Nick Nemeth: Private Credit Will Blow-up Insurance System | Immense Leverage, Shaky Loans, and Retirement System That Actually Does Have Run Risk (via Surrenders)

**Jack Farley** (0:00)
Today's episode is brought to you by the Teucrium Corn Fund, ticker CORN. Let's get into it. Joined today by Nick Nemeth, financial investor, researcher and author at Mispriced Assets. Nick, welcome to Monetary Matters.

**Nick Nemeth** (0:14)
Thanks, Jack. It's good to be here.

**Jack Farley** (0:15)
You write about a lot of topics. I think I first stumbled upon your work, the work that you've done on private credit and alternative assets. So private equity, real estate, but primarily private credit. And you have a piece out called The Smart Money Is the Subprime This Time. And you have some very, very bearish things to say about the private credit industry. You say it doesn't look like 2008 This looks like 1929 So first, what are we talking about here? Just a reminder, viewers, what private equity, private credit is. Why are you so concerned? What's the issue here?

**Nick Nemeth** (0:51)
Yeah, I just wanted to start off and say I'm not a perma bearer. You know, I made money this year.
I have read about longs. A certain segment of my audience is very interested in the systemic risk I've identified that I think is going to be the end of this cycle. And I think the end of this cycle, because it's been a long cycle, basically one, I don't count 2020, I don't count 2022, is going to be uglier for numerous different reasons. It's kind of like a marriage of built up risks, with private credit being the trigger for a massive blow up that's not going to start in the banking system, could end up affecting the banking system. But really the mass of the crisis is insurance, where there's a $10 trillion balance sheet, that's 150% of the Federal Reserve's.

**Jack Farley** (1:36)
Tell me about that, what do you mean?

**Nick Nemeth** (1:37)
I mean, we're talking about Subprime taking down the economy at $1.2 trillion. There's a trillion dollars of private credit, broadly private credit. The concerning part is the direct lending, which is when a private equity company takes debt out, kind of like a mortgage, in order to buy a business. Now, this can be done well, but they're running leverage at seven times EBITDA, that's adjusted. So EBITDA, your audience definitely knows this. I go into podcasts and it's less initiated.
That's fake earnings. That's what Warren Buffett would call fake earnings.
And then they make it doubly fake, because they adjust it on synergies that rarely come true. S&P comes out with data on each vintage, and 50% of the time they missed by 25%. Right? And sometimes it's 40 or 50%. So you can adjust those EBITDAs 30%, and then be looking at leverages at nine times that. So the interest coverage that they say to in public markets. So I'm natively a public markets guy.
I like seeing prices move. I just think it's a more fun game. I've always thought that. From the beginning of my investment career, these private market guys, they like talking stories, and the rubber rarely ever meets the road. Right? All you need to do is be able to exit in seven years. In the beginning of a cycle, that's great. You know, you're exiting in 2018, 2019, maybe 2021, if you're super lucky. And the people our age that have grown up and gone into private equity, they don't know anything different. You have to get to the MD level to see someone that actually felt a cycle and heard the stories, and then they fell apart. And those guys aren't doing the works. And even then, I feel like people are like, well, 2008 can never happen again. Well, the amount of opacity in insurance, let me tell you, I've been talking to big short guys, guys that put on the trade, researched the trade, called the trade. It was pretty simple. I know that sounds arrogant to say, but defaults go up, foreclosures go up, and CDOs break. You just had to do the work. Nobody does the work. Nobody does the work in public markets, small caps that I cover rarely in even the hottest sectors like semiconductors.
But when you're talking about insurance, the annual reports, the statutory filings, can get up to 10,000 pages. We're not talking about 500 pages on a 10K. We're talking about 10,000 pages.

**Jack Farley** (4:16)
Yes.
The way private equity works is they buy companies with debt, and then they sell them for a higher value, and that has worked wonderfully for many years. I think the last year where there were exits, so private equity selling their companies at scale was 2021 or maybe 2022 Since then, the Fed has raised rates, and they haven't been able to sell the companies, the IPO window, which may be open now. They haven't been able to exit these companies at all, so they haven't been able to pay their investors back. How have they paid their investors back? By borrowing money, so then you have the rise of private credit.