Private credit has moved from niche to mainstream as companies and investors chased bespoke lending arrangements and elevated returns. That growth now faces a stress test: a surge in redemption demands at business development companies - the publicly traded vehicles that funnel investor capital into private loans - alongside signs of shrinking returns and higher borrowing costs.
Industry participants have been reporting unusual levels of investor withdrawals since last year, and the pace picked up in recent months. Blue Owl Capital this week disclosed it had received a historic volume of redemption requests and has exercised its contractual ability to limit withdrawals. Other major managers - including Ares Management, Apollo Global, Blackstone, KKR and private credit arms of banks such as Morgan Stanley, J.P. Morgan and Goldman Sachs - have also implemented caps on redemptions.
Most of those firms have characterised the phenomenon as a period of recalibration rather than an outright crisis. But the behavior has highlighted vulnerabilities: BDCs are paying more on their bank borrowings even as the double-digit returns that private lending once delivered are moderating. Publicly listed BDC shares have tumbled this year, trading at about a 20 percent discount to net asset value in some cases.
"Youre going to have credit cycles, youre going to have losses, youre going to have some markdowns. I mean, theyre not lending at 5% for a reason, right?" said John Giordano, managing director at Seaport Global Holdings, reflecting a view that losses and markdowns are part of normal credit cycles. Giordano does not believe the current stress is systemic, citing generally low leverage at BDCs and the seniority or equity involvement these vehicles often have in borrower companies. He also noted the banking sector remains well capitalised.
Private lending expanded in the years after the 2008 financial crisis as an alternative to traditional bank finance. Private equity firms frequently used long-term loans with simpler covenants to buy medium-sized businesses, and investors seeking higher yields moved into the market. Exact exposures, valuations and loss figures remain opaque because many deals are private, but publicly listed BDCs and other funds collectively hold more than half a trillion dollars in private assets, while broader industry estimates place alternative asset management in private credit at about $3.5 trillion.
Market sentiment toward closely linked sectors has shifted. U.S. software services stocks - a sector noted for its connections to private credit through financing arrangements - have fallen by roughly a fifth this year. Some asset managers have trimmed holdings as a result; for example, one London-based portfolio manager said his firm had reduced exposure to some asset managers and sold shares in a Swiss private equity firm following comments that AI-driven disruption could materially increase defaults in private credit portfolios.
Concerns about artificial intelligence and its potential to disrupt software-reliant businesses have become a recurring theme. Steffen Meister, the chair of the Swiss private equity firm referenced by market participants, suggested last month that default rates in private credit could double over coming years because of AI-driven economic disruption. That view feeds into a broader debate about how technological change might accelerate deterioration in certain loan pools.
Rory Dowie, an equity portfolio manager in London, warned of a symbiotic risk between public and private markets. He said that, if market participants anticipate stress in private credit, that expectation alone could trigger larger problems across interconnected markets. "Its hard to say whats going to crack first... and it becomes a self-fulfilling prophecy whereby you could get a bigger, more systemic issue occurring," Dowie said.
Analysts at Oxford Economics have already suggested the market may be in the early stages of a rolling crisis in private credit. Their estimates indicate that between 25 percent and 35 percent of private credit portfolios could be vulnerable to AI disruption risks, according to a note discussed by market observers.
Alberto Gallo, chief investment officer at Andromeda Capital Management, used a metaphor to describe latent risks in private credit portfolios. He said investors may be holding portfolios where a subset of companies are effectively "dead" but not yet recognised as such until valuations are tested. "We are still at the beginning of discovering the issues and it might not happen tomorrow, it might happen in three months or six months," he said. "You have this box where you have 100 companies, but you know that 10 of them are dead cats. Until you open the box, they are still alive. Thats basically what they have created."
A central worry for some economists and strategists is not bank exposure to private credit, which they describe as modest, but the concentration of private credit holdings within life and annuity insurers. Over the past decade those holdings have more than doubled in aggregate. Private credit is estimated to make up about 35 percent of total U.S. insurer investments and nearly a quarter of UK insurer assets, according to the analysis referenced in market commentary.
Particularly noteworthy is the scale of assets held by insurers that have affiliations with private equity firms. Those affiliated insurers are estimated to hold roughly $1 trillion in assets acquired through their relationships with private equity. If private credit losses were to erode insurer solvency, the pain would likely show up differently than the bank-run dynamics of 2008, according to one market note: rather than a sudden liquidity event, the damage would manifest as a gradual deterioration of retirement security for pension funds and retail savers who have purchased life annuities.
Corominas, director of global macro strategy at Oxford Economics, warned that the concentration of private credit within insurers means any material losses would disproportionately affect U.S. pension funds and retail annuity buyers. He wrote that resulting contagion would be "a slow, grinding erosion of retirement security - harder to detect in real time, and significantly more difficult to reverse."
Gallo echoed the idea that private credit represents a different kind of systemic risk than that which arose in the 2008 subprime crisis. He highlighted that leverage in private credit can be amplified through insurance channels and that insurers typically do not mark holdings to market in the same way banks do. "This is a different animal with different contagion channels," he said. "Regulators always fight the last crisis, and here you have the opposite, the mirror image of the last crisis."
Market participants remain divided. Some see the recent strains and redemption activity as part of a necessary market adjustment after rapid growth in the sector. Others warn the opacity of holdings, the scale of insurer exposure, rising funding costs for BDCs, and possible AI-related defaults could combine to generate more persistent problems.
Amid this debate, a related question has surfaced in retail channels: whether investors should be buying shares in major investment banks or their private credit affiliates. An AI-driven stock selection tool referenced in market commentary posed "Should you be buying GS right now?" and evaluates Goldman Sachs alongside other companies by scanning multiple financial metrics. That promotional note highlights the degree of market attention focused on large banks and their private credit operations during a period of reassessment.
What happens next is uncertain, and market observers caution that the industry may be in early stages of discovering valuation weaknesses that will only become fully visible over time. The concentration of private credit in insurers, the opaque nature of private portfolios and emerging technological disruption risks mean the sector will remain a focal point for investors, regulators and retirement savers alike.