CNBC, the finance world's ultimate cheerleader, recently put out an article declaring private credit's 'zero-loss fantasy' was coming to an end. When even your biggest fan sounds concerned something is up. Now, there have been a lot of negative headlines around private credit for the past six months--mainly tied to business development companies ("BDCs"). What started out as a botched attempt by one lender, Blue Owl (albeit one of the industry's biggest players), to give its investors liquidity has morphed into fundamental concerns about the asset class itself following a few high-profile defaults. And liquidity.
Many of private credit's biggest investment vehicles are private, semi-liquid BDCs marketed to retail clients, who want (and need) liquidity. Private credit managers make 5-year loans to levered private equity-backed companies that don't trade. These loans often offer a 3-4% premium to public market fixed income (the 'liquidity premium'). Historically, they were sold to institutions, such as pension funds and endowments that have long investment horizons. But private credited needed to grow, so they targeted wealthy individuals.
The innovation was evergreen funds that offered quarterly liquidity. Yay! Illiquid assets in a liquid-y investment vehicle. Retail investors could have their cake and eat it too! There was a catch of course (which most people didn't seem to pay much attention to). Liquidity? Sure; but...up to only 5% of fund's net asset value ("NAV") in any given quarter. In normal circumstances, any individual investor could get all their money out at the end of the quarter; but what if many investors wanted to get out at the same time? Well, then the gates would come down to avoid a run on the bank scenario. In that case, it could, in theory, take you 20 quarters or 5 years to get all your money out. But gating often that just creates more panic and brings about a self-fulling prophecy as redemption pressure increases.
In Q4 2025 Blue Owl Technology Income Corp. ("OTIC") and Blue Owl Credit Income Corp. ("OCIC) saw redemption requests of 15.4% and 5.2% of NAV. In Q1 2026, Blackstone Private Credit Fund ("BCRED"), the industry's $83 billion behemoth, received redemption requests totaling 7.9% of NAV; likewise, Oaktree Strategic Credit Fund ("OCREDIT") received 8.5% in redemption requests in Q1. To their credit, these funds have managed to, or plan to, honor 100% of repurchase requests for the quarter by utilizing credit facilities, new capital, maturing loans, and, in the case of Blackstone, employee commitments. But others have not, as these measures naturally impact future operations. Apollo Debt Solutions ("ADS"), Ares Strategic Income Fund ("ASIF"), and HPS/ BlackRock Corporate Lending Fund ("HLEND") have all received redemptions well in excess of 5% of NAV and plan to gate investors. Collectively, these seven funds manage more than $200 billion of gross assets. And there are many more cases as withdrawals have spiked across the asset class in recent months, as shown below (click to enlarge).
Until recently, all these challenges hadn't really translated into negative returns for investors in the above funds. They are private, non-traded BDCs that report monthly. They don't really have to mark-to-market. Instead, they mostly carry loans at par till there's a default, which can be a subjective measure (extend-and-pretend anyone?). But in February, many of the biggest non-traded BDCs recorded their first monthly loss in almost four years, suggesting they are beginning to mark down questionable loans.
ASIF, ADS, BCRED, OCIC, OTIC, HLEND, and OCREDIT were all negative in February, ranging in losses from -7bps to -219 bps, as shown below (click to enlarge). Funds with more software exposure tended to have worse performances. The urgent worry among investors, as noted by Goldman Sachs, is that "money managers have loaned too much to software and technology companies vulnerable to disruption from AI."
This may just be the beginning for managers. Sell-side analysts, including UBS' Matthew Mish, forecasts defaults could reach up to 15% in an extreme scenario. What does that mean for fund investors? To do the math, we need two additional pieces of information: (i) the recovery rate on defaults and (ii) leverage. Defaults (failure to make timely payments on loans) doesn't mean a total loss for the lender. When a borrower defaults, lenders typically can recover a portion of the principal through bankruptcy restructuring or asset sales. Historically, for senior secured loans (which are the relatively 'safe' type of loans these funds predominantly provide), the recovery rate has been 70-80%. Let's assume 70% for our example. Second, most of these funds are levered at least 1:1; i.e., for every $100 of their investors' money they lend out, they borrow another $100 from banks to increase the total loan amount. Leverage can increase returns but also amplify losses.
If credit defaults do rise to 15%, with a 70% recovery rate, you'd expect losses around 5% for an unlevered fund. However, since these funds are all 1-1.25x levered (paying 8% or more in interest for borrowed funds) the losses could be 13-17%, based on the amount of leverage and the cost of debt. Even assuming that defaults don't happen all at once but over 2-3 years, it is still shocking for an asset class that is expected to have low single-digit defaults even under challenging market conditions. Which explains why retail investors are so eager to get out. And fund managers only incentivized them to do so. Managers didn't want to write down the value of their portfolios (not a good look) and were willing to cash out investors at par even though there is a very good chance these many of these loans could be worth less. The rationale decision of course is to take the managers up on their offer and get out as quickly as you can. And investors have. Too many have! Now you have gates and the start of valuation adjustments! Let's how see far write downs go and how painful it becomes for investors.
