game theory & private credit

Game theory perfectly describes the private credit market as withdrawals reach an all-time high and firms start to institute withdrawals cap. To set the scene, private credit is a loan by a non-bank lender to a private business. This used to be niche but grew to $1.5 to $2 trillion because one private credit funds were filling this lending void as post 2008 legislation prevented banks from lending to risky S&B's. Then two, in the zero interest era, investors couldn't make returns on bonds and so turn to other assets like private credit. To a lesser extent, private made private credit a good lending option for MasterCard. Game theory explains when the outcome of an individual is dependent on the behavior of an entire group. It also explains how small pieces of bad news can trigger a stampede of behavior. Because private credit is opaque, investors don't have perfect information, and they tend to over rotate on small market signals or other investor behavior. When bankruptcy like Tricolor and first brands were announced, they felt like market signals for investors to look heavily into private credit. And what they found was that private credit is highly concentrated into software. AI disruption creates panic that numb might be unrecoverable. Also, there's a lot of PIK loans which is the rolling forward of interest payments. Not inherently bad but make it hard to understand true performance. So as one investor withdraws, others see this as a market signal and will also withdraw. This is amplified by the influx of retail investors who are a lot more prone to panic selling during market volatility. Private credit funds are illiquid which means they have to sell assets to meet these liquidity demands and instituted withdrawals withdrawals. The cap is meant to prevent fire sales when the firm is forced to sell some of their best bones at discount. This destroys the value of the underlying assets for the rest of the fund. All know markets are interconnected, banks have trippled their lending to private credit in the last few years. Game theory would expect that the best outcome for the entire group is if everyone stays invested, when loans reach maturity, everyone gets 10 to 12% returns because the underlying assets haven't been impacted. But opake asset classes are so impacted by human behavior, which boils down to this game of just signaling.