The asset class has regularly been in the headlines and the concerns are legitimate – but these issues can also be interpreted as signs that the sector is maturing.
Private credit has spent the past year under an uncomfortable spotlight. The headlines have been familiar: refinancing cliffs, opaque valuations, hidden leverage and a growing drumbeat around restructurings. More recently, two issues have pushed the noise higher – concern about software exposure in the age of AI, and very visible redemption pressure across large non‑traded business development companies (BDCs) and semi‑liquid private credit vehicles.
It’s easy to read those headlines and conclude that something is fundamentally breaking. A calmer and more accurate interpretation is that private credit is being pushed into a more normal credit environment. One where liquidity assumptions get tested, weaker structures are exposed and price discovery becomes harder to postpone. That adjustment is uncomfortable. But discomfort isn’t the same thing as systemic collapse.
A market built in easy conditions
Private credit didn’t grow by accident. Its modern expansion followed the Global Financial Crisis, when banks pulled back from middle‑market lending under tighter capital and regulatory constraints. Private lenders filled the gap, and institutional investors leaned in, attracted by yield, diversification and the illiquidity premium.
Over time, that changed the shape of corporate finance. Today, private credit sits at around $2 trillion globally. But size alone isn’t the point. What matters is when much of that growth happened. The last decade was defined by low rates, abundant liquidity and benign defaults. Those conditions shaped leverage levels, covenant packages, refinancing assumptions and investor expectations. As those tailwinds fade, the resilience of capital structures is being tested more openly.
The sharp shift in interest rates since 2022 has been the biggest shock to the system. Most private credit loans are floating rate, so higher base rates feed through quickly into borrowers’ interest costs. Where hedging is limited and cash‑flow buffers are thin, the pressure shows up fast.
This is where the debate often gets confused. Yes, higher rates lift lender yields. But they also raise the bar for borrower resilience – especially for smaller companies with limited flexibility. Unsurprisingly, stress has appeared first at the lower end of the market, where margins for error are narrow and options are fewer.
Defaults are rising as refinancings approach
One reason private credit now feels ‘in turmoil’ is that defaults are becoming harder to brush aside. Default rates in public markets have been creeping up for a couple of years, and that pressure is increasingly filtering through to private credit. Some estimates suggest defaults among US private credit borrowers reached record levels in 2025, puncturing the long‑held idea that the asset class somehow sits outside the credit cycle. The precise numbers vary depending on the source, but the direction of travel is clear: defaults in private credit have risen.
At the same time, headlines only tell part of the story. Outcomes matter. Despite elevated defaults, realised losses for senior, first‑lien lenders have generally been contained. The message isn’t that stress is absent. It’s that results are sharply diverging depending on structure, seniority and underwriting discipline.
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Much of the commentary has focused on the maturity bulge coming between 2026 and 2028. The concern is straightforward: refinancing at yesterday’s leverage and pricing won’t always be possible, particularly where earnings haven’t grown as hoped.
But credit markets rarely adjust through a single cliff‑edge moment. More often, they grind. Amend‑and‑extend deals, covenant resets, partial deleveraging and sponsor support where it makes sense – and restructurings where it doesn’t. In private credit, ‘default’ is often a negotiated outcome, not a sudden failure.
Valuations and sector risk
Valuations have become another flashpoint. Private credit has long been sold as a stable asset class. That stability looks less comforting when markets turn, prompting investors to start asking whether valuations reflect reality.
Recent reports of banks marking down certain private credit loan collateral – particularly software‑linked exposures – have sharpened that debate. But the markdown itself isn’t the story. The mechanism is.
When banks reassess collateral values and tighten lending against them, leverage at private credit funds can come under pressure. That, in turn, affects the returns those funds can offer investors. In more extreme cases, it can also trigger cash sweeps or require additional equity injections to stabilise financing structures.
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Software has become a focal point because it sits where leverage meets uncertainty. Concerns around AI‑driven disruption have raised questions about revenue durability, pricing power and ultimately debt service capacity. Given how prominent software has been in private credit origination over recent years, concentration risk was always going to attract attention.
This doesn’t imply a sector‑wide collapse. But it does explain why software has become the market’s stress test for underwriting assumptions and valuation confidence. And it’s worth remembering that software isn’t one homogeneous thing. Resilience varies widely depending on integration depth, regulatory complexity and access to proprietary data. Additionally, AI is going to act as a disruptor for most industries, not just software.
Liquidity structures: the real warning light
If one theme deserves sustained attention, it’s liquidity structure. Elevated redemption requests across large private credit vehicles, including non‑traded BDCs and semi‑liquid funds, have exposed a basic tension: illiquid assets wrapped in products that promise periodic liquidity.
These vehicles are behaving as designed, with redemption caps and gating mechanisms. But even when solvency isn’t in question, confidence matters. The recent episode is a reminder that private credit cannot behave like a liquid asset class, especially under stress. Regulators are paying closer attention and it’s not hard to see why.
Despite the headlines, capital hasn’t disappeared. What has changed is how easily it’s raised and how forgiving it is of problems. Fundraising is taking longer, fewer funds are closing and investors are becoming more selective. In tougher conditions, underwriting discipline stops being a talking point and starts showing up in results.
That selectivity will almost certainly increase dispersion across managers and strategies – which is exactly what you’d expect as a credit cycle matures.
What investors should watch
The real question isn’t whether private credit is ‘broken’. It’s where stress is most likely to surface – and whether investors are being paid for it.
A few things stand out:
- Liquidity terms versus reality: redemption pressure has shown how quickly structure becomes part of the risk story.
- Valuation confidence: bank‑driven collateral markdowns are a reminder that private markets don’t exist in a vacuum.
- Sector concentration: software, in particular, is forcing tougher questions about durability and underwriting.
- Refinancing readiness: outcomes will vary widely based on leverage, cash flow and sponsor behaviour.
What we’re seeing feels less like an asset class breaking and more like one growing up under less forgiving conditions. That process brings discomfort – more restructurings, more dispersion and a more complicated investor experience, particularly in semi‑liquid products.
For investors, the challenge will be identifying which managers are genuinely equipped to operate when easy liquidity is no longer doing the heavy lifting.
Written in a personal capacity. The views expressed are solely those of the independent author and not representative of any organisation views.