This interview warns that private credit funds hide risk by not marking loans to market (a practice called 'ball washing'), creating a systemic danger if banks call in loans. Kieran Goodwin likes Blackstone for its unmatched deal flow, cites Tesla fans who made 50-100x by embracing volatility, and flags Silicon Valley Bank's interest-rate blowup. He says real alpha comes from patience, permanent capital, and imagination, and that EQ beats IQ in investing.
This episode of Invest Like the Best invites Kieran Goodwin, former partner and head of trading at King Street Capital, to discuss the current state of the private credit market, sources of alpha, and key factors for investment success. Core insights: The private credit market exhibits a phenomenon
Kieran Goodwin, former Partner and Head of Trading at King Street Capital (where the fund grew from $4 billion to $20 billion in assets), is now the founder of Panning Capital Management. This episode focuses on the "ball washing" phenomenon in the private credit market, the true sources of alpha, and the weight of EQ versus IQ in investment success. The most impactful judgment in the entire episode: Goodwin argues that the "ball washing" phenomenon—concealing real volatility by avoiding mark-to-market and using third-party valuations that consistently maintain par value—is the greatest systemic risk in the private credit market. Once leverage providers (banks) demand repayment of financing lines, it will trigger a domino effect, forcing funds to offload bilateral loans in illiquid secondary markets.
Goodwin argues that the private credit market suffers from a severe "ball washing" phenomenon, where asset volatility is artificially eliminated and true risk is concealed by avoiding mark-to-market valuation and having third-party appraisals consistently report par value.
Private credit has exploded from a "cottage industry" during the 2008 financial crisis to $1.4 trillion (up from just $250 billion in 2010). Core drivers include: yield-chasing in a zero-interest-rate environment, Fed OCC rules restricting banks from lending to companies with leverage exceeding 6x EBITDA, and a "symbiotic cycle" between private equity and private credit—more dry powder leads to more deals, which in turn drives more demand.
The specific mechanism of "ball washing": Funds present LP investors with smooth, volatility-free return curves (Sharp ratios as high as 10, criticized by William Sharpe himself as "absurd"), because loans are not marked to market, and third-party valuations almost always report par value. However, Goodwin points out: "Your car loses 30% of its value the moment you drive it off the lot—of course there's volatility; you just aren't marking it to market."
Worst-case scenario projection: To achieve net returns of 8-11%, funds typically borrow from major banks (Goldman Sachs, Citigroup, JPMorgan) at a 1:1 leverage ratio. These credit lines include covenants requiring collateral levels to be maintained based on third-party valuations. When default rates rise (already beginning in Q1 2023), banks will demand repayment of these credit lines. If funds cannot repay with maturing loans, they are forced to sell bilateral loans in the secondary market—a cumbersome process requiring disclosure of confidential information to borrowers. Once one bank takes action, others will immediately review their own exposures, triggering a rapid contagion from "no one has a problem" to "problems everywhere."
Goodwin emphasizes: "This is not a prediction, just pointing out a possibility." The key risk lies in asset-liability maturity mismatch: fund assets are 5-7 year loans, while credit lines are short-term and callable.
Goodwin is skeptical of most traditional forms of alpha, arguing that information advantages have been "leveled" by tools like Reorg Research. The real alpha, he believes, comes from time, capital permanence, and imagination around volatility.
Forms of alpha he explicitly questions:
Forms of alpha he believes in:
1. Time alpha: Capital permanence (using Buffett as an example) — the ability to withstand short-term volatility and wait for long-term value realization
2. Understanding new technologies: Biotech, AI, blockchain — but requires constantly searching for "the next new thing," which is not sustainable
3. Efficiency improvements in small and mid-sized enterprises: Creating value through operational enhancements
4. Network effects of top-tier alternative asset managers: Using Blackstone as an example, its real estate fund has the best deal sourcing, a full-market perspective, and cross-business synergies
Key analogy: Goodwin uses the WorldCom bond trade (2002) to illustrate "knowing what could kill you, and it actually killing you" — he bought WorldCom bonds maturing in 2003 (at 80 cents on the dollar), reasoning that the company had a $500 million undrawn revolving credit facility to repay maturing debt, with fraud being the only risk — and fraud is exactly what happened (capitalizing operating expenses to inflate EBITDA). This leads to his concept of "hard EBITDA vs. soft EBITDA": "Someone asks you, how many strokes did you shoot in golf? 90. Was it a hard 90 or an easy 90? Big difference."
Goodwin argues that in investment success, emotional intelligence (EQ) is more important than IQ, but the core of EQ lies in "knowing when to be humble" and "being able to hire people smarter than yourself and helping them grow."
He constructs a thought experiment: if, like creating a character in Madden NFL, 100 points of EQ and 100 points of IQ were allocated to a CIO, he would assign more points to EQ—provided IQ is not below average. Key dimensions of EQ include humility, fearlessness in hiring smarter people, and the ability to give constructive feedback. However, he acknowledges exceptions: "Some very successful investors have low EQ, but they possess strong independence and are not swayed by others—Soros would sell everything when his back hurt."
Core insights on volatility:
The relationship between imagination and volatility: Goodwin cites the old remark, "He cannot be a mathematician because he has no imagination," arguing that understanding volatility requires imagination—imagining how quickly and on what scale things can reverse. The Silicon Valley Bank case: "A publicly listed company reported earnings every quarter, and the market saw the hole in its balance sheet, yet no one asked, 'Why are you holding $50 billion in 10-year Treasuries without hedging?'... I never thought a financial institution could blow up from interest rate risk—this is a basic risk that can be calculated with pen and paper."
Goodwin is a strong advocate of Income Share Agreements (ISA), viewing them as a way to replace debt financing with equity financing to invest in talent. The key, however, lies in targeting "right-tail risk"—that is, potential superstars among top-tier talent.
Core Logic: The entire economic system is overleveraged (public, private, Western societies). ISA offers an equity-like solution—individuals give up a fixed percentage of future income (recommended no more than 10-15%) in exchange for current resources (training, equipment, living expenses), enabling them to maximize their talents.
Why It Has Yet to Scale:
1. The initial pilot areas (coding schools like Lambda School) targeted the wrong demographic—not top-tier talent.
2. Investors have yet to see returns—completed deals have underperformed.
3. Insufficient education—18- to 20-year-olds do not understand the terms (though they also do not understand student loan terms).
Goodwin's Suggestion: Start with groups that have the potential to generate "100x returns," such as MIT computer science students, minor league baseball players, and YouTube creators with proven potential. Investors need to see the possibility that some investments in the portfolio will achieve 100x returns.
Goodwin argues that successful investing is more akin to an "infinite game" (citing Graham Duncan's concept)—facing unsolvable puzzles every day, maintaining the right process and discipline, and thereby uncovering some alpha. Setting specific goals (e.g., "I need to make X% this year") may actually backfire.
Sports analogies:
| Position | Guest Stance | Key Data |
|---|---|---|
| Private Credit Market (Overall) | Risk Warning | Size grew from $250 billion in 2010 to $1.4 trillion; default rates in the lower-middle market expected to rise |
| Blackstone | Bullish | Possesses the best network, deal sourcing, and cross-business synergies |
| Silicon Valley Bank (SVB) | Risk Case Study | Held $50 billion in 10-year Treasuries without hedging interest rate risk |
| WorldCom | Risk Case Study (Historical) | Bonds fell from 80 cents to zero due to fraud (capitalizing operating expenses) |
| Tesla (TSLA) | Neutral Mention | Many fans made 50-100x returns, reflecting "long volatility" |
| Bitcoin / Cryptocurrency | Neutral Mention | Some made 10,000x returns; blockchain can solve payment system issues |
1. "Mark-to-myth" is the biggest systemic risk in private credit (Goodwin): By avoiding mark-to-market and always reporting face value via third-party valuations, volatility is artificially eliminated. Once leverage providers demand repayment of financing lines, a domino effect is triggered—funds are forced to sell bilateral loans in illiquid secondary markets.
2. The alpha from information advantage has been commoditized (Goodwin): Tools like Reorg Research have "leveled the playing field in bankruptcy proceedings"; for quarterly-driven long/short equities, "I don't really understand what alpha is left."
3. True alpha comes from time, capital permanence, and imagination (Goodwin): Buffett's greatest advantage is "having time and capital permanence"; understanding volatility requires imagination—"Silicon Valley Bank blew up on interest rate risk, a basic risk calculable with pen and paper, yet no one questioned it."
4. EQ matters more than IQ, but the core is humility (Goodwin): "Knowing when to be humble, being able to hire people smarter than yourself and helping them grow"—this is the key dimension of EQ. Exception: Some successful investors have low EQ but strong independence (e.g., Soros "sells when his back hurts").
5. "The road to hell is paved with positive carry" (Goodwin): Borrowing short to lend long (asset-liability duration mismatch) is the root of all major blowups—Long-Term Capital Management, MF Global, Silicon Valley Bank, and potentially private credit funds.
6. Income Share Agreements (ISAs) should start with top talent (Goodwin): MIT computer science students, minor league baseball players, proven YouTube creators—investors need to see the possibility of some positions achieving 100x returns. Coding schools (Lambda School) chose the wrong demographic.
7. Investing is an "infinite game," not a goal-driven finite game (Goodwin): Setting specific return targets may lead to excessive lending at cycle peaks (e.g., private credit funds "lending to be number one"). The right approach is to maintain process and discipline, mining for alpha like extracting ore.
8. Synergy = creating mismatches, not similarities (Goodwin): Using the NBA as an example, Tatum and Brown are "too similar," unable to create mismatches in pick-and-roll; while Murray and Jokić create "two mismatches"—this is true 1+1>2. The same applies to investment teams: they cannot all be leaders or all be introverts.