The PE Bros Are Subprime?

Came across this substack. Figured this was a good place to get perspectives. Where does he get it right / wrong?

https://mispricedassets.substack.com/p/the-smart-money-is-the-subprime-this

“Start with a company marked at 100.

At the company, there is 45 of debt.

So the sponsor says the deal is 45 percent levered, and in the narrowest possible sense that is true. That is what the portfolio company owes.

Then the fund borrows.

Maybe it is a subscription line. Maybe it is a bridge loan. Maybe it is a NAV loan. Maybe, at different points, it is all of them. Add another 10 to 15.

Now the stack is 55 to 60.

Then the co-invest is financed.

Add 5 to 10.

Now it is 60 to 70.

Then the LP is financed.

The LP borrows against commitments, against fund interests, against a private-markets portfolio that is supposed to be diversified and is, in practice, full of the same marks from the same years. Add another 10.

Now it is 70 to 80.

Then the people inside the firm borrow too.

They borrow to meet capital calls. They borrow against expected distributions. They borrow against carry. They borrow against the bonus they are supposed to get when the thing finally exits. Add another 5 to 10.

Now the true stack is 80 to 90 on an asset marked at 100.

Nobody reports it that way. They silo the leverage to make it work on paper.

1. The company lender sees company debt. 
2. The fund lender sees fund NAV. 
3. The co-invest lender sees a co-invest. 
4. The LP lender sees fund interests. 
5. The private banker sees a rich man with carry.

All of the debt is stacked on the same cash flows, and the same exit.

Now write the portfolio down 25 percent.”