The financial press and Substack have turned sharply negative on private credit.

Some are even claiming it could trigger a market crisis.

But the reality is a lot more measured.

Private credit is going through its first real stress cycle, not a systemic collapse.

Why Private Credit is Struggling:

Read the full breakdown below.

Other articles worth your time this week.

Recovery Turbulence (S&P Global) - Loan recoveries in bankruptcy have declined as protections have weakened.

Opportunistic Credit (Davidson Kempner) - Strain in private equity and direct lending has increased the opportunity set for special sits credit.

Private credit AUM has tripled over the last decade.

Amid the breakneck growth, lending standards have inevitably loosened.

Addbacks have gotten larger, protections weaker, and spreads tighter as lenders compete to win deals.

Now the industry is grappling with its first stress cycle.

I) Rising Defaults

The most direct measure of credit stress is defaults, and the trend is not encouraging.

The growth of private credit was built on deals underwritten during ultra low rates.

But today’s higher-for-longer rate environment is putting major pressure on highly levered borrowers.

Morningstar’s data shows defaults (missed payments, distressed exchanges, and bankruptcies) have quadrupled in two years.

While 4% is not crisis level, the trend is clear: stress is increasing.

II) AI Risk

AI disruption has dominated market narratives.

And no sector is more exposed to this threat than software, which is one of private credit's largest industry exposures.

In public BDC filings, software ranks as the third largest sector exposure. According to PitchBook, nearly 30% of these software loans are due in '27 and '28.

The risk to software is real, but the recent real estate downturn is an interesting corollary.

While commercial real estate values cratered in the wake of covid, banks and other lenders didn’t collapse. Losses were absorbed slowly through restructurings and recapitalizations.

Software is not the first industry to face massive disruption, and it’s unlikely to bring down an entire asset class.

III) Redemptions & Gating

The illiquidity premium exists for a reason: private market investments can’t be monetized quickly.

The recent headwinds in private credit have increased redemption requests at some of the largest fund managers, including BlackRock, Morgan Stanley, and Cliffwater.

This has triggered gating, or limits on redemptions, which has fueled panic and even more redemptions.

But gating actually protects investors and funds. It prevents forced fire sales and breaks the loop of panic redemptions.

It’s also important to remember that liquidity is different than value.

You can’t monetize billions in private loans overnight. But that doesn’t mean the loans are worthless.

The Bear Case is Overstated

Private credit is facing stress. But stress and collapse are not the same thing.

Defaults are rising but remain manageable. Software losses don’t sink an entire asset class. Redemption pressure is largely contained to non-traded BDCs, where gating prevents a bigger issue.

Private credit built up risk during years of explosive growth. It’s now working through it, like a textbook credit cycle.

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