I’m typically not a betting man, but I’d wager that most wealthy Americans with exposure to private credit don’t subscribe to Bloomberg News. If they did, they likely would have better understood the risks of tying up their money in so-called business development companies that lend money to debt-ridden small and medium-sized companies owned by private equity firms.
Ignorance isn’t bliss when dealing with Wall Street sharks, many of whom openly regard retail investors as “dumb money.”
Bloomberg has a team of journalists who understand that the nearly $2 trillion private credit industry is in danger of imploding, but they judiciously avoid sounding overly alarmed. I’d liken them to Detective Sergeant Joe Friday of the 60s TV series Dragnet, whose signature line was, “All we know are the facts.”
For weeks, Bloomberg has been delivering scoop after scoop on the landmines exploding in the private credit industry. Fortunately for President Trump, most of the corporate media has ignored the reporting because mainstream reporters are too inexperienced to understand it. Bloomberg published a story yesterday, first reported by the Financial Times, that I regard as the Wall Street equivalent of shouting “fire” in a crowded theater.
JPMorgan Chase, whose CEO Jamie Dimon previously warned about “cockroaches” surfacing in the opaque world of private credit, is marking down the value of certain loans in the portfolio companies it lends money to. Bloomberg said the devalued loans are to software companies, home to some of the biggest borrowers in the private credit market. The ability of these companies to repay their loans is of increasing concern because artificial intelligence is expected to disrupt their business models.
Wall Street lenders like JPMorgan act as banks to private credit funds, providing them with cash using their loans as collateral. By reducing the value of that collateral, JPMorgan has curtailed the amount of money it will lend to these funds, whose investors are increasingly demanding their money back. Most private credit funds limit withdrawals to about five percent of the fund’s total assets in any quarter, a detail many investors likely never understood — or chose to ignore.
Even if all private credit funds were only subject to five percent withdrawals over the next 12 months, the industry would still shrink by 20 percent in a year. For a nearly $2 trillion market, that’s $400 billion of liquidity vanishing from the economy. To meet those redemptions, the funds will have to begin selling off their best loans, which will reduce their value because there will be more supply than demand.
Market veterans are increasingly drawing uncomfortable parallels to the early stages of the 2008 financial crisis. Investor George Noble, the former director of the Fidelity Overseas Fund, has noted that the last time investment funds began restricting withdrawals from investors was in 2007, when BNP Paribas froze roughly $1.7 billion in funds tied to U.S. mortgages. Within six months Bear Stearns collapsed and the global financial system was spiraling toward crisis.
“Everyone said it was contained,” Noble posted on X. “Six months later the entire financial system nearly went under. I’m not saying we’re there yet. But the pattern is rhyming.”
Noble’s counsel to credit fund investors: “Get out before the exit gets more crowded.”
Allow me to connect the picture dots: The value of loans in private credit portfolios is determined by the mostly private equity funds that made those loans. There are all sorts of hocus pocus maneuvers available to put some lipstick on loans that are teetering. One popular shade is known as “payment in kind,” whereby a troubled borrower’s interest payment is simply tacked on to the loan principal.
Bloomberg reports that unlike many of its rivals, JPMorgan had the smarts to reserve the right to revalue private credit assets at any time. What’s alarming is that JPMorgan has determined that private credit loans in funds it lends to aren’t worth what those funds say they are.
Although software companies owned by private equity firms are believed to be the bigger borrowers of private credit, healthcare companies also figure heavily into the mix, particularly specialty physician practices in dermatology, gastroenterology, ophthalmology, anesthesiology, and emergency room medicine.
These were once small, independent practices owned by doctors, many of whom underwent grueling years of medical training believing they were pursuing a noble profession of healing people. The geniuses of private equity had a less romantic view of physicians, viewing them as a monetizable asset class whose labors they could exploit for far bigger profits than physicians could generate themselves.
In recent years, private equity engaged in a lucrative roll up strategy buying up medical practices and saddling them with crippling debt owed to private credit firms. The debt loads were so large that many practices had to generate enormous amounts of cash simply to service their loans.
The PE Masters of the Universe thought they could pull it off by bringing “efficiencies” to their medical practices by getting physicians to recruit and see more patients, performing more procedures on them, charging more for their services, and cutting costs. Another brainchild PE idea was hiring considerably less trained and lower paid physician assistants and nurse practitioners to perform more procedures.
Bloomberg was wise to the trend early on, producing a detailed story six years ago about private equity’s rollup of dermatology practices and how it was harming patient care and demoralizing physicians.
What the PE industry didn’t bank on was that health insurance companies rivaled their greed and weren’t as generous as expected to fund private equity profits. Not surprisingly, at least to people with a modicum of common sense not employed in private equity, heavily leveraged healthcare companies couldn’t meet their debt obligations.
The most notorious failure was Envision, a physician services company KKR acquired in 2018 for $10 billion. Two years earlier, Wichita-based Envision merged with ambulatory surgery center company Amsurg, creating a large physician-staffing company with 261 surgery centers and one surgical hospital.
“Significant advances in medical innovation have yielded new products and services for patients, while consolidation and novel approaches to care delivery have the potential to improve clinical outcomes and reduce associated costs,” Ali Satvat, head of KKR’s Health Care Strategic Growth, said when the private equity firm launched a $l.5 billion fund to acquire healthcare companies.
KKR, whose leveraged buyout of RJR Nabisco was detailed in the 1988 bestseller Barbarians at the Gate detailing the greed, corporate maneuvering, and high-stakes finance that was already prevalent in that era, loaded Envision with $7 billion in debt. To make the deal work, Envision had to generate enormous amounts of profits.
KKR’s “secret sauce” for that cash? A controversial practice called surprise billing, where their ER doctors stayed out of insurance networks to charge patients much higher rates. When Congress finally banned these surprise bills in 2022, KKR’s primary engine for paying off that $7 billion mountain of debt was effectively destroyed.
As the debt became unbearable, KKR reached into the private equity playbook to protect their own interests. They moved AmSurg’s ambulatory surgical centers — Envision’s most profitable asset—into a separate “unrestricted” subsidiary, out of the reach of their original lenders. This allowed KKR to use the “good” part of the company as collateral for new loans to keep the lights on a little longer. It left the physician staffing side of the business – the healthcare “providers” working mostly in hospital ER departments, accountable to a company drowning in debt.
Envision finally filed for bankruptcy in May 2023, one of the largest losses in KKR’s history. For KKR’s billionaire partners, the write off was insignificant in the grander scheme of the firm’s profits and portfolio. Envision’s physicians bore the brunt of KKR’s misadventure. Many were forced to take pay cuts and saw bonuses delayed so the company could continue servicing interest on its debt.
Studies have documented what often happens when private equity sinks its tentacles into healthcare. Quality of care declines and costs rise.
A JAMA Health Forum analysis of 73 private equity acquired hospitals and 293 matched control hospitals found that patient care experience worsened after private equity acquisitions. Patients reported poorer staff responsiveness and lower overall satisfaction. Even more troubling, the gap between private equity hospitals and their peers widened with each subsequent year after the acquisition.
Other research has found similarly disturbing results. One study concluded that when a private equity firm acquired a nursing home, the short term mortality rate increased by roughly 10 percent. Private equity investments in healthcare have also been associated with significantly higher costs to patients, sometimes exceeding 30 percent.
Healthcare services may now be the canary in the coal mine for the private credit market. While software companies are facing a valuation crisis driven by artificial intelligence, healthcare companies are confronting something more immediate: a solvency crisis fueled by high interest rates, labor shortages, and regulatory pressure.
A report last fall from credit ratings firm KBRA found that physician practice roll ups financed by private equity carried some of the weakest credit profiles in the private credit market. Many operate with razor thin interest coverage of just 1.1 times, meaning they barely generate enough cash to pay their debt. Much of that debt sits on the balance sheets of private credit funds and business development companies that eagerly financed the physician practice consolidation boom.
More than a third of the sector’s $45 billion in borrowings were scheduled to come due by the end of 2026, roughly double the refinancing pressure facing other private credit borrowers. Not surprisingly, healthcare roll ups already posted the highest payment default rate of any sector in 2024, and lenders recovered less in bankruptcy than they typically expect from senior loans.
That’s hardly surprising since the most valuable assets in a physician practice are the doctors, nurses, and healthcare workers themselves. Unlike factory equipment or real estate, they cannot be seized in a bankruptcy.
Fitch reported that healthcare produced the largest share of private credit defaults in January. Thirteen healthcare borrowers failed to make their debt payments, driving the sector’s default rate up to 7.8%, compared with 7.2% the previous month and 6.1% a year earlier.
The implications extend far beyond distressed physician groups. Private equity financed healthcare roll ups represent one of the largest concentrations of private credit exposure in the U.S. economy. If these businesses begin failing in waves, the losses will not be confined to private equity firms. They will ripple through the vast ecosystem of lenders, business development companies, pension funds, and retail investors that financed the boom.
For physicians and patients, the consequences are likely to be far more immediate. Medical practices burdened with unsustainable debt will cut staff, consolidate offices, and pressure doctors to see more patients in less time.
To reduce labor costs, many practices will rely even more on nurse practitioners and physician assistants whose training is significantly shorter than that of physicians, while physicians are pushed into supervising larger numbers of these providers and handling heavier patient loads themselves.
To generate cash, some practices will raise prices or pursue more aggressive billing. The result will be a healthcare system that is simultaneously more expensive and harder to access.
American healthcare has been reshaped into a system designed less around patients than around the demands of leverage and financial engineering. Private equity promised to bring efficiency to American medicine. It may have delivered a leveraged healthcare system engineered for bankruptcy.