Private credit has grown rapidly over the past decade, evolving from a niche segment of alternative finance to a key component of global capital markets. By providing direct lending to companies outside traditional banking channels, it has offered investors attractive yields and presented borrowers with flexible financing solutions. However, recent developments have brought renewed scrutiny to the asset class. A sharp rise in redemption requests across major funds, combined with a more challenging economic environment, have exposed structural tensions that have previously remained mostly hidden. This article examines the current stress in private credit from multiple perspectives, starting with a comprehensive outline of the scale and structure of the industry. This is followed by an analysis of the mechanics of fund liquidity and the drivers of recent investor behaviour, as well as an exploration of how emerging technologies, particularly artificial intelligence, may shape risk management going forward.

What Is Private Credit?

Private credit is debt financing provided by non-bank lenders through privately negotiated, non-traded loans. Rather than tapping the broadly syndicated loan market, where a bank originates a loan and distributes it among dozens of institutional buyers, a borrower goes directly to a private credit fund and negotiates terms with a single lender or a small club. The loans are not publicly traded, and the terms – such as interest rate, covenants, maturity – are bespoke. The asset class emerged from the regulatory vacuum left by the 2008 financial crisis. Post-crisis banking regulations constrained banks’ ability to hold risky corporate loans on their balance sheets, pushing lending activity outside the traditional banking system into what was initially called “shadow banking” and later rebranded as private credit. The growth accelerated in the post-COVID zero-interest-rate environment, when institutional investors desperate for yield channeled enormous capital into the sector. Global private credit assets under management have ballooned from roughly $310bn in 2010 to an estimated $1.7–$3.5 trillion by early 2026, depending on measurement methodology. The variation reflects whether estimates count only direct corporate lending or also include specialty finance, asset-backed finance, and structured credit.

Figure 1: Global Private Credit AUM Growth (2010–2026E) 

Historical Context
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Private credit’s track record prior to 2026 was, by most measures, remarkably strong. The Cliffwater Direct Lending Index has historically shown lower volatility and higher risk-adjusted returns than public high-yield bonds. Default rates in private credit have typically been reported at 1-2%, well below historical averages for broadly syndicated leveraged loans. The asset class navigated the COVID shock of 2020 without systemic distress, in part because lockup structures prevented forced selling and in part because the Federal Reserve’s emergency rate cuts to near-zero rapidly eased borrower interest burdens. This resilience attracted a wall of capital and deployment volumes surged 78% YoY to $592.8bn in 2024. As a result, today’s private credit portfolios may face a crisis stemming directly from too much capital chasing too few deals, a dynamic that has eroded underwriting standards and covenants.

The Players and the Products

For most of its history, private credit was the domain of institutional investors: pension funds, endowments, insurance companies, and sovereign wealth funds – sophisticated, patient capital with long investment horizons. Borrowers are typically middle-market companies (often private-equity-backed) that either cannot access public debt markets due to their size or prefer the speed, confidentiality, and structural flexibility of a single-lender relationship. In exchange, they pay an illiquidity premium, with interest rates typically 100-150 basis points above comparable syndicated loans.

Wall Street’s innovation was to “democratise” private credit by offering retail and high-net-worth investors access to the asset class through new fund structures. The most prominent of these are non-traded perpetual BDCs (Business Development Companies), SEC-registered vehicles that invest in private loans, price shares at net asset value (set by the fund itself, not the market), and offer limited quarterly redemptions, typically capped at 5% of shares. These vehicles also often employ fund-level leverage: for every $1 an investor contributes, the fund may borrow another $0.50–$1.00, amplifying both returns and risk. This retail expansion was enormously successful. Blue Owl, for instance, drew approximately 40% of its over $300bn in AuM from individual investors.

The Crisis in Numbers
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In the span of roughly six weeks in early 2026, a wave of investor redemptions swept through the private credit industry’s largest retail-facing funds, exposing a structural fault line that had been building for years. The sequence began in February, when Blue Owl Capital permanently halted quarterly redemptions at its $1.7bn OBDC II fund after withdrawal requests overwhelmed the vehicle’s 5% quarterly cap. What followed was a cascade of gating events across the industry’s most prominent names.
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In early March, Blackstone’s flagship BCRED, the largest non-traded private credit fund at roughly $82bn, faced record redemption requests of 7.9% of shares, approximately $3.8bn. To avoid prorating investors, Blackstone raised its quarterly repurchase cap from 5% to 7% and mobilised over $400mn in capital from the firm and more than 25 senior executives. Days later, BlackRock’s $26 billion HLEND fund capped repurchases at 5% after investors sought to withdraw 9.3% of net asset value, roughly $1.2bn, marking the first time the fund had triggered its redemption limit since inception.

The dominoes continued to fall. Morgan Stanley returned just $169mn to investors in its $8bn North Haven Private Income Fund, honouring less than half of the 10.9% of shares tendered. Cliffwater, whose $33bn Corporate Lending Fund is the world’s largest institutional interval fund, capped redemptions at the regulatory maximum of 7% after requests reached a record 14%. By late March, Ares Management imposed a 5% cap on its $10.7bn Strategic Income Fund following 11.6% in redemption requests, and Apollo’s $15.1bn Debt Solutions BDC did the same after 11.2% of shares were tendered.

In total, industry estimates suggest roughly $13bn in redemption requests hit private credit funds in Q1 2026 alone. Stock prices of major alternative asset managers fell sharply: BlackRock dropped as much as 8.3%, while KKR, Ares, Apollo, and Blue Owl all declined 5/6% on key announcement days.

Market and Macroeconomic Stressors

Several converging forces have tipped private credit from quiet concern into open stress. 
The cumulative effect of over 500 basis points of tightening since 2022 has weighed heavily on leveraged borrowers, even as the Fed has signalled a stabilisation in rates. Because most private credit loans carry floating rates, borrowers' interest costs rose in near-perfect lockstep with policy rates. Beyond the rate environment, a significant share of private credit has been extended to software companies on the conviction that SaaS businesses offer predictable, recurring revenue. That thesis is now being challenged by the emergence of AI-first competitors capable of displacing incumbent software products at speed. Structural weaknesses within loan portfolios have added further pressure. First-lien recoveries have declined from approximately 80 cents to roughly 60 cents on the dollar, and competitive pressure among lenders during the boom years produced loans with fewer protective covenants than existed even before 2008. Finally, fraud and operational risk have entered the conversation. High-profile cases, including First Brands and Tricolor where fraud involving the "double pledging" of collateral was uncovered, have rattled confidence in underwriting standards. While isolated, such incidents reinforce a broader narrative of lax due diligence during the origination boom.

​Why This Crisis Is Unusual

Private credit has historically been one of the most stable corners of the alternative investment universe. The current stress is unusual for several reasons. First, it is driven primarily by investor sentiment and liquidity demand, not by a widespread deterioration in underlying loan performance. Second, the redemption wave is hitting every major fund simultaneously, suggesting a market-wide confidence shock rather than idiosyncratic problems at any single manager. Third, the stress is concentrated among retail and high-net-worth investors, who have proven far less patient than the institutional capital that historically anchored the asset class.

Why This Matters

Even investors who are not redeeming face consequences. If funds must sell performing loans at discounts to meet elevated withdrawal requests, the marked-down prices can ripple through valuations across the portfolio, eroding NAV for everyone. The self-reinforcing psychology is powerful: the more funds that gate, the more investors in other funds rush to submit preemptive redemption requests, regardless of whether the underlying assets are sound. Beyond individual investors, private credit has become the primary source of financing for thousands of mid-sized businesses that cannot easily access traditional bank lending or public debt markets. If fund managers are forced to prioritise liquidity management over new origination, the supply of credit to these companies contracts, which could slow M&A activity and constrain growth capital more broadly. The most significant concern, however, is contagion risk to the broader financial system. While private credit is not as systemically interconnected as the mortgage-backed securities that triggered the 2008 crisis, it is far from isolated. Banks such as JPMorgan have significant lending exposure to private credit funds, insurance companies have allocated heavily to the asset class, and pension funds globally rely on private credit returns to meet obligations. A sustained forced-selling cycle could transmit stress to public credit markets, widen spreads, and tighten financial conditions at a moment when the economy is already contending with geopolitical uncertainty, tariff-driven cost pressures, and a fragile real estate market.

Redemption Mechanics & Fund Stress

A defining feature of the current dislocation in private credit markets lies not only in macroeconomic conditions or borrower quality, but in the structural evolution of the funds themselves. Over the past decade, the rise of semi liquid evergreen vehicles has transformed access to private markets, bringing with it both unprecedented growth and a set of latent vulnerabilities that are now being exposed.

Evergreen funds differ fundamentally from traditional private market structures. Instead of operating with a fixed lifespan, these vehicles are perpetual. Capital is continuously raised, invested, and recycled, creating an ongoing investment cycle rather than a defined beginning and end. Investors subscribe into an already deployed portfolio and gain immediate exposure, avoiding the drawn out capital calls typical of closed end funds. This hence allows capital to remain continuously invested, benefiting from compounding over time rather than sitting idle during deployment phases. At the same time, evergreen funds introduce a key innovation: periodic liquidity. Investors are typically able to request redemptions on a quarterly basis, subject to predefined limits, most commonly around five percent of net asset value. This has led to the classification of these vehicles as semi liquid. However, the distinction is critical. Liquidity is not guaranteed, but rather conditional on the functioning of the underlying system.

The appeal of this model is evident in the pace of its adoption. As of the end of 2025, semi liquid evergreen funds had grown to approximately 457 billion dollars in assets across hundreds of vehicles, with a large proportion launched in just the past few years.This reflects a broader golden era for private markets, where strong historical returns, combined with low interest rates, drove investors to seek higher yielding alternatives to traditional fixed income. Evergreen funds became the primary conduit through which this capital entered the space, particularly from high net worth and retail investors who had previously been excluded due to high minimums and long lock ups. The composition of these funds further highlights their structural characteristics. As shown in the data below, credit dominates semi liquid evergreen portfolios, accounting for more than half of total assets, compared to a far more balanced allocation in institutional portfolios. This is not coincidental. Credit strategies generate regular income through interest payments, which can be used to support redemption requests, and typically involve shorter duration assets than private equity. In theory, this makes them more compatible with a structure that promises periodic access to capital.

Figure 2: Total Net Assets in Institutional Funds ($10.5T)

Figure 3: Total Net Assets in Evergreen Funds ($457B)

​Yet this compatibility is only partial. The underlying loans remain inherently illiquid. They are privately negotiated instruments, not continuously traded securities, and cannot be sold instantly without potential discounts. To manage this, evergreen funds maintain what is often referred to as a liquidity sleeve, holding a portion of assets in cash or near cash instruments. Typically, this buffer can range between ten and twenty percent of the portfolio under normal conditions, providing a first line of defence against redemption requests.

The problem emerges when redemption demand exceeds what this structure can support. Under normal conditions, redemptions are met through a combination of incoming subscriptions, interest income, and available liquidity buffers. However, when requests exceed the quarterly cap, funds are forced to activate protective mechanisms. The most immediate response is gating. Rather than fulfilling all redemption requests, the fund honours only a proportional share up to the permitted limit, with the remainder deferred to future periods. Investors who expected liquidity receive only a fraction of their capital, often without certainty as to when the balance will be returned.

If pressure persists, managers may be forced to take more drastic steps. This can include selling assets in the secondary market, often at a discount to their reported value, or drawing on credit facilities to meet short term obligations. Both options carry consequences. Asset sales can lead to downward pressure on valuations, affecting all investors within the fund, while increased leverage introduces additional risk at the fund level. In extreme cases, funds may suspend redemptions entirely to preserve portfolio integrity.
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These dynamics have been clearly visible in recent months. As outlined in Part 1, major platforms such as Blackstone, BlackRock, Blue Owl, and Ares have all faced redemption requests significantly above their stated limits, in some cases more than double the allowable threshold. The consistent response has been the imposition of caps, partial fulfilment of withdrawals, and, in certain instances, internal capital injections to stabilise the system.

The underlying drivers of this surge in redemptions are both cyclical and structural. On the cyclical side, higher interest rates have fundamentally altered the relative attractiveness of private credit. Investors can now achieve comparable yields in liquid markets, reducing the incentive to accept illiquidity. At the same time, rising borrowing costs have increased concerns around credit quality, particularly among leveraged borrowers whose debt servicing burden has risen sharply. However, the structural dimension is arguably more important. The evergreen model creates a form of liquidity mismatch. Investors are offered periodic access to capital, while the underlying assets cannot be liquidated at the same frequency or certainty. This mismatch remains largely invisible during periods of inflows and stable sentiment. It is only when many investors seek to exit simultaneously that the constraint becomes binding.

What follows is a self reinforcing dynamic. Once redemption limits are triggered, investors begin to anticipate future constraints. Those who might otherwise have remained invested are incentivised to submit redemption requests early, in order to secure their place within the limited liquidity window. This behaviour mirrors the logic of a bank run. The issue is not necessarily that the assets are impaired, but that access to liquidity becomes a scarce resource. This coordination problem is further amplified by the nature of the investor base. Unlike traditional institutional capital, which is typically locked in for long periods, evergreen funds have a significant proportion of wealth and retail investors. These investors tend to be more sensitive to short term market conditions and more inclined to reallocate capital in response to changes in sentiment. As a result, redemption pressure can build rapidly and across multiple funds simultaneously.

Importantly, this does not imply that the underlying private credit market is fundamentally broken. Rather, it suggests that the structure through which it has been accessed is being tested for the first time at scale. The golden era that enabled the rise of evergreen funds was characterised by abundant liquidity, strong inflows, and relatively benign credit conditions. The current environment is markedly different. What is being observed today is the transition from a system supported by continuous inflows to one constrained by outflows. In such a regime, the limitations of semi liquidity become apparent. Evergreen funds have successfully broadened access to private markets and accelerated their growth, but they have also introduced a tension that cannot be fully resolved: the attempt to provide liquidity in an inherently illiquid asset class.
The present stress, therefore, is not merely cyclical. It is structural. And it is revealing, for the first time, the true boundaries of a model built on the delicate balance between permanence of capital and the expectation of its return.

Investor Behavior & Market Sentiment 
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The key questions to address are therefore why private credit has become a central topic in financial markets, and what the factors are that are driving concerns about its potential downturn. A primary driver of this shift is that the illiquidity premium historically offered by private credit is now being challenged by higher interest rates. From the post-crisis period to 2022, the rates have been exceptionally low, with a moderate surge between 2016 and 2022. However, starting from March 2022 a moderately high tightening cycle has begun. This has improved yields in liquid fixed-income instruments, reducing relative attractiveness of private credit investments. 

Figure 4: U.S. 10-Year Treasury Yield (2019–2026)

​At the same time, higher borrowing costs negatively affect corporate operations, making investors worry about defaults of companies that are partly financed by private credit funds. This has raised investor concerns that further negative developments may be emerging in the sector. The pressure mainly comes from software firms that make up a large portion of private credit borrowers. Rapid AI developments are seen as threats to the whole sector, further increasing the credit risk of the lenders. This dual effect has reduced relative returns and raised credit risk, thereby weakening the overall appeal of the asset class.
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Also, the rapid expansion of the sector, now a roughly $2 trillion market, has increased competition among lenders, contributing to a deterioration in underwriting standards and a higher proportion of lower-quality loans. As in the banking system, the worst loans are often made in the best of times, when abundant liquidity and competition reduce discipline in underwriting. The vulnerability of this system has been largely masked by the absence of a period of prolonged downturn, delaying the realization of the default risk and reinforcing investor caution.
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Finally, uncertainty is increased by limited transparency. The valuation system that characterizes this industry amplifies the aforementioned phenomenon. Unlike public credit markets, private credit assets are not marked-to-market and are instead valued using internal models, which can obscure underlying volatility and delay the recognition of losses. This can create a disconnect between reported valuations and actual market conditions, particularly during periods of stress. Public credit funds are currently trading at around 75 cents on the dollar on average, while comparable private funds are effectively priced at par, creating a strong incentive for investors to reallocate capital. The following graph compares market prices of publicly traded BDCs relative to their net asset value with private credit funds, which are typically valued at par and not marked to market. In most cases, BDCs trade below net asset value, indicating that market-based valuations are generally lower than those reported by private credit funds, thereby incentivizing investors to exit illiquid positions prematurely.

Figure 5: BDC Market Prices vs Net Asset Value (2026)​

​To further highlight the relevance of the current situation and its possible implications, it is useful to compare it with past episodes of financial downfall. The current dynamics in private credit, in fact, share similarities to past episodes of liquidity stress, particularly the 2008 financial crisis and the ‘dash for cash’ during the COVID-19 shock in 2020, where investors rapidly moved into liquid assets. Similar to those periods, the current environment is characterized by heightened uncertainty, lower risk tolerance, and a stronger preference for liquidity. Also, worries about lack of transparency and valuation have led to clear comparisons with the financial system before 2008. However, the stress in private credit right now looks far more like a repricing story than anything resembling a systemic breakdown. Borrowers are stretched, funding channels have narrowed, and rates have stayed higher for longer than many had anticipated, but that remains a very different proposition from the solvency spiral witnessed in 2008. What is driving the pressure is not a collapse in the traditional sense, but rather a confluence of the factors mentioned.
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While much of the discussions has focused on the investor’s perspective, it is crucial to analyse the current situation from the borrower's perspective as well. 

Small companies, with less financial cushion to ride out distress, are often the riskiest and most lucrative companies to lend to. Unlike large companies with many options to pull to respond to rising interest rates, tariffs, and supply chain disruptions, or the economic impacts of war, these small companies typically see distress first. More than half of all value-weighted private credit is provided to borrowers in sectors with relatively low collateralizable or tangible assets such as software, financial services or healthcare services, and thus have lower recovery rate for every dollar of defaulted loans.
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Furthermore, private equity deals experienced substantially larger increases in borrowing cost during the 2022 rate hike cycle. Higher sensitivity to the rate hike cycle indicates PE deals generally involve relatively riskier borrowers, because they carry more leverage. The average interest coverage ratio displayed a significant decline in recent quarters, indicating weakening debt service capacity. With mean interest coverage of around 2.0x, a slowdown in economic conditions could lead to further deterioration of cash flows and to the inability of borrowers to repay their loans.

In normal conditions, private credit structures offer a degree of flexibility to borrowers in distress, where they can negotiate directly with a small group of lenders, often reaching an extension or restructuring before things deteriorate further. But today, access to new capital has become more selective. Stronger credits can still refinance, typically at a higher cost, while more leveraged or structurally weaker borrowers increasingly find themselves with few alternatives, left reliant on their existing lenders or on sponsor support to bridge the gap.

Asset-Level Pressure & The Role of AI

As redemption pressures intensify and investor sentiment continues to shift, stress in private credit markets is increasingly visible at the level of the underlying assets. Higher interest rates and tighter financial conditions are placing growing strain on borrowers, particularly leveraged middle-market companies that rely on floating-rate debt. As borrowing costs rise, early warning signs such as declining interest coverage ratios and weakening cash flows are becoming more apparent across portfolios. At the same time, risks are not evenly distributed. Sector-specific vulnerabilities, especially in cyclical industries and highly leveraged segments, are increasing the likelihood of defaults. As borrower quality deteriorates, loan portfolios become both riskier and less liquid, making it more difficult for funds to meet redemption requests without incurring losses. In this environment, the central issue is not only rising risk, but limited visibility into how that risk is reflected in valuations.
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As discussed earlier, private credit assets are typically valued using internal models and are often reported close to par, even as comparable risks in public markets, such as listed BDCs or broadly syndicated loans, trade at noticeable discounts. This gap between reported and market-implied valuations has become increasingly important, as it raises questions about how accurately private portfolios reflect current conditions and helps explain the recent increase in redemption requests. Artificial intelligence offers a way to address this problem more directly. By analysing data from public credit markets, sector trends, and macroeconomic developments, AI systems can generate independent estimates of what private credit assets might be worth under current conditions. These estimates do not replace internal valuations, but provide a consistent external benchmark. In effect, AI makes it possible to compare reported values with a market-based reference point, reducing the opacity that has traditionally characterised the asset class and anchoring valuations more closely to observable market signals.

This has important implications. If independent estimates suggest that private portfolios are valued above comparable market levels, investor concerns are likely to increase. More broadly, valuation becomes less opaque, and the traditional reliance on internally determined pricing becomes harder to sustain. This may also reduce the timing advantage historically held by fund managers, as differences between reported and implied values become easier to identify. The stability of semi-liquid structures depends heavily on investor confidence in reported values; as discrepancies become more visible, that confidence may weaken, reinforcing existing redemption pressures and potentially accelerating outflows during periods of stress. At the same time, AI changes how borrower risk is assessed. Rather than relying solely on periodic reporting, lenders can incorporate a wider range of data to form more timely views of borrower performance. This improves the ability to detect early signs of stress, particularly in an environment where rising interest costs and slower growth affect companies unevenly.

However, this improved monitoring also alters the borrower-lender relationship. A key attraction of private credit has been discretion: borrowers accept higher borrowing costs in exchange for a more private financing arrangement, without continuous external scrutiny. The use of AI challenges this balance. Even without public disclosure, lenders are able to build increasingly detailed and timely assessments of borrower performance using a wide range of data sources. This reduces the informational gap that has traditionally separated private credit from public markets and introduces a form of continuous assessment that was previously absent. As a result, borrowers may continue to pay an illiquidity premium while receiving fewer of the privacy benefits that justified it. Over time, this reduces the distinction between private and public credit, particularly if greater transparency is not accompanied by lower borrowing costs.
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It is also essential to note that AI is subject to clear limitations. Private credit markets are characterised by less standardised and less frequent data than public markets, which can reduce the reliability of model outputs. In addition, many AI models are complex and not always easy to interpret, which can make their use in decision-making more challenging. As a result, AI cannot fully resolve the underlying uncertainties in the asset class. Looking ahead, AI is likely to play an increasingly important role in private credit, particularly in valuation analysis and risk monitoring. However, it does not change the fundamental drivers of the current stress, which remain linked to interest rates, borrower strength, and investor demand for liquidity. What AI does change is the level of transparency. By making valuation gaps more visible and borrower performance easier to assess, it reinforces the pressures already present in the market. In that sense, AI does not resolve the challenges facing private credit, but makes them more clearly visible.

Conclusion
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The stress spreading through private credit in early 2026 is not a temporary dislocation that better macroeconomic conditions will resolve. It is the predictable consequence of a structural bargain that was never fully stress-tested: offering periodic liquidity to retail investors in an asset class whose underlying instruments cannot be liquidated on demand. Years of abundant capital, compressed yields elsewhere, and strong historical performance obscured this tension. A more challenging rate environment has now made it visible. The fundamental question facing the industry is not whether private credit remains a viable asset class, it does, but whether the semi-liquid evergreen structures through which it has been democratised can be redesigned to honestly reflect the illiquidity of what they hold. If they cannot, the current redemption wave will not be the last. The industry must choose between genuine structural reform and a gradual erosion of the retail investor confidence it spent a decade building.

By: Tristan Buckley, Martina Caruso, Emma Hey, Pietro Nicolazzi

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SOURCES

• Bank for International Settlements 
• Britannica
• Federal Reserve of Boston
• International Monetary Fund 
• JPMorgan
• Latham & Watkins
• McKinsey & Company
• Morgan Stanley
• Reuters
• Securities and Exchange Commission 
• U.S. Congress
• White House
• World Economic Forum
• MDPI