  "It's in everyone's best interest to not push back." — Nick Nemeth (15:01)

• On Investor Logic:
  "If this is so good, why aren't the Saudis buying this whole thing? What do you need me for?" — Josh Brown (36:46)

• On Insurance Risk:
  "On average they're levered 17 times. Lehman was levered 30 times right before bankruptcy." — Nick Nemeth (28:22)

• On Offshore Reinsurance Transparency:
  "They’ve made it invisible. Every single time anyone has asked anything, they freaked out...there’s basically nothing—more liabilities than assets." — Nick Nemeth (32:58)

• On the Trigger for Crisis:
  "The thin line separating calm from chaos is continued inflows to the asset class via financial advisors." — Nick Nemeth (35:05)

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Important Segment Timestamps

• 03:39 — Volatility laundering & manager-marked valuations
• 07:01 — How NAVs are based on questionable assumptions
• 13:51 — Private credit works fine when inflows are steady; breaks down when money stops coming in
• 19:18 — Public/private valuation gaps in BDCs/BXSL discussion
• 26:03 — The real systemic risk is insurance company exposure
• 28:22 — Insurance industry leverage compared to Lehman Brothers
• 32:58 — Problems with offshore reinsurance and lack of transparency
• 34:12 — What triggers the “fuse”: redemptions, downgrades, or stopped inflows
• 35:54 — Why financial advisor sentiment is a key risk gauge
• 36:46 — Skeptical investor mindset: “why me?”

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Closing Thoughts & Tone

The episode is cautionary, analytical, and direct, characterized by Nemeth’s refusal to sugarcoat the “borderline insane” assumptions and leverage built into both private credit and insurance. Josh Brown tempers the analysis with wider perspective, but shares the skepticism of sudden, too-good-to-be-true investment surges. Both stress diligence, skepticism, and simplicity for investors in a climate where risk is often disguised as innovation.

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To explore more, including Nick's deep dives and data analyses, check out his Substack: Mispriced Assets (link in show notes).

Transcript

[A]

One of the big structural trends in global markets over the last several years has been rising defense spending. That raises an interesting question for investors. How do you position your portfolio to align with that shift? WisdomTree has built a suite of ETFs designed to offer exposure to companies connected to defense, security, and the geopolitical forces shaping the modern economy. If you're thinking about how geopolitical dynamics could influence markets over the long run, it's worth taking a closer look. Visit wisdomtree.com geopolitical opportunities to learn more. All right, you guys, I'm going to learn something today and maybe be scared out of our wits. Private credit is the fuse. The bomb is underneath the life insurance industry. That's my guest Nick Nemeth, the author of Mispriced Assets on Substack, where he's been writing extensively about risks inside the private credit markets and the growing connection between those markets and the life insurance industry. Believe it or not, private credit is now a multi trillion dollar asset class. The US life insurance industry sits on roughly $10 trillion of assets. And increasingly, those two worlds are intersecting with private credit moving on to insurance balance sheets. Nick, I'm so glad you're here to explain your ideas to the audience. Say hello for us.

[B]

What's up, compound? Thanks for having me on downtown.

[A]

All right, we're thrilled to see you. I think investors keep hearing about how are there a quote, how there are problems with private credit. Right. So they hear it on TV all day. They read about it in the Wall Street Journal and in Bloomberg, I think because it grew so fast. And maybe one of the major concerns is that any time something grows as quickly as this has, it sort of sneaks up on people. And then when they hear that there is maybe shortcuts in the way money was raised, maybe miscommunications, whether intentional or unintentional, between the primary conduits of that money being raised. In this case it would be financial advisors and the wealth channel, et cetera, et cetera. Sometimes you just have like this general sense of unease, but people have trouble putting their finger on what the problems actually are. And that's what I hope we can do today. So we're going to start with the foundation of the private credit issues that you have identified. And then we'll get into what you say is the fuse that's triggering this financial crisis. And we're going to do this at the end. But just for people to understand, Nick has been writing furiously about this issue at mispriced Assets and I think has become one of the primary voices on this particular topic. So we're really getting it from the horse's mouth. So let's start at the foundation. You've argued that private credit returns look smoother than they really are because they're not marked to market, they're manager marked. So I would say that that is like the best place to start for an audience of investors and financial advisors. What is that problem and why is it a problem in the first place?

[B]

Well, people talk about volatility laundering for a long time on private equity and that's, you know, originally you got paid for the illiquidity and now it seems like that's more of a feature than a bug. So there's a lot of, there's a lot of stuff that's been said before and then you have to kind of follow it to what it means. We've seen an asset grow from essentially nothing to multi trillions. And whenever you have explosive growth, especially in credit, you have to worry about are the valuations correct and if, and if the valuations aren't correct on the equity, you know, private equity, the majority of this asset class is just LBOs. So they're talking about LTVs loan to value, how much of the total value is debt. And you know, people are specifically talking about software. It's been well covered. Everyone says it's not systemic. And the further you look into it, you realize, okay, this is not central to the banking system. This is not huge on bank balance sheets, but it's still a huge issue. Okay?

[A]

So people are saying, so people like yourself are saying, look, you've got funds out there that are invested in hundreds, in some cases thousands of individual credits. Many of these particular loans were loans made to an industry, the software industry, that is now under siege. We see this distress in the public equity markets. Every day the stock market opens some of the largest SaaS. Software companies are trading down 10, 20, 30, even 40% from their highs. And there's this constant drumbeat of all of these companies are facing this disruption from AI, et cetera, et cetera. So now you're going a step further and you're saying, well, if the public equity markets look this way, then why do we feel good about the loans and the private credit side of this? Because it's the same companies who. Or smaller companies. So if we think Salesforce, for example, is in some degree of distress, what is a $50 million privately held software company's loan actually worth relative to what the lender is saying it's worth? When they report to the credit investors. Is that the heart of that issue?

[B]

Yeah. Or what about figma? Right. The selection. To be in the public markets, you have to meet a bar. Private, private equity. They haven't met that bar. They would get access to more capital and cheaper capital. If you're looking at the cost of debt for these companies, 10%, you know that it's really hard to have that be your hurdle rate on capital.

[A]

Right.

[B]

And there's a reason for that. If you could get public market debt, if you could go to the public markets, you would do it.

[A]

Okay. So these are companies that are not public, they're private. And we have to go by what the lender says these loans are worth.

[B]

Yeah. And it's based off of assumptions that are borderline insane.

[A]

Give us an example.

[B]

You have. There's. There's many different layers to how these guys price this debt. But rolling into it, if you're in a software valuation, you know, B Cred's a great example. Right. Blackstone's huge in software. They underreport it. All of these guys under report it. You know, you can say it's for, you know, it's just because they have to or because they're trying to hide the software. I'm not trying to get into that argument, but when you go through the business services, first of all, they say 25 to 26% of assets is software. When you really look through it, you go through the 400 businesses they lend to in bered. And by the way, BS XL is 80% of the same loans. That's the publicly traded BDC. You're looking at like 33. Journalists say it's 31. I think it's more like 35% of software on assets. But then they're running at 1.7 times leverage, so it's really over 50% of their. You know, for people thinking, you know, having. Having a portfolio, it's like being on margin. You know, you have $100,000. You just bought 55% in Tesla. Okay. But then you bought, you know, on margin, you bought, you know, Pfizer and some other stuff. And there's definitely no Pfizers in these portfolios. But, you know, if that goes down 50% the loans, then you're worried about taking a wipe of 25% off of their navigation. And what you're seeing in public markets is they're saying, we don't trust the navs. And it makes complete sense. The narrative that I'm seeing out of the private equity guys, it's like, I'm taking crazy bills. You have John Gray saying that worst case scenario, apocalyptic is our nav is off 3.5%. And I'm like, that is the apocalyptic scenario. You're preparing for that? The memos are crossing your desk, by the way, this is our downside risk at Blackstone. And if Blackstone is saying that and that's how they're underwriting risk, what is the 50th ranked PE company doing that's trying to keep up and get a little bit of gravy in this?

[A]

So are we talking about isolated pockets or just software? Or just a certain type of software that's being marked incorrectly relative to, to the disruption risk slash the, the macro picture, or is this across the entirety of, of private credit and every fund, every large fund, every small fund, there is some version of this happening on their own portfolio.

[B]

If all you need to understand is the software component in order to realize there is an issue, okay, I think that's a red herring and that's what they're going to want to push to. The underwriting across the board is crazy. They're running seven times leverage on Ebitdas that are sponsor marked. They add back whatever they want. There's no, you know, if you look

[A]

at sponsor, I'm sorry, sponsor marked meaning. And you phrased it this way, they're checking their own homework. So sponsor marked valuations meaning it is worth 99 cents on the dollar. Because they said it is.

[B]

Right. It's sponsor marked ebitda. You know, they're doing these adjustments you wouldn't believe. I don't want to get too far into it, but at the same time, it's also good times multiples. Right.

[A]

So we're in a health, we're in a healthy environment. I'm sorry, we're in a healthy economic environment. Meaning this is, we're not in a distressed economy yet.

[B]

Right. And if we go, even when we go into, you know, a recessionary period, which is 2022, you know, technical recession. No, but it wasn't a great time. They don't, they don't adjust anything. The only, the only way that they adjust anything is, is if they look at the loans that are clearing again, another selection effect like in software right now, databricks, you know, huge, you know, databricks is huge. Databricks is a great company. Okay. But now they're comparing to the, to the data bricks being, you know, being like the entirety of the capital markets for these types of loans. So, you know, I think the Marks are tremendously off, but I don't think it's just software. And that's where people need to start understanding. It's like, okay, if you're paying, putting seven times leverage on EBITDA, on H vac companies, at 18 times, you know, 50, if it's a roll up, maybe it's 14. You have, you have an equation where there's so much debt on these businesses that have variable outcomes, you know, especially during a recession. And the Ebitdas themselves, every deal that they do, they usually miss by 25% over 50% of the time. They miss in year one and, and two, by 25% of their assumptions. So I think the underwriting across the board is questionable.

[A]

Can I ask two questions to play devil's advocate that I hear frequently either from defenders of the industry or people who have allocated clients to the industry. Okay, here's the first one. Isn't it true that every day or every week, a lot of these loans mature, term ends and the money is paid back without an issue, or there's some mechanism by which there is a workout between the fund and the borrower and nothing yet other than the frauds, which we know about, which were last year so far. I'm sure there are more, but the ones that we're aware of, other than those, a lot of loans mature every day and the money is paid back, a new loan is made. There's a role and it's sort of uneventful. Is that, is that maybe part of why there's a lot of complacency still? Or do you view that as a legitimate pushback against this idea that everybody is insane with the way they're marking their, their values?

[B]

Yeah. Refinances are fine when there's money pouring into the asset class. Okay.

[A]

Which has been the case so far,

[B]

as soon as recently. Yeah. As soon as there stops being inflows that all of a sudden gets harder and people have to actually, you know, acknowledge the fact that these are really defaults.

[A]

You wouldn't go. So you wouldn't use the P word to describe that. You wouldn't go that far or you would.

[B]

What's the P word?

[A]

Ponzi.

[B]

You know, it has characteristics. It's like, I would say more so a bubble.

[A]

Okay. The second sort of devil's advocate comment would be, if this is true, why aren't institutional investors pushing back harder on these marks? Like, if it's as obvious, if it's as obvious as you make it sound, which it may be, where is the pushback from the larger end. Investors forget about wealth management because a lot of these deals obviously have institutional money in them as well.

[B]

Yeah. I mean, where was the pushback in 2007, 2008?

[A]

You know, it's in everyone's best interest to not push back. In other words.

[B]

Yeah, everyone's making money. Right. And then, you know, every single time it's. You're expecting it to never end. The banks, why aren't they pushing back? Because they make more money on this business segment, specifically direct lending, than any other business. That's where all of their growth, as well as the highest margins that they have are.

[A]

Right. You've pointed out something that I think is really important, which is that the liquidity, the quote unquote liquidity in this system, this particular system is more manufactured than it is organic. And when inbound cash slows down or, God forbid, reverses, I think the reliance on finding new sources of capital becomes more of a spotlight issue. And maybe this is about ongoing capital commitments. You've written about certain funds where it's unclear where they're even going to get the money to fund the existing commitments, let alone if something goes wrong and there's some sort of a hole. How much of a worry is that component of it?

[B]

Structurally, it's a huge issue. I mean, these guys are allergic to cash drag. They want to get, you know, for these unfunded commitments, they want to get that few million dollars now so that they can loan it out. You know, they're running with zero margin of error. And they say, oh, well, we got, you know, Cliffwater specifically said they had two years of liquidity with no inflows. They didn't count the unfunded commitments they are contractually obligated to fund. Right.

[A]

So there's money they have to come up with for existing commitments. That, and it's, I think it's in the billions for a lot, a lot of these funds. Okay.

[B]

Oh, yeah.

[A]

Last week we heard from Blue Owl, and the headline that got everyone's attention was the fact that they had for one of their funds in particular, a 40, almost a 41% withdrawal or redemption request. But if you read a little bit further down, they say the redemption requests are coming from only a small number of investors. I think they said less than 10%. They also said that they had actual inflows to go along with all those outflows. What do you make of that? Because the defenders of the asset class rightfully pointed out, hey, look, there's actually still people writing checks and bringing in investment capital, even though there's a lot of demand to withdraw?

[B]

Yeah, Cliffwater said the same thing. They predicted $3 billion coming in and they're backed by Temasec and TPG. So maybe they get bailed out. I would really think about that. So if a small contingent of super high net worth people are the ones redeeming and it's only the panic hasn't started. If the smart money is getting out in big check size and they're saying, oh, it's just the smart money that's really small contingent. It's like we're just getting started.

[A]

Is that the smart money, the 10% that's redeeming versus the 90% that's staying put? Do we know for sure that that's the smart money? Because I think the industry would say actually that's the panicky money where the financial advisors who placed their clients in this fund did not do a good job of explaining the illiquidity.

[B]

Yeah, go on Twitter and see the people defending this. They're not the smart money. Okay, okay. The people leaving game theory says that's intelligent. If you go out of these funds at nav, first of all, they're going to sell the best assets first. The more assets they sell, the worse the nav gets. Right. They're, they're, they're going to window dress. There's only so far that they can do that. The game theory is even if you like private credit, you're going to go into these BDCs at a discount which are closed.

[A]

Okay, so let's pause there so we can explain that. You mentioned there's a lot of crossover. So you might have a private credit product that does not trade. It might have as much as 80% overlap with a sister product that is publicly traded. What we call a public bdc. And it's got a ticker symbol. It goes up and down each day like a stock or an etf. The public version for a lot of these is at a 20 or 25% discount to the stated NAV or net asset value of the portfolio. If you own the private version, they are marking these things at what you consider to be an inflated nav. If you go into the public market, you can buy that at a 20% discount. Even if you don't believe the marks, it still sounds like it's a better use of fresh capital to the sector. What explains the behavior of somebody that would rather have the private version at the inflated NAV rather than buy the publicly traded? Are they that averse to the daily volatility.

[B]

Yeah, I think that's a component of it. But I also think that there's, if we don't move, there can't be a problem. I think there's complete delusion. If you're going from BCRED, you know, Blackstone's got 200, maybe $300 billion of RAA money in it now. If you're going from BCRED to BXSL, which is at a 12% discount, it's 80%. The same loans, you know, everyone should learn how to use. Claude, go say, match the loans. How much of a difference is there? This is the same credit team underwriting the same loans. And then even if you don't have a direct match, because for whatever reason, you know, you're, you're, you're in TPG or something like that, you can, these are broadly like, they're all the same companies. It's, it's the difference.

[A]

The borrowers, the borrowing companies in the portco, in, in the portfolio port codes

[B]

are almost all the same. You'll see the same companies everywhere. And these guys want to say it's a sales, it's salesmanship. Right. We're really good underwriters. Might be problems elsewhere, but we're the best. It's like they all say that they can't all be the best. You know, there are definitely guys that are way worse, but they all rushed into the same like, like, like blackrock is considered pretty well. They're all trying to deploy so much capital. Cliff Water is deploying. They have like 20 or 30 credit guys. First of all, they don't underwrite. But, you know, just do the math on how many credit guys they have and how much capital they're deploying. Right. It cannot be super intelligent. You might like, it's, it's, it's almost like buying hygiene. You know, they're just putting, you know, money to work. And these are for each loan, 350 page loan documents. And then you got to go through the models and you got to do all of this. The amount of deals that they're doing, they're, they're not reading the contracts. They're not reading. There's just no way mathematically you can, or logically you can trust that the underwriting is clean and pure, even for the best.

[A]

I want to give people a sense of how big this is. You've said that the leverage in this system is much higher than people realize because it's embedded. It's not just in the fund, but it's at the borrower level, what are the stats or what is the idea of the true leverage in the system that gets your. That rings alarm bells for you if

[B]

you're thinking about a business or economic outcome and considering that a base unit and then you have you know, hopefully 25% EBITDA margins. And by the way, I want to cut in real quick please. Everyone should go look at Domin Doren's table for how to rate a bond based off of size, based off of Hughes ebitda. Right. He's got coverage and he's got ebit. They want to throw away the DNA and add back a bunch of other stuff. So when they say it's a triple B rated investment grade bond, try to convert that to what Damadorin would say and then they package it all up in a double a C lo it's the same thing that happened in 2008.

[A]

That's NYU professor quote the Dean evaluation Demoderin. So okay, all right, so but like how. I guess what I'm trying to get to for the, for the audience is like how much leverage is out there in this system and how dangerous could it be if we do get into a weaker economic environment where things start to go wrong.

[B]

Just talking about the base unit though, you know, obviously there's operational leverage, you know re the variability of revenue affects earnings or ebitda, you know, at, at an inherent base level. And the economy, how the economy does will obviously influence that. Then they're running, running seven times leverage. On top of that it's really nine times. If you take take away their, you know, synergies that they always like to talk about that don't end up actually working. And then at the, you know, on, on the front side you have some amount of leverage usually 1.5 to 2 times in these clos, depending where you are, it might be up to 10 times. So just you're not getting 10% because it's a corporate IG bond and it's safe.

[A]

And you know, just understand you're saying the end Investor is getting 10% as their annualized return, let's say through the interest rate. But there's a lot of leverage that's baked into the cake in order to deliver that 10% for sure.

[B]

And obviously risk associated with that, of course where that goes into the system is a whole different equation because a lot of people are probably watching this and they're like eh, I always thought that was kind of weird and dumb but everyone's telling me it's not systemic.

[A]

Okay. But of course it is, because if everyone's doing it, by definition it has to be systemic.

[B]

Yeah. I want to highlight the number you opened with. $10 trillion is on the balance sheet of US annuity and life insurers. Okay. These are huge numbers. The Fed balance sheet is six point something trillion. Okay. This is a bigger balance sheet than the Federal Reserve that everyone wants to trust that they can permanently bail out everything forever.

[A]

So that's where I wanted to go next. And this is where for me, because I'm reading all your stuff and so you write an open letter to Treasury Secretary Besant and then you followed that up shortly afterward with an open letter to Representative Johnson in Congress, who I guess has insurance company oversight.

[B]

Is that the only way this changes is through Congress? You know, I got to speak to the speaker of the House.

[A]

Okay, so basically what you're saying now is that this risk does not stay in the private funds. Meaning think about all the people who are watching this or listening to this. They're saying to themselves, well, I didn't invest in any of these private BDCs. I didn't invest in the public ones. I don't even know what these things are. They're not in my portfolio. I'm a Vanguard investor. I'm an iShares investor. I don't give a shit. Now you're saying this is a life insurance industry issue which absolutely could come home to roost and affect people in the same way that the AIGs of the world were, were affected. And that, that old, that development where people saw the, the connection between the stuff that Goldman Sachs was buying from aig, the liabilities that AIG was incurring for selling these products. That's really when the financial panic went into overdrive. And, and they had the past TARP because they recognized, okay, this is not about speculation anymore. This is now about the insurance industry. And I don't want to alarm people unnecessarily. But you, you are worried about this and you are calling attention to this because you do think that it could threaten the insurance industry or force a bailout of some kind. So could you tell us in the time that we have left why insurance is where the rubber meets the road?

[B]

Yeah, that's where the mass of the issue is for the anal annuity and life industry. They have $658 billion as capital surplus. That means that their assets and their liabilities, you know, both a little bit over 10 trillion, 9.5 trillion. The difference between that is where it goes, is, goes to the Government, okay, that means that they're on average levered 17 times. Lehman was levered 30 times right before bankruptcy.

[A]

Right.

[B]

There's, there's obviously a lot of discrepancy where you know, the PE backed insurers are being extremely aggressive, the pubcos are being almost as aggressive and the mutuals are much better. You know, if you have a life insurance policy from New York Life or some other mutual fund, it's better because their incentive is to you, you are an owner of the Green Bay Packers. When you have a policy, the incentive structure is far better. The 600 billion dollar gap, that's where it's like the industry wants to say we only have 8% exposure to private credit. Okay. But you only have 6% before receivership for the entire industry. And obviously when there's a credit crisis, it doesn't happen just in private credit. It's going to happen in all these different silos and buckets. We're already seeing high yield and high quality corporates start to start to grow a spread. So you know, you have extreme risk takers in there. And, and that's kind of just the overview of the math. Then when you look into the mechanics, which I've done with a forensic accountant who has been screaming about this For 41 years, he's been chasing down fraud in the industry. And there are seven reinsurers that two 680 different life insurers are saying, okay, well in annuity, in life, our biggest risk is our balance sheet in property and casualty might be hurricane risk or fire or what have you. So they will reinsure the risk of their balance sheet to these guys and it's, you know, a put option. But the thing is the seven, the seven don't have the money. So then it goes into offshore and they say they have $2 trillion backing there. You know, I think we're lucky if they have 1 trillion backing there. Right? So then when you have a hole, and you know, by the way, TARP was, the headline number was 700 billion. They only drew 450, 50ish billion. And that took down the entire global economy. Right. So there's something like that. And it's like, oh well, the Fed will just print money and it will go there. It's like if we don't address it. And that's why I'm going at this from like, can we just look into this please, please? And this has all been regulated where US regulators are not allowed to see what's in the Bermudas. Whatever lobbyists decided that they were going to convince politicians that it's okay that we have to trust offshore accounts is. It doesn't make any sense. We need to bring it back. So that's my call to action for people.

[A]

So, in English, I have a policy with an insurance company. They say to their regulators, don't worry, we have reinsurance. The point that you're making is a. It seems like a relatively small number of reinsurers who are being cited by all of these insurance companies as being the backer of last resort. It's not possible, given what we know about their assets, that they could possibly be the backstop for all of these entities. That's one. And then two, they can't even be compelled to deliver transparency on what their holdings are because it's not. We don't have that level of granular insight into how they're investing the reinsurance money. So I think I'm summing up what you're saying. Maybe I'm just trying to process it myself.

[B]

Right. They've made it invisible. Every single time anyone has asked anything, they've, you know, freaked out, be like, no, it has to be invisible. And meanwhile, the few looks that we have into this reinsurance, there's basically nothing more liabilities than assets. So the fact that we're supposed to just trust this and, you know, there's a reason why all these companies have gone towards this. It's like the easiest money in the world there. Something stinks about this. I wrote up recently with a forensic accountant just how bad it is, and I encourage everyone to read that we're

[A]

going to send everybody to mispriced assets so they can read your work. I want to finish by asking you, okay, so if the bomb is the life insurance balance sheet writ large, like the industry, and the fuse is private credit, what's the trigger? Or like, what's. What's. What is the thing for the rest of us to watch for, to say, okay, now the fuse has been lit and like, we're. We're on the clock. I think that would probably be the thing that most of my audience would say, okay, so what am I, what am I looking for here?

[B]

Yeah, I used to think it was, and I still might be leaning this way. Redemption's huge. Huge. Why? Because when the. The money comes out of the asset class, they don't have this constant inflows. We got to get. We got to get closer to reality. Once you get closer to reality, the insurance, if there's any downgrades, that's another thing. But I think this is going to create the downgrades because then if it's triple B, they can be leveraged 70 times on it. If it goes to single B, they can only be levered, I don't know, 20 times, 25 times on it. Still ridiculous leverage. But that would, that capital call would be something that would, you know, probably, probably be a catalyst for, for what I, what I think is a bomb sitting offshore.

[A]

So if you, if you're saying the, the thin line separating calm from chaos is continued inflows to the asset class via financial advisors, I'm going to tell you that that's a little bit worrisome to me because I don't know a financial advisor right now that's as enthusiastic about allocating to the asset class as they were six months ago. I think the media has sort of done their part in putting the asset class under a lot of scrutiny. You might feel the media hasn't gone far enough. That's a, that's another story. But, like, if you talk to advisors, even advisors who have this as part of their allocation, they are way less enthusiastic about talking about it with clients than they were just a few months ago.

[B]

Yeah, I think the media has done a decent, some good job. They're constrained, obviously, with what they can say. You know, it's different when you're writing on substack and you have zero care if people disagree with you and, you know, you have no sponsors or whatever. But I would like to see them start poking into insurance. It's a, it's a hard equation. You can just take a little slice, talk about that. It really needs to be talked about. And then for the typical ria, I would just question the narrative, the exposure. We were talking before, it's like, what kind of products. Do you ever think about why this is being offered to you? Are you that special that, you know you're getting the best product that Wall street has to offer? And then.

[A]

So, yeah, this is, this has always been one of my, this has been like my Socratic method. When somebody comes to me with an IPO or a venture capital investment that I can offer to clients or a private equity fund or a private credit fund. It's not that I think there's like this inherent reason that the investments are bad. It's that my first principle's answer is, well, why me? Like, you can get money from any. If this is so good, why aren't the Saudis buying this whole thing? What do you need me for? Yeah, what do you need my clients what do you need my clients for if this is so unbelievable? So. But that I'm maybe overly cynical, but. No, I think that kept me out of a lot of trouble.

[B]

There's no charity. That's fine. Just, you know, try to simplify. Portfolios understand that at this point in time, all assets are correlated. You know, gold, bonds, stocks, everything's going up. The only thing that you know is really, you know, it's, it's, it's. It's cash. So I think, you know, know there's a reason why some of the banks are starting to say having a healthy cash position is smart. And I, I encourage people to look into this. Like, again, I'm, I'm naturally a bull. Right. AI is awesome, but we have a lot of risk to underwrite and I hope people do the work. And, you know, it's shocking how little people do. But, you know, all of the stuff that I've written on this issue is unpaywalled for a reason because, you know, it just, it gives me a little bit of anxiety, honestly.

[A]

Yeah. Nick, I do want to point out you are not a professional short seller. You are not somebody that has the ability to short a private credit fund. I don't know that anyone does. There was a story over the weekend, I think, at the Journal, where Goldman Sachs is starting to come up with ways that institutional investors or hedge funds can place bets against some of these portfolios or sponsors. But that is fairly nascent, and that is not what you are out here doing. It's, it's. It seems like you're out here informing people. There are obviously people that disagree with you, but I don't want people to get the impression that you are in some way placing these like, CDS bets or. I mean, I don't know if you are, but it sounds like you.

[B]

Maybe I should and people would take me more seriously. Yeah, I'm starting to think, like, I

[A]

think there's a component of that is. Well, there's a component of that is like, what is this guy's motivation? There must be something. So. But what you've said publicly is that that's not the case. And you're not a permeable, a perma bear. You're not a somebody that sells a doom and gloom sort of newsletter. You've made this stuff public. People can read it on your site. And it seems as though you want to have this conversation that a lot of people just don't want to have.

[B]

Yeah, for sure. And just so everyone understands, this has been good for business, but it was totally outside of, you know, when I started writing about this, it was a risk because it was. It was not typical and it's not built towards the sub stack model, at least the way that I developed my brand. So, you know, I do want to characterize, you know, you do good work, all of a sudden there's, you know, opportunities. And, yeah, I can't help but, you know, I started off saying, I'm not shorting this. I can't help but short some of this. You know, I trade and. But we're not talking about, you know, he's paid by a hedge fund to, you know, say this stuff. I feel this stuff. And that's why I'm saying, well, Nick,

[A]

we appreciate you sharing your ideas with us, and I know you've gotten a lot of attention recently for talking about what's going on. I assume you'll continue, so I would just ask, could we check in with you as things develop? Hopefully they don't develop too negatively, but we'll come back to you for sure. And really appreciate your time today. Thank you so much.

[B]

Thanks, Josh. Amazing to be here.

[A]

All right, guys, check out Nick's substack if you want to learn more. Of course. It's called Mispriced Assets, and we will include a link in the show notes. Thank you so much for watching. Thanks for listening. Talk to you soon.