Story submitted by David Disraeli
Your money isn’t gone, unless you ask for it.
Take a moment with that. Because that sentence, which sounds like reassurance, is actually the most honest description of what you own inside certain private credit and private real estate funds right now. The money exists. It exists on a spreadsheet. It exists in a valuation model. And it exists under optimal conditions.
It stops existing the moment enough people ask for it at the same time.
The most expensive sentence Wall Street ever uttered is: “Yeah, but it’s a long-term investment.” Those seven words have absolved more bad products, buried more conflicts of interest, and cost retail investors more money than any single market crash in history. They’re not wrong. They’re just strategically deployed at exactly the moment when you should be asking a completely different question.
The question isn’t whether it’s a long-term investment. The question is whether it’s a liquid one when you need it to be — and beyond that, whether anyone actually knows what it’s worth. Unlike a bond, which reprices every day whether anyone likes the new number or not, private debt is carried at par regardless of the value of the collateral or whether it is even performing, until the lender is forced to recognize the loss. Value and reality are delinked. The sponsor doesn’t truly know. You don’t know. The Securities and Exchange Commission (SEC) doesn’t know.
And then there is the SEC’s unspoken guarantee. The one nobody puts in the prospectus but that underlies the entire disclosure-based regulatory framework: if you follow our rules and make all the required disclosures, you can lose as much money as you want to.
Three ideas. One mechanism. And a lesson we apparently didn’t learn the first time.
Risk Laundering, Defined
There is a term in finance called volatility laundering: the practice of using infrequent, model-based valuations to smooth out the true volatility of an illiquid asset, making it appear far steadier than it actually is. Academics have written about it for years, mostly in the context of private equity returns that look suspiciously calm compared to public markets holding the same underlying risk.
What I am describing is the next stage of that idea. Call it Risk Laundering: the practice of sanitizing risk that is eerily similar to the derivatives of 2008: taking leveraged, illiquid, opaque, model-valued risk that originates on institutional balance sheets, and repackaging it for retail investors through interval funds, non-traded BDCs, and app-based platforms with $10 minimums. The risk doesn’t change. Only who’s holding it does, and how clearly they can see it.
Institutions launder risk the way other industries launder money: by passing it through enough legitimate-looking structures that its origin and true character become invisible to whoever receives it last. The retail investor at the end of that chain isn’t a sophisticated…
Read More: Risk Laundering: How Fundrise, Starwood, and the Private Credit Industry
