Han Dieperink: The law that investors keep forgetting

March 3, 2026

_{This column was originally written in Dutch. This is an English translation.}

By Han Dieperink, written in a personal capacity

There is one rule in financial markets that never changes, even though investors repeatedly forget it: the credit cycle. Not because they don't know about it, but because the temptation to participate is simply too great.

In simple terms, the rule is that what starts as healthy credit to solid companies almost always ends in a wave of cheap money to weaker debtors. Private debt is no exception. But the real danger of the credit cycle, especially in the current climate, lies mainly with the banks.

The credit cycle

The credit cycle always follows the same pattern. In the initial phase, the requirements are strict: interest rates are attractive, collateral is solid and the risks are clear. But as soon as the first investors show good returns, more parties flock to the market. Competition increases, requirements become more flexible, loans go to companies that were previously rejected and the covenants that protect the lender become weaker.

Economist Hyman Minsky described this pattern back in the 1960s: it ends when the market suddenly realises that too much credit has been granted to parties that are too weak. Confidence evaporates. Those who were able to borrow money easily shortly before are suddenly faced with closed doors. Nowadays, this is also referred to as the Wile E. Coyote moment. This cartoon character runs off a cliff, hangs in the air above a ravine for a moment and only falls when he realises that there is no ground beneath him.

This is also how it works in financial markets: assets are sometimes kept above their fundamental value for a long time. Not despite, but because of the fact that no one dares to look down. As long as liquidity is ample and confidence remains intact, the market floats. The power of the metaphor lies in the fact that it reveals something essential about market psychology: it is not the abyss that causes the fall, but the perception of it.

The Blue Owl fiasco

The recent turbulence surrounding Blue Owl Capital illustrates how quickly sentiment can change. This asset manager, one of the largest players in the private credit market, announced that it would sell $1.4 billion in loans to pay out investors who were exiting.

Management thought this would be received as positive news. The opposite happened. The share price fell by 10% on the day of the announcement and then experienced its biggest monthly decline since its IPO in 2021. Other major players followed suit: Apollo lost 8.5%, Goldman Sachs 7.5% and KKR more than 6%. The KBW banking index fell by 4.9% in a single day, the biggest daily decline in months.

Activist investor Boaz Weinstein of Saba Capital put it bluntly: “We are in the very first innings of the wheels falling off the cart.” He then offered to buy private investors' holdings at a discount of 20% to 35% on the official fund value. Such an offer says more about confidence in official valuations than any press release. What followed was a snowball effect: large business development companies were hit hard, KKR and Apollo credit funds wrote off assets, and BlackRock reduced distributions on several funds.

The precarious position of banks

The credit cycle has always been dangerous for banks. They borrow short-term from savers and customers and convert that money into long-term, hard-to-sell loans. A relatively small credit loss can then quickly turn into a bigger problem, because the balance sheet of any bank offers little room to absorb losses. Increased transparency requirements also have an unexpected side effect: because shareholders and depositors are quicker to see that there are problems, the reaction can also be quicker and more severe.

An illustration of this: Wall Street banks recently rushed to assess the extent of their losses on billions in loans to British mortgage lender Market Financial Solutions, which collapsed after allegations of fraud and double pledging of collateral.

This destabilising mechanism is less prevalent in private debt. Private credit funds are financed by end investors (pension funds, insurers and wealthy individuals) who apply less leverage and do not withdraw their money overnight. After all, no saver empties their account in the morning. This makes the system more robust, but not immune. Private investors also have their limits. The sharp rise in exit requests for semi-liquid funds at the end of 2025 shows that retail investors still look for the exit as soon as the headlines turn negative. Investors are patient, until they are no longer patient.

The risk of artificial intelligence

Every credit cycle has its own surprise. In 2008, it was the US housing market. This time, more and more analysts are pointing to artificial intelligence. AI is not a risk for a single sector; it is a horizontal force that cuts across all industries. Companies that are still profitable today and pay their interest rates on time may be outcompeted by AI-driven alternatives in two years' time. That is creative destruction at an accelerated pace.

Banks and private debt funds have large portfolios of corporate loans that carry this risk, without current credit models being able to assess it properly. After all, a loan is granted on the basis of historical profits and tangible collateral, not on the basis of competitiveness in a world with generative AI.

In addition, AI has a strongly deflationary character. If it structurally increases productivity while wages lag behind and prices fall, deflation may return. And a debt-deflation spiral, in which falling prices increase the real value of debt and make it increasingly difficult for companies to meet their obligations, is the most feared scenario for any lender.

Lessons for investors

What does this mean for investors? In recent years, private debt has rightly earned its place in diversified portfolios. Returns were attractive and losses were low. But two things deserve close attention. Low loss rates in a favourable cycle are not proof of credit quality. They are proof of favourable conditions. And the signs that characterise the end of a credit cycle are beginning to emerge: more aggressive profit calculations, weaker covenants, rising PIK interest rates.

Those who are currently invested in private debt do not need to panic sell. A downward market is the worst time to divest illiquid investments. Those who want to allocate new capital would do well to be selective: choose managers who have weathered a full credit cycle, sectors that are less vulnerable to AI disruption, and positions in the capital structure. Senior secured loans with a real claim on collateral offer more protection than subordinated credit.

The easy years are behind us. Private debt is not a bubble; it is a mature market that has taken a permanent place in global financing. But the market is facing its first real test: a full credit cycle, with geopolitical uncertainty and technological disruption on a scale we have never seen before. The structural shift towards private markets is real and sustainable. But risks do not disappear, they simply shift. From bank balance sheets to funds. From transparent markets to valuations that are more difficult to control. Anyone who understands Minsky knows what that means.

More columns by Han Dieperink