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.
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