Private credit shows stress, $2 trillion

Private credit is basically a giant nonbank lending machine. Funds raise money from institutions and wealthy individuals, then lend directly to companies that either can’t or don’t want to borrow from banks. It grew fast after 2008, and by 2026 it had become a core funding source for middle-market companies and leveraged buyouts. But this month the story changed. The Financial Stability Board put out its first dedicated report on the sector on May 6, warning that rising borrower stress, opaque valuations, and deeper ties to banks could turn a niche credit problem into a broader one. ### What actually broke? The immediate shift is that private credit stopped looking insulated. The FSB said broad indicators point to rising defaults, and it flagged more borrowers using payment-in-kind structures — basically rolling interest into the loan instead of paying cash, which is often a sign that cash flow is getting tight. That matters because private credit sold itself for years as steady, low-volatility income. (fsb.org) Once borrowers start needing accounting workarounds to stay current, that story gets shakier. ### Why are people focused on withdrawals? Because withdrawals are where an illiquid asset class gets stress-tested in public. In March, Blackstone said investors had asked to redeem 7.9% of BCRED — about $3.8 billion — and it moved to meet those requests in full. Blue Owl went further earlier in the year and ended regular quarterly liquidity in one semi-liquid private credit fund after selling $1.4 billion of loan assets across three funds. (fsb.org) Ares and Apollo also moved to curb withdrawals in some vehicles. That does not mean every fund is broken. But it does mean managers are having to manage liquidity much more aggressively than the sales pitch implied. ### Why do banks matter here? Because private credit was supposed to be outside the banking system, but turns out the walls are porous. Banks lend to the funds themselves, provide credit lines, and finance what the industry calls back-leverage. That is leverage sitting on top of already leveraged corporate loans. JPMorgan’s move in March captured the problem neatly — it marked down software-heavy loan collateral tied to private credit clients and reduced how much those firms could borrow against it. (cnbc.com) When banks get more cautious, private lenders lose flexibility fast. ### Why is software showing up so much? A lot of private credit money chased software companies during the low-rate years. Those borrowers often had recurring revenue and looked safe enough to support aggressive lending. But AI disruption and higher rates changed the math. JPMorgan’s markdowns were concentrated mostly in software loans, and market watchers now see that sector as one of the clearest pockets of weakness. (cnbc.com) In other words, the asset class did not just grow — it crowded into the same kinds of borrowers. ### Is this a default wave or just accounting smoke? Probably both. Morgan Stanley warned that direct-lending defaults could rise to 8%, versus a historical 2% to 2.5% range. But private credit does not always show stress through clean, obvious defaults. It often shows up as maturity extensions, covenant waivers, liability-management exercises, and PIK interest — what people call shadow defaults. S&P Global’s With Intelligence work said the “true” default rate approached 5% through the first nine months of 2025 once those softer restructurings were counted. (cnbc.com) ### Why is Europe part of the story? Because capital is already shifting. Europe had a fundraising surge in 2025, hitting €56 billion through the first nine months, while North America slowed. Some of that looks like diversification. Some of it looks like investors hunting for cleaner entry points as U.S. portfolios age and strain starts to surface. Europe is not magically safer — but it has become the place allocators are looking as the U.S. direct-lending model loses its aura of easy money. (cnbc.com) ### So what’s the real bottom line? Private credit is not blowing up all at once. But its first real downturn test has started. The catch is that this market was built on the promise of stable income from assets that do not trade much and do not reprice in public every day. That calm always looked better on paper than it would under stress. Now the stress is here. (fsb.org) (spglobal.com)