Since 2008, private credit has exploded as banks retreated from risky lending. Understanding this shadow system is essential for credit analysis.

The Private Credit Boom:

Traditional banks, facing higher capital requirements post-2008, pulled back from:

• Leveraged loans (financing LBOs)
• Middle-market lending
• Real estate development
• Distressed credit

Who filled the gap? Shadow banks:

• Private credit funds (KKR, Apollo, Blackstone)
• Hedge funds
• Business development companies (BDCs)
• Specialty finance companies

These entities now provide the majority of credit to mid-sized companies and alternative borrowers.

KKR as a Proxy:

KKR & Co is one of the largest alternative asset managers. Its stock price serves as a canary for private credit health:

• KKR rising with S&P: Private credit is healthy, shadow pipes are open
• KKR falling while S&P flat: Smart money lenders are de-risking — they see something
• KKR diverging bearishly: Often leads broader credit stress by months

Regional Bank (KRE)s (KRE) as a Proxy:

While private credit serves larger borrowers, regional bank (KRE)s serve:

• Small businesses
• Commercial real estate
• Local developers

When KRE crashes, the 'real economy' credit pipe is breaking:

• Small business lending freezes
• CRE refinancing becomes difficult
• Local economic impact

The Dual Watch:

Track both KKR (private credit to larger borrowers) and KRE (bank credit to smaller borrowers). If both are weak, the entire credit system is stressed.