Seeing the Cycle Clearly

As we close out 2025, the market feels like a study in contrasts. Headline inflation is cooler at ~3%, the S&P is up ~16.5% at the time of this writing, and the economy still looks solid on paper. But beneath that calm surface, the credit markets, where the real story plays out, are starting to tighten.

Money hasn’t been free for the past few years, and that’s a healthy thing. Short-term funding rates like SOFR remain near 3.95%, and the 10-year Treasury has traded between 3.9% and 4.4% for most of the past six months. Meanwhile, the 2-year Treasury yield has dipped below the Fed Funds rate, suggesting markets see an eventual easing but perhaps farther out than previously thought earlier in the summer.

Capital has a cost again, and discipline is back in style. For disciplined, mid to long-term investors like us, that’s not a problem; it’s an opportunity.

 

Where the Cracks Are Showing

Stress tends to surface at the edges first, and this cycle is no exception. The failures of Tricolor Holdings and First Brands Group have become emblematic of what happens when years of cheap capital meet aggressive, loose underwriting.

Tricolor, a Dallas-based subprime auto lender once praised for serving underserved borrowers, collapsed this fall amid allegations of accounting manipulation and securitization fraud. The company’s rapid growth masked weak collateral and poor oversight — and when confidence evaporated, lenders were left nursing hundreds of millions in losses. Liquidity vanished first where underwriting was weakest.

Similarly, First Brands Group, an auto-parts supplier with billions in liabilities, filed for bankruptcy after revealing missing receivables and tangled financing structures. Creditors allege billions “simply vanished” through double-pledged invoices and opaque factoring arrangements. Complexity and leverage proved a dangerous mix.

Beyond these headlines, credit markets are showing broader signs of strain. Lenders are tightening terms on bridge and construction loans, especially where debt-service coverage is thin. Spreads have widened across lower-quality debt, even as high-grade borrowers retain access to funding. The shadow-banking ecosystem, once a quiet beneficiary of low rates, is now under sharper scrutiny.

This, hopefully, isn’t a 2008-style contagion, but it is a reality check. For perspective, the US housing market was estimated to be ~$10 trillion at year end in 2006. Today, the broader “US non-bank financial intermediaries (aka shadow banking)” is estimated at $20 trillion, with private credit making up approximately $2 trillion of that figure. Underwriting discipline, liquidity, and collateral quality matter now more than ever. It’s a return to fundamentals — and a reminder that when the tide goes out, you see who was swimming with borrowed leverage.

 

 

Equity Market Valuations & Returns

While credit is tightening, equity markets are still pricing in optimism. The S&P 500 (as of Nov 13th) is trading at approximately 28x earnings, well above long-term averages. History tells us that when valuations are this high, forward returns tend to be quite low.

Historically, in every case (without exception) buying the S&P at a P/E ratio of 23 produced 10-year annualized returns in the +2% to –2% range. It’s not a forecast, but it’s a reminder that returns are a function of what you pay.

Further, the S&P’s average return for the last 100 years is 10% but the annual return is almost never between 8% and 12%. The index is typically up big or down hard — and today’s setup suggests more risk ahead than reward.

 

Time for Investors to Take a Closer Look

Based on the conditions we’re seeing across markets, I feel this is a good time for investors to reassess their portfolios. When equity markets are priced for perfection and credit markets are potentially tightening, risk and reward can start to drift apart.

It’s worth asking a few simple questions:

• Do I understand my true exposure to market volatility?

• Is my portfolio underweighted in conservative investments?

• What’s the quality of the collateral behind my debt holdings?

We’re entering a phase where underwriting and transparency matter more than yield. Some lenders/investors are already learning the hard way that “secured” doesn’t always mean safe.

In this environment, clarity is a competitive advantage. Knowing what you own and why you own it could define who plays offense in the next cycle and who sits on the sidelines.

 

What the Big Money Is Doing

The largest global allocators — firms like Blackstone, Brookfield, and Apollo — are once again showing through their actions, not just their words, where conviction lies. They’re repositioning portfolios toward real assets that generate dependable income and away from sectors that rely on cheap financing or aggressive growth assumptions.

Blackstone recently announced the sale of roughly $1.8 billion in senior-housing properties, accepting losses of more than $600 million in the process. It was a clear acknowledgment that capital-intensive, high-operating-cost assets carry more risk in a world where money isn’t free. Brookfield, on the other hand, leaned into its long-term thesis by acquiring an $845 million portfolio of eight multifamily properties — more than 4,000 units across Las Vegas, Phoenix, Columbus, and North Carolina. These moves illustrate a broader institutional shift from speculative exposure toward defensive yield and operational stability.

Across the industry, private-equity firms are quietly reloading for the next phase. Transaction volumes remain below historical averages, but capital formation is strong, and many funds are expected to ramp up deployment into late 2025 and 2026. The focus is narrowing toward income-producing multifamily, logistics, and infrastructure assets; the kinds of investments supported by demographics and daily necessity, versus hype.

 

Looking Ahead

As we enter 2026, we expect more of what we’ve seen this year: selective distress generating ample opportunities to put capital to work across our debt and equity offerings. Further, we’re seeing some potential greenshoots in the opportunity to sell certain assets held in our portfolio at or above our strike price for returns within our targets. For now, cash, and an ample, liquid balance sheet and access to quality debt remain king.

To our current investors, thank you, as always, for your continued trust and partnership. We’re honored to steward your hard-earned capital. 

 

Founder & CEO

 

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