Private Credit Markets: A Sign of Distress?

Major Private Credit funds like Blue Owl are limiting redemptions to just 5%. They advise that the public is too quick to jump the gun and that asset-backed fundamentals remain strong. Yet, investors think otherwise. The asset-liability mismatch is reminiscent of 2008, but is it really a cause for concern?

What Even is Private Credit?

To put it simply, private credit (PC) is just a firm lending money to other firms, which takes place outside the traditional banking system. Private credit funds like Apollo, Ares, and Blue Owl issue debt to mid-sized companies that are too risky or too small for traditional banks. Thus, these funds raise capital from typical institutional investors and retail investors and give it to firms as loans in the hope of gaining higher interest rates (given the higher risk).

Private Credit boomed especially after the 2008 financial crisis, when banks had stricter regulations and capital requirements. Firms need a different form of funding, and that's where private credit fills the hole.

The key trade-off of private credit, though, is liquidity. These loans are privately arranged and hard to sell in a hurry, so investors typically accept restrictions on when they can withdraw their money. This illiquidity is supposed to be compensated by higher returns. That bargain is now being tested.

Who's the Biggest Borrower?

This is where the current problem becomes clearer. PC's biggest borrower is software, specifically firms built on the Software-as-a-Service (SaaS) model. According to the Bank for International Settlements, outstanding private credit loans to SaaS firms grew from around $8 billion in 2015 to over $500 billion by the end of 2025, representing roughly 19% of all direct lending. Morgan Stanley estimates the number to be around 26% when you include adjacent tech services. When you expand to all tech and business services that number jumps to 40% (Source from JP Morgan).

SaaS blew up, especially with AI, and so a lot of firms that thought they were generating sticky revenues are being challenged. The problem for private credit is that the loans were underwritten against revenue assumptions that may no longer hold. Seat-based pricing models, where companies pay per user, arevulnerable because AI reduces the number of humans needed to perform tasks. UBS has warned that in a severe AI disruption scenario, default rates in software-heavy private credit portfolios could reach 13%, more than triple the projected rate for high-yield bonds.

Unrelated to software entirely but still relevant. The high-profile collapses of First Brands Group and Tricolour Holdings in late 2025 exposed just how much can go wrong when due diligence fails. While both cases were due to fraud and not market weakness, it highlighted to investors that PC is immune to the kind of blowups associated with public markets.

What's Going Wrong Now

The biggest PC funds are facing unprecedented withdrawal requests, with Blue Owl redemptions hitting $5.4 billion within just two funds. Blue Owl responded with capping redemptions to just 5%. This is happening across the sector, with over $7 billion in total across the industry in late 2025 and early 2026. A lot of investors are retail, who may not be able to tolerate long lock-up periods like institutional investors, so when things go south, they're quick to sell. The issue is the liquidity mismatch. These vehicles promise investors periodic redemption windows, i.e., monthly or quarterly, while holding loans that can take months or years to sell. When confidence drops, and multiple investors head for the exit simultaneously, fund managers face a choice: sell assets at fire-sale prices, or restrict withdrawals and hope sentiment stabilises. For actual defaults, the headline default rate in private credit has officially stayed below 2% for years, but once you factor in selective defaults and liability management exercises, the "true" default rate approaches 5%.

Is This like 2008?

Short answer - No. PC is less than 5% of US GDP, and so the spillover effects if PC goes bust would be pretty minimal. While PC is growing, it's still relatively contained.

Also, the investor base is different. The core of private credit remains institutional investors who can absorb mark-to-market losses without triggering cascading liquidations. In 2008, the crisis was amplified by retail depositors making bank runs. The parallel today would be retail investors redeeming en masse from semi-liquid funds, which is happening, but the funds have contractual gates specifically designed to prevent forced selling.

The risk isn't systematic collapse, it's slow credit deterioration. If the foundation cracks, it erodes returns, test fund structures, and ultimately trust. Going forward, investors may look for higher scrutiny when it comes to underwriting loans, similar to bank regulations. More and more people are getting concerned with Jamie Dimon (JPM CEO) stating that “credit standards have been modestly weakening pretty much across the board.”

Outlook

Private credit is not going away. Bank disintermediation, regulatory-driven lending gaps, and investor demand for yield remain firmly in place. But the composition of the market is shifting; speciality finance overtook direct lending as the most popular strategy for new fund launches in 2025, and asset-based finance is increasingly where the growth and innovation are happening.

The takeaways for investors are clear. Selectivity matters more than ever. J.P. Morgan expects performance dispersion to widen significantly in 2026, favouring funds with diversified sector exposure, senior capital structure positions, and a tilt toward larger borrowers.

Disclaimer: This post is for educational purposes only and does not constitute financial advice. All views are those of the author.