Bain's Steve Pagliuca on Private Credit and National Debt

In Brief:

While Wall Street fixates on potential risks in private credit markets, the real systemic threat facing the American economy lies elsewhere—the $37 trillion national debt that has ballooned from $1 trillion in just four decades. Steve Pagliuca, senior advisor at Bain Capital Private Equity and veteran of the largest leveraged buyout in history before the recent Electronic Arts deal, spoke with Bloomberg's Jonathan Ferro and Annmarie Hordern about why he dismisses concerns about private credit while warning that the national debt trajectory represents an existential fiscal challenge. Pagliuca argues that private credit operates fundamentally differently from bank lending because losses don't create systemic multiplier effects—when deals go bad, only the equity investors lose money rather than triggering cascading failures.

Big Picture Drivers:

• National Debt Explosion: U.S. national debt has grown from $1 trillion in 1982 to $37 trillion today—more than GDP—with interest payments becoming one of the government's highest expenditures alongside defense and healthcare

• Private Credit Market Evolution: Private lending has fundamentally different risk characteristics than bank lending, with losses contained to equity investors rather than creating systemic multiplier effects across the financial system

• Capital Pool Transformation: Fund sizes have grown 20x since the industry's early days, with sovereign wealth funds and institutional players now partnering with private equity to create unprecedented dry powder

• Leverage Dynamics Shift: Modern mega-deals like Electronic Arts carry significantly more equity relative to debt compared to predecessors like HCA, reflecting market evolution toward lower leverage requirements

Key Themes:

• Contained Risk in Private Credit: Private credit markets pose limited systemic risk because failures only impact equity investors rather than triggering cascading effects through the banking system, unlike traditional bank lending that can multiply losses

• Fiscal Sustainability Crisis: The national debt's trajectory from $1 trillion to $37 trillion over 40 years represents a slow-moving crisis that remains "okay till it isn't okay," with refinancing at higher rates threatening to consume even larger portions of government budgets

• Private Equity's Enduring Model: Despite decades of questions about whether opportunities can support growing capital pools, private equity's value creation through company transformation without quarterly earnings pressure ensures the model continues expanding globally

• Sports as Global Aggregation Play: Sports franchises have become rare assets that aggregate billions of fans globally through technology-enabled access, making them valuable to advertisers battling for attention in fragmented media landscape

Key Insights:

• Leverage Ratio Reversal: The HCA buyout in 2006-2007 was $5 billion equity and $27 billion debt, while the Electronic Arts deal is approximately $30-35 billion equity and $20 billion debt, demonstrating how markets now require significantly lower leverage multiples despite larger absolute deal sizes.

• Private Credit Risk Containment: Private credit failures only write off equity from investors who put capital in rather than creating systemic multiplier effects, making Pagliuca less concerned about private credit markets than the much larger threat posed by national debt dynamics and rising government interest expenses.

• Debt Trajectory Breaking Point: The national debt took 250 years to reach $1 trillion in 1982 but has grown to $37 trillion in just 40 years, creating an "always okay till it isn't okay" dynamic where debt service costs will escalate dramatically as low-rate financing rolls over to 4.5-5% rates.

• Capital Pool Expansion: Fund sizes have grown approximately 20 times since Bain Capital's early days, with the industry evolving from three or four U.S.-focused firms to a global ecosystem where sovereign wealth funds and major institutions directly partner with private equity sponsors.

• Sports Valuation Fundamentals: Sports franchises command record valuations because technology has transformed fan bases from tens of thousands locally to billions globally, making sports the only remaining content that reliably aggregates massive audiences for advertisers across fragmented media landscape.

• Private Equity Permanence: Despite being asked whether sufficient opportunities exist to absorb growing capital pools since 1989 and repeatedly over 27 years, the private equity model's ability to transform companies without quarterly earnings pressure ensures continued expansion and value creation.

Memorable Quotes:

• "I'm less concerned about credit right now in terms of the private credit markets because the private lenders actually are very good. Private credit is different than credit from banks because if it does go bad, you only write off the equity from people that put the equity in. It doesn't have a systemic multiplier effect." - Steve Pagliuca, explaining why he dismisses Wall Street concerns about potential private credit market risks

• "It took 250 years to have $1 trillion of national debt. In the last 40 years we now have $37 trillion, which is more than the GDP. Interest from the government now is one of the highest expenditures, right up there with defense and healthcare. That concerns me more than private credit." - Steve Pagliuca, contrasting the contained risks in private credit with the systemic threat posed by explosive national debt growth

• "In situations like this, it's always okay till it isn't okay. You pass a trillion, then 10 trillion, then 20 trillion, then 30 trillion. But at some point, you've got to have some long-term plan to pay that money back and get that deficit down because it's eating up huge amounts of the government budget." - Steve Pagliuca, warning that the national debt's gradual increase masks underlying fiscal unsustainability

• "I got asked that question in 1989—are there enough opportunities to go around—and again 27 years later, and I feel like a broken record. Private equity I think is here to stay. The model has really evolved so it really is huge value added to transform companies, make them better, globalize them, build new products in an environment where you don't have to worry about quarterly earnings." - Steve Pagliuca, defending private equity's enduring relevance despite decades of skepticism about capital deployment opportunities

• "Sports is now the only thing left that aggregates huge audiences globally. When I lived in Holland in the 1970s, you would only get sports scores 3 days later. Now you can watch any team globally, so fans are counted in the billions instead of the tens of thousands. That's why advertisers want to reach the globe." - Steve Pagliuca, explaining the fundamental drivers behind record sports franchise valuations

The Wrap:

Pagliuca's perspective reveals a striking disconnect between market anxieties and actual systemic risks—while commentators worry about private credit's rapid growth, the real threat lies in a national debt that has exploded 37-fold in four decades. His confidence in private credit stems from structural differences that contain losses to equity investors rather than cascading through financial systems, making private lending fundamentally safer than traditional bank credit. Ultimately, Pagliuca's four-decade career surviving multiple market cycles validates private equity's model of transforming companies without quarterly earnings pressure, suggesting the industry's expansion will continue absorbing growing capital pools regardless of periodic valuation concerns.