Transcription
All right, ladies and gentlemen, we have a very important interview today. This is going to be an explosive conversation that is likely to go all across Wall Street because we're going to bring on Nick Neoth. Nick is a Substack author and the creator of markedtofantasy.com. And Nick is now sounding the alarm on private credit and private equity. But he's not just talking. He took the latest artificial intelligence technology and he parsed through all of the public documentations that are in the SEC's database and rather than just look at the headline numbers, Nick has been able to analyze loan by loan what is actually happening in private credit and he is here to tell us that what is being marketed is not actually what he sees using these tools.
Now, this is a fascinating conversation because not only is there a lot of ramifications if private credit is actually a problem, but also Nick is on the cutting edge. He's an individual with no institutional backing. He's simply using tools from artificial intelligence and public documentation to go and do investigative research to better understand what is the health of the US economy and how can we prepare for a potential crack that could be bigger than the global financial crisis. Here's my conversation with Nick Neoth.
All right, Nick, I thought a great place to start this conversation is you wrote this open letter to Secretary Bessant and you basically call out what's happening in private credit and private equity. And this to me serves as somewhat of like an alarm system. You're basically saying, hey, this is a massive problem. And I just want to read the first uh couple of words that you wrote here to him. You said, "Scary Bessant, I am writing to you about nearly $13 trillion that marks its own homework." Great line. 9.4 trillion in private equity, 3.5 trillion in private credit. The largest pool of self-marked capital in the history of global finance. I am nobody. I have no institutional backing, no fund, no lobbyist. I'm recovering alcoholic who spent years learning to be part of society rather than apart from it. I rebuilt myself from nothing. Then I broke into the game with no credentials, no pedigree, and no permission. I have no subpoena power. I have no regulatory authority. I have a few computers, a parser, and the SEC's own documents. Every institution in this chain already knows what I'm about to tell you. They built it. It was not always built this way. They know how it works. They do not know how it ends." You're basically like a citizen investigative journalist who has identified this massive problem. Can you explain to us how the machine works and why you think this is such a big deal?
Um, the the the private equity side of things, they're, you know, the private equity and private credit are inherently linked and the private equity side, you know, they're just like they're toggling and they're looking for IRRs and then they're marketing paper marks. Um, that's always been a problem. People have been talking about volatility laundering for a long time. So, you have to understand like the incentives at play. It's kind of all ironic like as you read that I'm like, "PE, I know what people are going to think." And and and it's essentially that this guy thinks he's buried. And I'm I'm writing it and I'm going through this process and I'm thinking about how impressed I was by The Big Short when I watched it when I was 14, 15.
So, let let's talk about you. In in this letter to Secretary Besset, you explicitly say, um, and again, this is all alleged, right? I'm asking you the questions, but you say that Cliffwater marked up a website sleep numbers URL from 35 cents to 42 cents on the dollar. You then write, "The business has been functionally eliminated by Google and artificial intelligence. There is no scenario in which the URL generates enough revenue to service the debt, but Cliff Water marked it up anyway." And then you say that, uh, the funds borrowers pay an all-in cost of capital of SOFR plus 700 basis points, so 10.6%. The vast majority of these businesses cannot generate enough free cash flow to unlever from that rate. Practically the entire portfolio is un-tranche. Every dollar of loss hits the fund dollar for dollar. There's no structural protection, no first loss tranche absorbing defaults, no sleeves, no diversification. Every loss goes straight through." And so this Sleep Number URL is a great example where you're basically saying they're marking it up, but you're looking at it from a fundamental basis and you're saying there's no way that that makes sense.
>> Yeah. I mean, 99 uh cents on the dollar for for their book. So just just so we understand, that loan is one of their lowest marks. And what they do is they say, "Okay, what is the liquidation value?" When their arm is like basically twisted. They don't underwrite any of these loans. They're co-investors on all of them. And what they do is they go into CLOs and and CIVs in order to get access. Like Aries is different. Apollo's is different. They source loans. That's what they say their edge is. This is one of their worst marks. But I'm looking at their worst mark and I'm thinking about what are their assumptions. And their assumptions finally become, what is the liquidation value? Like the true downside. And I'm looking at the true downside of this business and I'm like, there is no way that is worth 42 cents on 100 or $70 million or whatever it is. So, you know, I I I went through and I did it from, you know, the pars down to the bottom marks, what's going on? And yeah, it's a it's a good example. Like I don't know specifically off the top of my head what this what the SOFR plus rate is, but I would just like to describe it. Right? We're talking about 10% compound annual interest. That that is something that would double in seven years, right? If if Aries, when they started, start started as a firm, got 10% compound annual interest, they would eat the economy. It's it's not. So when people are talking about like, what is the sustainability of this? Like, you can't deliver from that, especially if you're not a growth company, and none of these companies are growth companies.
>> And so one of the things I saw on here is, um, the fund has maintained a 41-month win streak. It has never reported a losing year. It has reported zero non-accruals. You claim to have found 50 with just your desktop and public filings. So, is this a case of, uh, there's interpretation and they're saying zero, you're saying 50, or is this like a pretty clear fact pattern of there's a clear definition? It's either an accrual or it's not. They're saying zero. You're claiming that fraud, a mistake, a calculation error, like what exact, how do we get here?
>> On their fact sheet, they won't show any of that. Now, what I've heard from the back door, they're speaking to people that know. They're saying, "Oh, it's less than 1%." But when they're going towards, you know, retail, maybe through their RIA, I don't see how people are seeing that. They're not advertising that. And then the 41-month win streak, it's like the typical pushback is like, "It's, you can't do it on a monthly basis." It's it's like that is their marketing marketing materials. I'm just using the materials that they give the public. And when you look at it, it's far too smooth. They should never even put it out. Anyone that knows anything is like, "This is ridiculous. A 41-month win streak." And I wrote out in there and I was like, "In April 2025, spreads blew out. Everything blew out by the end of April is when their mark was. It wasn't as bad as when Liberation Day was, but they marked up. They said that was a winning month." And it just kind of shows, okay, this is a little ridiculous. In 2022, they they had a losing month. That's the last one. And it's like the market was going down, rates were going up. They started at 0.1 SOFR. And all of a sudden, one month, they're like, "Got to take an L." And then they didn't take another L for the rest of the year.
>> So, one of the things I find interesting is you have a section in this letter where you say, "Now, let's consider the statistics. There's a report CCL FX reports a sharp ratio of 3.75. You say Bernie Madoff, who could pick any return he wanted because he was fabricating them, fudged a sharp of roughly 3.5. That's how he got caught. The returns were too smooth. The volatility was too low. Harry Markopolos looked at the numbers and said, 'This is not possible. No legitimate portfolio produces these risk-adjusted returns.' CCLFX is penciling a higher sharp ratio than Madoff on a portfolio of leverage loans to PE-backed companies." It's kind of crazy.
>> Yeah, they didn't listen to him for 15 years. But the point was, he, he was, this is too smooth. Too many winning months. It doesn't make any sense. And for Cliffwater, and it's not just Cliffwater, but for this entire industry, almost, for them to say, "Here are our risk-adjusted returns and show the math based on that." It smells of public markets. Guys would never stand it. A lot of people would never never stand it, but it's still in their marketing materials, which means that it works. And it works for allocators. It works for the wealth managers, and it works for, you know, the white collar 401k guys that that buy this. And I think it, it's indicative of a a larger problem. It's not so much that we can just throw out that data point. Clearly not true. Okay, I'm not alleging fraud. I'm alleging that the volatility is not shown. It's too smooth. And this should ask questions. When you get a 3.5 sharp, a question should be asked because again, Madoff could have picked any number that he wanted, and he picked 3.5 to be like, so.
>> Uh, one one thing that I wanted to point out is I've through back doors heard that they were advertising an 11 sharp on their enhanced fund. That is better than high frequency trading. There's too much friction in the financial system to do like to do to do better than an eight or a nine. And they're saying, "Oh, yeah, we're 11."
>> I mean, I, if I, I don't know if that's true or not. If that is true, I think that a lot of people would be like, "All right, that's kind of crazy." An 11 sharp. I don't think I've ever heard anyone claim that.
>> Yeah, you you can't. If if you just had ups, but there were volatile ups, you would have maybe a seven or an eight. High frequency trading is very not volatile, and they win basically every time unless something happens to their computer.
>> Now, now what I find interesting is you do say later in the letter, you're not picking on Cliffwater in particular. You just happen to use them as an example. But, um, in fact, you are just simply saying this practice is everywhere in private credit and the marks are just as bad in private equity. The incentives that produce this outcome at Cliffwater produce it at every fund in the space. Every fund that pays its own valuation agent has the same conflict. Every interval fund that reports monthly NAV on illiquid assets has the same temptation. Every BDC that books pick as income and pays cash dividends on phantom revenue is running the same death spiral. The acronyms change. The structure does not. What happens? What is the end result here? Is there a 2008 implosion and you know, portfolios get wrecked, we're in a recession, the economy requires the government to step in? Or there's a second scenario you lay out, which is Japan, and maybe we head more towards that direction? Like, where do we go from here? If what you're saying in here is actually accurate?
>> I really want to focus on the why this is happening. So, it's the incentive structure, and I think the beginning of that where I lay it out is really important. It's really all about market share. And when you understand that, you realize that the risk has crept in. And if you look at the structures and compare it to mortgage-backed securities, it's very similar, except mortgages are almost more interchangeable. A house is not identical to another house, but a $500,000 house in San Jose is kind of similar to a $500,000 house in in in San Jose. This is way different. We're we're we're considering businesses to be almost interchangeable. And and and that has, you know, led to this diversification effect where they are saying it's double A or investment grade when underlying it are really high risky loans that would never be in the public markets. So therefore, if we're talking about the volatility they're showing, I'm talking about the skew, the excess kurtosis. That means that there's a left tail. And the left tail that I see can happen one or two ways. And I I sort of show because people's typical pushback is, "This is not 2008." I'm like, "Okay, maybe it's not 2008." I hope that it is because 2008 was so central and it was used as collateral that it was impossible to ignore. The alternative I believe is Japan, where something breaks, regulators come in, and they do a half measure, and then things are good for a few months or maybe a few years, and then something breaks again. And everyone's always pointing like, "That guy's the problem." And then in three months, the fingers are pointed at me. And that is how I see us potentially losing a generation despite all of the things that people are talking about on AI and how positive that's going to be. And I agree, I'm an AI bull, right? But the idea that our credit system could be fundamentally flawed, I think needs addressing. And I'm trying to show, listen, there's a way of doing this that would be acutely painful and cause a lot of deleveraging adjacently to all of this. It's it's not just the deleveraging in this space, but when you try to fix this space, other things are going to break, and that's going to be painful. It's going to take a lot of lean and men and women in a room trying to figure it out, and hopefully we can keep the lobbyists out. That is a much better alternative to the last decade. And what I would say to the administration is, it may be less popular in the short term, but if we're talking about legacy, you do not want to be the guy that left us or, you know, with with a a decade of problems where people can assign that back to you.
>> Let's say that the incentives are there. Obviously, we can draw this all back to Dodd-Frank, and this opened up this entire industry. What do you think the solution is? Do we put it back to the banks and say, "Hey, they should be doing this," or what should we do to fix the incentives in the problem?
>> Yeah, I I wrote it there. You guys want to deregulate the banks? Fine. I actually think that's probably the only, the the least painful way is to just be like, force it back into the financial system. Now, what that's going to take is accurate marks. If you are a wealth manager and you put your client's money into an ARC and and they may be the best, but if those marks should be at 75 cents versus par, you got to take the haircut. You took, you know, good returns the whole time. Um, and generally what I would say is there's going to be massive amounts of deleveraging on the side. Like if we just perfectly focused on this, a lot else may break. And that's kind of that's kind of the scary part. You never know, but this is absolutely something that you fix now or it gets worse.
>> And as an economy, do you think that this is big enough? You know, we're talking, um, 10, 20 trillion total, depending on how you slice it with private equity, private credit, etc. Do you think it's big enough to, uh, cause kind of a 2008 recession?
>> Nominally, I think it's bigger. And it extends into, if you look at $1.1 trillion in the Bermudas, what has led to a capital push into this has been a fiend. They start coming out with 6% annuities. All of these other insurance companies, again, losing market share. "Oh god, we we got we got to do what Apollo is doing with Athene." So nominally, I think it could be bigger. But at the same time, structurally, I think it is less, um, central. So the deleveraging of it is when you go into ALs and you look through subprime loans and you go through all of the leverage in the system, and underlying it all is a rehypothecation of Treasuries. So we have a more levered system. We think we're doing it smarter, but there's still more leverage. So, what I would say is it could be better, it could be worse. What I would say is take eat the pill.
>> Now, when you think about this from an investor seat, what are you doing to capitalize on this? So, let's say that you have a piece of information right now, you understand that there are problems in this system that maybe other people are not willing to accept, don't want to take a harder look at, or don't believe are actually problems. What are you doing with your portfolio to benefit from this?
>> What I would say is raise cash. I mean, I might be trading around it, but ultimately cash is the best hedge. You buy puts that are three months out. If these guys stay alive for three months, those puts are dead. And then what? You're going to buy more puts? Could maybe that's a smart idea, but I don't see the the reason why people don't have, you know, Cliffwater has no cash. I love that they they have to give back 5% and they have very little, uh, liquid assets and no cash. Don't be like Cliffwater, okay? Structurally, Cliffwater is broken. Don't be structurally broken. Have money that you can capitalize when there are babies thrown out with the bathwater, which ultimately they'll be. That's what I would that's what I would tell your audience that, you know, it might be inherently skeptical, right? Um, but also at the same time, like, okay, we're not going to go live under our bed with all of our wealth, but you can have dry powder. I would say that's probably the smartest thing to do.
>> Now, are you worried about, um, getting sued? The private equity or private credit guys coming after you, anything like that?
>> There's a lot of money at stake. So, I just think it would go really bad for them because, you know, from my point of perspective, it's better to be roughly right than precisely wrong. If there's anything that I've said wrong and they want to clarify, I'm open to it. I've reached out to Cliffwater. I've reached out to Cliffwater through people. No response despite the fact that they told Rubric, "You should reach out to us. You shouldn't just say things." It's like, "Okay, I'm reaching out." And they're like, they're like, "Oh, people, they don't want to talk to people like you." And I'm like, "Okay, fine."
>> Have you talked to anyone in the administration, the SEC, CFTC, any regulatory bodies, anything like that?
>> I have not. I've been reached out to by people that say they're going to put it around the Treasury. When I was writing this up, I was conjuring it. I was like, "Get to the right place." Um, so I'm happy that it's getting some attention.
>> Got it. Okay. What, um, what has to be true for you to think that, okay, I was wrong? What, what are the things you would either need to see or, you know, kind of, uh, decisions that maybe the private credit or private equity guys can make that you would then say, "Okay, you know what, uh, the, the concerns I had are alleviated?"
>> Shows show us the balance sheets of these companies, right? If the balance sheets are pristine and all public guys can look at that and say, "That's not a zombie company," what was I talking about then? It becomes a different question. Now, the the amount of issues that that I identify, the rollup strategy, raising prices on the consumer, doing promos, pretending like this is sustainable software, business services. There's more than that. But if I could look at the fundamentals of the businesses and assess that and say, "Okay, this is over a 90% hit rate, which it needs to be in credit," then I would say, "Oh, that's wrong."
>> And one of the things you've called out is, uh, your retirement is the collateral. Explain this.
>> Well, it's actually, it's it's two, it's two parts. It's the pension funds. They're all allocated towards the privates. You know, we saw saw the Michael Bur, Big Short, how these allocators allocate, and we thought we learned. And maybe it's not as dramatic in Hollywood as that, but they're really not thinking this through in my opinion. So, there's a lot of pension funds, government, corporate, global allocators, and I put this all on my site, marktofantasy.com. Go to the map and see the allocations. That's a big, uh, component. But that's that's not, those pensions aren't going to go to zero unless the whole economy goes to zero. The bigger concern for me is insurance where people have bought and paid into annuities for 30, 40 years potentially, and now they're starting to get paid out in retirement to supplement social security, their pension, and they've crept up their lifestyle. That is highly levered. People, you know, they say fortress balance sheets. Athene says this. Maybe Athene has a fortress balance sheet compared to everyone else. Some of those insurance companies, as they've crept up, are levered 20 times or more, potentially up to 50 times on their equity. If that blows up, that's where the shadow, the the receiverships come from. That's how to me it becomes the global financial crisis and and expands and extends throughout credit. So what we need to do in my opinion is take the insurance out of the Bermudas, out of the Caymans, put it back in the US, not allowed, not okay. If you are offshoring it, and really go through that, and that's sort of the iceberg for me. But this is th this is not money of this is retirement money. But I also want to emphasize it's like I'm writing and I'm talking about what the politicians are going to talk about. It's a it's your retirement, the collateral. When I wrote that piece, I'm thinking it's not actually. It's really the kids. It's, you know, my kid is going to be born with a negative balance of a million dollars. It's going to be another bailout. And again, the the managers, the partners, they're going to be fine. There's going to be no clawbacks. There's going to be no, you know, we need to take your second home away from you in order to pay for this. I think that it's going to end up on the government's balance sheet, and it might end up okay like Fannie Mae, uh, you know, and Freddie Mac. But it's it also may not because these things are highly levered. It might be a hit to, uh, the US taxpayer. And even these CLOs's and and BDCs, they're levered too. So the hole, if there's losses, could be massive and and be bigger than TARP.
>> Are you being paid by anyone to do this?
>> I'm not being paid by anyone. I have a Substack and people want for me good stocks and and it it takes me a lot to be like, "I really want to write about this though." Like, "I don't even know if anyone's going to make any money off of this, but I want to write about this. I think people should know about it. I think it's a risk to identify." And it's a risk because people are like, "Has has this dude lost it?" But, you know, I took the risk and ultimately it worked. Now I am paid to do due diligence mo entirely on equities. I'm paid by, you know, asset managers to help them with the workflows and kind of show what I'm doing with AI, as well as build local models, uh, scripts. I do, I I am paid by institutions, but nobody told me to look into this. I decided to do it on my own.
>> Like, basically, you've got, uh, it sounds like you do some consulting, you've got a job, due diligence, etc., that's completely separate, but no one is explicitly paying you and saying, "Hey, go look at this specific company's, uh, loan book and then publish information about it or or in any way target, uh, anyone. That that's not, um, how you're funding this."
>> No, no, no. The Cliffwater was a lead from someone in the industry. Zero financial payment. Now that I'm talking about this, I am getting inbounds of like, "Can you look into this BDC? Can you do that?" Um, nothing I've released so far has had anything to do with that. If I was paid, I would be paid not to talk about it publicly. So, you know, that's sort of the financial backing of this. And I am, you know, set up to get more consulting contracts. That was not the intention. That was not the intention, uh, to begin with. Um, and yeah, even when I'm writing that yesterday, I'm like, "I mean, uh, what was it? Two, yeah, it was two days ago. I'm thinking like, this is really good. I hope this goes somewhere. It's it's hard to describe the creation process. And also, when you put something out there, you may think it's really good, but you don't really see how it's going to roll. You're trying to just kind of conjure it into the what you would hopefully imagine, but you always underell yourself, or at least I did when it came to this."
>> I'm very impressed. Uh, I just looked at the website, mark, what we say, marktofantasy.com.
>> marktofantasy.com.
>> Yeah, it's, it's very good. Um, you built all of this using AI and it's just you as as a solo person using public filings.
>> Yeah, that's 76,000 lines of code on there. You know, I I crunched a lot of data. I spent a lot of money on AI, like more money than any one person, uh, should spend, but I see the ROI on it. And I think, you know, ultimately people might be taking away two things. One, we got to do, we got to do more. You know, this is not a chore to figure out. We actually have to figure this out. Figure this out. And the kind of the funny part is like, people thought that the risk to these CLOs's was AI. They were right, but they didn't think about how AI was going to go through and be granular in a way that sort of makes the sausage appe. It's it's it's not a bundle anymore. You can't get fooled by the pool. You're actually looking at the ingredients. Mark the fantasy.com. Nick, thank you for taking the time to do this. Uh, I don't know if you are the next Michael Bur or the next Harry Markopolos, but I do know that, uh, you did a lot of work here and it's pretty impressive to see. Um, you know, I think, uh, look, facts are facts, right? And, uh, I think you're right in that, um, there is some information that you don't have in this analysis, terms of balance sheets of some of these companies, the health of these companies, how sustainable is some of this stuff, etc. But, um, I don't think that it's crazy to ask questions and say, "Listen, maybe some of the things that are, uh, being presented are not as they seem." Um, and that's true of a lot of asset classes, right? I'm sure that there's stuff that happens in real estate or venture capital, private equity, private credit, etc. But I do think that as this bubbles up and more and more people are talking about it, obviously redemptions are increasing. Uh, and to your point, um, there's a lot of folks who probably have exposure to this and don't even realize it because whether it's pension money or or something like that is, uh, is invested. Um, I do think that, uh, the American people deserve to understand a little bit more detail here. So, um, if nothing else, thank you for taking the time to, uh, to not only talk to us, but spend the time to do this and, and it's pretty cool to use the latest, you know, AI tech to be able to kind of, uh, parse through stuff that maybe otherwise, uh, a human would really struggle to do.
>> Yeah, I I had four asks for Secretary Bent. I would say, just let's look into this. Let's discuss it. Let's identify the risk. There's plenty of things that I don't have access to. No subpoena power. I don't have PitchBook. I don't have all of these things. There are some things in there where I can see or I could look at a news story and say, "The leverage in EBITDA and, you know, the adjusted EBITDA is what I see." I would love more information. There are some things I may be wrong, but like I said, it's better to be roughly right than precisely wrong.
>> All right, man. Well, going, >> what >> that's Ke I can't I I gotta I gotta make sure that the audience, uh, I'm not stealing that quote.
>> Are are you, uh, are you into Bitcoin?
>> I have been into Bitcoin. I think it's been a rough, uh, period of time. I I match with the Bit, the Bitcoin audience a lot, but it's, uh, a really small position for me at this point in time.
>> Yeah. It's like a, you're like a rational Bitcoiner. I got you. I just think honestly, I I know I know we're wrapping up. I think that Sailor put a stank on it a little bit, and I think ultimately three, six, nine months, we'll be able to assess it. Um, I would be perfectly willing to sacrifice Bitcoin. I don't know if you feel this way. You have a huge Bitcoin stake, but would you, I'll oppose it for you. Would you sacrifice Bitcoin for a healthy financial system?
>> 100%. Okay.
>> So considering that we don't have a healthy financial system, I'm bullish Bitcoin. Maybe just not in the next three to six months as we figure this out.
>> People think that, um, I I I said this in some sort of, uh, jest, if you will, but, um, here, I'll, I'll read you the exact tweet that I put out that, uh, I still believe to this day. Um, I basically said something to the effect of, uh, you know, "I'd rather watch my portfolio go to zero holding Bitcoin, Open Door, uh, etc." And, uh, the reason is because, uh, I believe that, um, there are certain companies and technologies that are good for the American people and and people globally, and putting your capital behind them is a way to help them be more successful. And obviously, yes, you will personally profit as well if those things work. But I believe that the future should be brighter than the past. And so holding these things are an optimistic view. Now, it's a pessimistic view of reality, but it is a belief that, you know, optimism, uh, can create something that is better. But I would much rather live my life being optimistic about where the future can go and see the portfolio go to zero than I would, you know, sit around and say, "Hey, let me play insider games and just enrich myself while everyone else gets screwed over."
>> No, I like that a lot. You know, that the Bitcoin hedge, I I think you can still make a lot of the money and if Bitcoin fulfills its use case, but we need to get Bitcoin back to development, >> desktop >> Alexa, back to development and the Lightning Network, like we we got to build on it if if it's going to be anything other than a catastrophic hedge. So I I'm very hopeful for crypto in general. I think that a lot of my generation has been pushed into this because of an economic, you know, blockade that they've been going into crypto and recently gotten smoked. I think that may continue. I am extremely optimistic on the potential of blockchain.
>> Amazing. All right, Nick, thank you so much for taking the time to do this and, uh, let's see how this plays out, my friend.
>> Thank you. Thanks for having me, Bob.
>> Now, I promised you that this was going to be an explosive conversation and Nick really delivered. I think that Nick is the exact example of what I'm excited about in finance. Individuals with cutting edge technology that are able to use public information, spend the time to actually better understand what's happening and do the things that humans historically have not been able to do. Nick is calling for the alarm system to be rang and hopefully a lot of people are going to listen. That's it for today's show. Please remember to subscribe on YouTube and we will see you all live from the desk of Anthony Pompiano on