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For years, private credit was the asset class that could do no wrong. While stock markets gyrated and bond yields disappointed, these funds, which lend directly to businesses rather than going through banks, quietly delivered steady, double-digit returns. Investors piled in. The market swelled to somewhere between $2 and $3 trillion globally. Everyone wanted a piece.

Now the bill may be coming due.

In the space of just a few weeks, some of the biggest names in private credit have been scrambling to manage a wave of investors trying to pull their money out. Defaults are climbing. A UK mortgage lender has imploded amid fraud allegations. And the rise of artificial intelligence is casting a shadow over billions of dollars of loans made to software companies. Welcome to private credit’s first real stress test.

The Rush for the Exit

The clearest sign of trouble is the queue forming at the door.

Earlier this month, BlackRock, the world’s largest asset manager, told investors in its $26 billion HPS Corporate Lending Fund that it could not honour all their withdrawal requests. Investors had asked to take out roughly $1.2 billion (about 9.3% of the fund’s value) in a single quarter. BlackRock paid back only about $620 million, applying its standard 5% quarterly limit. It was the first time the fund had hit that ceiling since it launched.

Morgan Stanley followed days later, limiting withdrawals from its North Haven Private Income Fund after investors tried to redeem nearly 11% of the fund’s shares. The fund returned just $169 million, less than half of what was requested. And Cliffwater, which runs a $33 billion vehicle, faced demands for 14% of its assets in a single quarter, choosing to cap payouts at 7%.

The message from investors is clear: they want their money back, and they want it now.

Blackstone’s experience is worth noting for a different reason. Its flagship $82 billion BCRED fund received the largest withdrawal requests of the group, about $3.7 to $3.8 billion, or 7.9% of the fund, but unlike its peers, it chose to meet every single request. To do so, it raised its redemption cap from 5% to 7% and injected $400 million of its own and employees’ money into the fund. Net outflows, after new money coming in, stood at $1.7 billion. Blackstone’s willingness to honour all requests in full was a deliberate signal of confidence, but even that move rattled markets.

Blue Owl, meanwhile, quietly ended regular quarterly cash redemptions altogether at one of its funds, switching instead to discretionary payouts funded by asset sales.

These are not random coincidences. They are the market’s verdict on an asset class that has, in many cases, promised investors more liquidity than its underlying loans can realistically deliver.

Defaults Are Rising and the Numbers Are Worse Than They Look

Behind the redemption pressure lies a more fundamental problem: borrowers are struggling to repay their loans.

According to Fitch Ratings, the US private credit default rate hit 5.8% for the 12 months to January 2026, the highest level since Fitch began tracking the figure in mid-2024. For smaller companies (those with annual earnings below $25 million), the rate was a sobering 15.8%. And within Fitch’s closely monitored portfolio of directly rated private borrowers, defaults reached 9.2% across the whole of 2025, up from 8.1% in 2024 and a new record.

Three names capture the flavour of the problem. First Brands, a US auto-parts supplier, collapsed in bankruptcy amid allegations of fraud and double-pledging, using the same assets as security for multiple loans simultaneously. Tricolor, a subprime car lender, went into liquidation. And in the UK, a specialist mortgage firm called Market Financial Solutions (MFS) fell apart almost overnight. Creditors initially estimated a £930 million hole in the collateral backing their loans; later court filings put the shortfall at over £1.3 billion, with similar double-pledging allegations at its core.

JPMorgan CEO Jamie Dimon put it bluntly when he described the situation as a “cockroaches” problem: if you can see one, there are likely more hiding nearby.

Making matters harder to read is the widespread use of payment-in-kind, or PIK, arrangements, a mechanism that lets struggling borrowers defer their interest payments rather than pay cash. Lenders can book these deferred payments as income, making portfolios look healthier than they are. PIMCO has pointed to what it calls “really bad underwriting,” overly optimistic forecasts, and sloppy documentation as root causes of the deterioration.

The AI Question Nobody Wants to Answer

There is a particular anxiety running through private credit right now that goes beyond the usual credit cycle worries, and it has to do with artificial intelligence.

A significant chunk of private credit portfolios, somewhere between 20% and 40% by many estimates, consists of loans to software companies. These are the kinds of businesses that, until recently, seemed like safe bets: steady revenues, recurring subscriptions, low physical assets to depreciate. Private credit lenders loved them.

But generative AI is changing the economics of software fast. Tools that once required teams of engineers or large software licences can now be replicated more cheaply. Competitive advantages that lenders priced into their loan terms are eroding. JPMorgan has already started marking down the value of software-related loans it holds as collateral. UBS analysts have warned that in a worst-case AI disruption scenario, default rates in this part of the market could spike as high as 15%.

This is the scenario keeping private credit managers up at night: not a straightforward recession, but a slow-motion repricing of an entire lending category that was supposed to be safe.

Could This Spread?

Private credit does not exist in isolation. Banks including JPMorgan have lent hundreds of billions of dollars to private credit funds themselves, creating a web of connections between the shadow banking system and the regulated one. If defaults in private credit accelerate, that stress could flow back into bank balance sheets, tighten lending conditions more broadly, and rattle equity and bond markets along the way.

Retail investors face particular risks. In recent years, private credit funds have opened their doors to everyday wealthy investors through structures like exchange-traded funds, defined contribution pension plans, and in Europe, a new category of vehicle called ELTIF 2.0. These investors typically expect easier access to their money than institutional investors do. Frozen redemptions, as we are already seeing, could hit them hardest.

Moody’s has flagged the systemic ties between private funds and the banking sector as a growing concern. Regulators on both sides of the Atlantic are paying close attention.

It’s Not All Bad News

It is worth keeping a sense of perspective. The private credit market is large, diverse, and not uniformly in trouble. Funds focused on service businesses, with conservative underwriting and transparent valuations, continue to perform well. Some forecasters expect the overall default rate to ease back toward 4.5–6% if the US Federal Reserve delivers further interest rate cuts, which would relieve pressure on borrowers carrying floating-rate debt.

Blackstone’s decision to honour every redemption request, at considerable cost to itself, was a reminder that the largest managers have the resources to manage stress without panicking. Lower rates, when they come, could also unlock a wave of refinancing activity and new deal flow.

The divide between well-run and poorly-run funds, however, is becoming impossible to ignore.

What This Means for Investors

For those with exposure to private credit, whether directly or through a fund of funds, now is a good time to ask some pointed questions:

• How much of the portfolio is lent to software companies, and what assumptions have been made about AI disruption?
• What are the actual redemption terms, and how realistic is it to access cash quickly if needed?
• How transparent is the manager about valuations? Are loans being marked to market, or held at cost?
• What is the track record of the underlying borrowers, and how aggressively were deals underwritten during the boom years of 2021–2023?

The private credit story is not over. But the easy years, when almost everything worked and redemptions were a theoretical concern, are behind us. What comes next will reward investors who chose their managers carefully and understood what they were actually buying.

It has now been almost two weeks since the United States and Israel launched a major coordinated assault on Iran in the early hours of 28 February 2026. Since our initial scenario analysis, the situation on the ground has shifted considerably, enough to warrant an updated assessment and a clearer picture of what investors should be watching.

Iran Has a New Supreme Leader

Following the killing of Supreme Leader Ayatollah Ali Khamenei in the opening strikes, Iran moved quickly to establish an interim leadership council. Mojtaba Khamenei, son of the late Supreme Leader, has since been elevated to lead the country. This points to regime continuity rather than collapse, the outcome that would most rapidly de-escalate the conflict.

The War Has Spread Geographically

Iranian forces have continued daily missile and drone strikes against US military bases and allied infrastructure across the Gulf, including Kuwait, Bahrain, Saudi Arabia, and the UAE. Iran has also targeted commercial shipping and oil facilities near the Strait of Hormuz, and has formally warned that vessels belonging to the US, Israel, or their allies could be treated as legitimate military targets.

Meanwhile, the US and Israel have continued large-scale air operations across Iran. Iran’s ability to retaliate appears to have diminished compared with the first days of the conflict, with observers noting a significant reduction in missile and drone launches.

The Strait of Hormuz Remains the Key Flashpoint

The most consequential economic development has been the near-paralysis of tanker traffic through the Strait of Hormuz, the narrow waterway through which roughly 20% of the world’s oil supply normally flows. Iranian threats and attacks on shipping have caused many vessels to remain outside the strait. Shipping costs and insurance premiums have surged as a result.

Crude oil prices briefly surged to US$120 per barrel before retreating to the US$80-85 range as markets began to reassess how prolonged the disruption might prove. As of 11 March 2026, WTI crude was trading at approximately US$88 per barrel.

The International Energy Agency has announced its largest-ever release of emergency oil reserves, 400 million barrels, equivalent to roughly 20 days of normal Strait of Hormuz traffic. This is expected to act as a ceiling on how high oil prices can rise, rather than a mechanism for bringing them back down.

Western governments are also considering plans to escort commercial vessels through the Strait. The US military has already destroyed Iranian vessels in the region. Nevertheless, tanker traffic through the Strait remains negligible, and pressure on oil prices persists.

How Have Financial Markets Responded?

Equity markets have reacted with heightened volatility rather than outright panic. Global equities are down approximately 4% since the conflict began, a significant move, but not the kind of sharp sell-off that would suggest investors believe this is the start of a prolonged global crisis.

This is broadly consistent with how markets have behaved during past geopolitical conflicts. History shows that equity markets tend to fall sharply in the early stages of a conflict, driven by uncertainty and rising energy costs, before stabilising once the scope and duration of hostilities becomes clearer.

The single most important variable for markets remains oil. If prices stay above US$100 per barrel for a sustained period, the economic consequences become significantly more serious: higher transport and manufacturing costs would act as a drag on global growth, slow corporate earnings, and likely delay interest rate cuts by major central banks. Conversely, if the Strait of Hormuz reopens and oil retreats, equity markets are expected to recover as investors refocus on economic fundamentals.

The Two Paths From Here

As we outlined in our initial analysis, the conflict is likely to resolve along one of several broad paths. Given what has changed since then, the two most relevant scenarios for investors to monitor are now as follows.

Path 1: De-escalation (Still the Most Likely Outcome)

Iran’s military capacity continues to weaken under sustained US-Israeli air operations. Both sides find grounds to declare limited objectives achieved. Attacks on shipping gradually subside, and tanker traffic through the Strait resumes. Under this scenario, oil prices would likely retreat toward US$70–80 per barrel, inflation pressures would ease, and financial markets would stabilise.

US domestic politics may reinforce this outcome. American petrol prices have already risen roughly 12% in the past week. With mid-term elections approaching, the Trump administration faces a powerful incentive to bring the conflict to a swift conclusion, a prolonged war risks handing the opposition both economic and political ammunition.

The good news is that the US has precedent here. During the so-called Tanker Wars of the late 1980s, the US Navy, joined by European allies, successfully re-opened the Strait of Hormuz through sustained armed naval patrols. A similar effort is now being considered.

Path 2: Prolonged Disruption (The Risk Scenario)

In a more severe outcome, Iran escalates its attacks on Gulf infrastructure or manages to sustain the blockade of the Strait of Hormuz for an extended period. This would significantly reduce oil exports from the Gulf and could push prices back above US$120 per barrel, triggering a broader global economic shock. Higher energy costs would feed through into inflation across transport, manufacturing, and household electricity, potentially forcing central banks to keep interest rates higher for longer.

The key triggers to watch for this scenario are: any reports of Iran attempting to lay mines in the Strait; further activation of Iranian-backed proxy forces such as Hezbollah or the Houthis; and whether Gulf oil infrastructure, including pipelines and export terminals, comes under sustained attack.

What Should Investors Be Watching?

With the situation still evolving rapidly, we would caution against making significant portfolio changes based purely on day-to-day developments. That said, there are three specific signals worth monitoring closely.

• Strait of Hormuz activity. Any credible reports of Iran attempting to lay mines in the waterway would be a significant escalation signal, pointing toward the more severe scenario. This is arguably the single most important variable for oil prices and markets right now.
• Iran’s proxy forces. If Hezbollah begins firing rockets into Israel in significant numbers, or the Houthis resume anti-shipping operations in the Red Sea, the probability of a prolonged conflict rises sharply.
• Diplomatic signals. Any statements from Iran’s new leadership council indicating openness to ceasefire talks or conversely, pledging total resistance will be the clearest near-term guide to where this is heading. Back-channel contact through Oman appears to be ongoing.

In the early hours of Saturday, 28 February 2026, the US and Israel launched a major coordinated military strike on Iran. The operation, one of the most significant in the region in decades, killed Iran’s Supreme Leader Ayatollah Ali Khamenei, the Commander-in-Chief of the Islamic Revolutionary Guard Corps (IRGC), and senior security official Ali Shamkhani. Targets included nuclear facilities, ballistic missile sites, military command centres, and leadership compounds across the country.

Iran retaliated within hours, firing waves of missiles and drones at US military bases and allied nations across the region, including Bahrain, Kuwait, Qatar, the UAE, Jordan, and Saudi Arabia. The Port of Jebel Ali in Dubai was struck. Dubai International Airport suspended flights indefinitely. Iranian missiles also targeted British military bases in Cyprus. The conflict had spread well beyond Iran’s borders.

Iran has since imposed an internet blackout and declared 40 days of national mourning. Yet alongside footage of demonstrations against the US and Israel, other videos have emerged showing Iranians celebrating Khamenei’s death in cities including Tehran — a reminder that Iran’s population remains deeply divided, and the country’s political future is far from settled.

At this stage, no single outcome is certain. Situations like this rarely unfold according to a neat script. What we can do is map the most plausible scenarios and their likely impact on financial markets.

Scenario 1: Regime Collapse and Transition

Timeframe: Weeks  |  Oil: Falls below US$70  |  Equities: Strong rally

The decapitation of Iran’s top leadership is more complete than in any previous confrontation. With Khamenei and the IRGC leadership gone, the remaining regime has lost both its symbolic authority and its military command chain. Domestic protests, already significant, could now escalate rapidly.

If a transitional government emerges and opens negotiations with the US, the geopolitical risk premium that has weighed on markets for years could evaporate quickly. Oil prices, after an initial spike, would fall sharply below US$70. Equity markets would likely rally strongly. Gold would pull back from elevated levels.

This is the best possible outcome for investors, and it is now nearly as likely as our base case.

Scenario 2: Short Conflict, Ceasefire (Our Base Case)

Timeframe: 4–6 weeks  |  Oil: US$80–90, then eases  |  Equities: -10%, then recovers

US and Israeli strikes continue for two to four weeks, further degrading Iran’s military capacity. Iran retaliates, but with diminishing effect. A ceasefire is eventually brokered, most likely through Oman or the United Nations, in exchange for Iran’s new leadership council agreeing to US demands on its nuclear programme.

Oil prices spike to the US$80-90 range in the near term but ease once it becomes clear that the Strait of Hormuz will remain open. Global share markets enter correction territory, a fall of around 10%, before recovering over the following four to six weeks. Gold remains elevated throughout. This is currently the most likely single outcome.

Scenario 3: Prolonged Conflict via Iran’s Proxy Network

Timeframe: Months  |  Oil: US$85–100 sustained  |  Equities: Ongoing pressure

For this scenario to unfold, Iran’s allied militant groups, Hezbollah in Lebanon, the Houthis in Yemen, and Iraqi militias, would all need to enter the conflict simultaneously. At present, each group is calculating its own interests carefully.

Hezbollah is weighing its own survival and facing domestic Lebanese political pressure to stay out. The Houthis have issued threats but have not yet acted. Iraqi militias have called for action but are conscious of Baghdad’s fragile political dynamics. The scenario becomes more likely, however, if the US or Israel strikes Houthi or Hezbollah territory directly.

If it does materialise, oil would remain elevated at US$85-100 for months, keeping inflation high and complicating the outlook for interest rates. Share markets would remain under sustained pressure, and safe-haven assets such as gold, US government bonds, and the US dollar would stay in strong demand. This would be the most damaging sustained outcome for investors.

Scenario 4: Strait of Hormuz Closure (Tail Risk)

Timeframe: Months  |  Oil: Well above US$100  |  Equities: -15% to -20%

The Strait of Hormuz is the narrow waterway through which approximately 20% of the world’s oil supply passes each day. If Iran’s remaining leadership, facing total collapse, decides to attempt to close or severely disrupt it through mine-laying or attacks on Gulf oil infrastructure, the consequences for energy markets would be severe.

Oil could surge well beyond US$100 per barrel. Global share markets could fall 15–20% in a sharp sell-off. Inflation expectations would spike, making it very difficult for central banks to cut interest rates as they might otherwise wish to. Energy company shares would be among the very few to benefit.

This remains a tail risk, unlikely, but not impossible. The key trigger would be a moment when Iran’s regime concludes it has nothing to lose.

Scenario 5: Rapid Negotiated Settlement

Timeframe: Days  |  Oil: Returns below US$70  |  Equities: Rally

Iran’s new leadership council, under overwhelming military pressure and facing domestic collapse, moves quickly to accept US demands in exchange for an immediate ceasefire. There are already tentative signs this may be in play: Iran’s Foreign Minister has publicly stated that Tehran is interested in de-escalation. Oman, a traditional back-channel mediator between Iran and the West, remains actively engaged. President Trump has acknowledged that Iranian leadership has requested talks.

If realised, markets would recover swiftly. Oil would fall back toward pre-conflict levels. Share markets would rally. This is the least probable of the five scenarios, but the diplomatic signals are worth watching closely.

What Should Investors Focus On?

With events moving this quickly, the situation does not yet warrant major changes to portfolios. What matters more right now is knowing which signals to watch.

• The Strait of Hormuz. Any credible reports of mine-laying or attempts to block the strait would be the single most important signal for oil prices and markets overall. This is the trigger most worth monitoring.
• Iran’s proxy forces. If Hezbollah begins firing rockets into Israel, or if the Houthis resume attacks on shipping in the Red Sea, the probability of a prolonged conflict rises significantly.
• Diplomatic signals from Tehran. Public statements from Iran’s new leadership council, whether indicating openness to talks or pledging total resistance, will be among the clearest near-term guides to how this unfolds.

The Supreme Court just kneecapped Trump’s “anytime, anywhere” tariffs

The US Supreme Court ruled (6–3) that President Trump exceeded his authority using the International Emergency Economic Powers Act (IEEPA) to impose broad global tariffs. (Reuters)

But the ruling didn’t end tariff risk, it reshaped it. Within hours, Trump pivoted to a temporary 10% duty (reported as a 150-day measure with exemptions for some categories), and his team signalled new investigations under other legal authorities. (Reuters)

Nonetheless, policy uncertainty stays high, even if the legal “shortcut” is narrower. Reuters notes trade partners may gain some bargaining power, but Washington can still apply pressure via other channels, though these are narrower, slower and more procedural. (Reuters)

The US military build-up in the Middle East is now market-relevant again

While tariffs grabbed the headlines, the more serious tail risk was geopolitical. This month highlighted one of the largest US military deployments in the region since 2003, with rising concern that diplomacy could be eclipsed by escalation dynamics. (Reuters)

This is the classic recipe for oil volatility and risk-premium swings because markets price in the possibility of rapid escalation. We cannot rule out the region sliding towards conflict as military preparations build.

More AI disruption on software stocks

Software stocks continue to suffer. A sharp drawdown earlier this month tied to fears that new AI tools could commoditise parts of the software stack, citing roughly $830bn wiped from software and services market value over six trading days. (Reuters)

What this means is that investors are no longer attaching a high valuation to these companies as their earnings growth rate is at risk. The rotation away from growth stocks (at risk from AI disruption) to value stocks (benefits from AI usage) remains intact.

The Great Rotation continues: Europe is still getting the marginal dollar

European inflows remained a major theme. According to data from EPFR, which tracks fund flows globally, European equity funds have attracted approximately $10 billion in each of the past two consecutive weeks, putting February 2026 on course to be the single highest month for inflows into European stocks ever recorded.

Price action has matched the story. Bloomberg reported the Stoxx Europe 600 hit an all-time high around 630, with rotation partly driven by investors seeking diversification away from US tech turbulence and relatively cheaper valuations. (Bloomberg.com)

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Based on Q4 results, the AI Hyperscalers’ backlog continues to grow. Microsoft and Oracle are the leaders. Their fortunes are increasingly tied to OpenAI. Profits need to catch up with investments eventually, if their stock prices are to continue going up. Currently, the big spenders are seeing their stock prices drop.

Key Takeaways