Boaz Weinstein offered Blue Owl Capital Corp II shareholders an out at 20-35% below NAV. Less than 1% bit.

Saba Capital and Cox Capital pitched the tender in February when Blue Owl’s gates clanged shut. The bet was that retail investors trapped in a winding-down vehicle would crystallize losses for any exit. They didn’t. “We would have had more success if we offered for their larger BDC, but we had the offer ready before they offered to pay back investors and we still wanted to go through with it,” Weinstein said.

The flop landed during a strong week for Blue Owl. Q1 fee-related earnings of $393.6 million topped consensus by $9 million. AUM hit $315 billion. Shares jumped 14% Thursday. Co-CEO Marc Lipschultz spent the call insisting sentiment is grimmer than reality. PIMCO had bought every dollar of OBDC’s $400 million bond a few weeks back. Asset sales to CalPERS, OMERS, and BCI cleared at 99.7% of par.

Direct lending itself stumbled. Net loss of 1.1% in Q1 against 5% over the trailing 12 months. Repayments outpaced originations by $500 million. Three-quarters of new equity capital came from outside direct lending entirely.

Ares, Blackstone, and Blue Owl rolled out proprietary AI scorecards for their software books. The findings were uniform and reassuring. Each firm graded its own homework.

Vista Equity capped redemptions at its non-traded BDC after investors sought to pull 10% of assets. The gating list now includes Apollo, BlackRock, Blue Owl, and Vista.

PIMCO CIO Daniel Ivascyn delivered the warning that should worry every retail investor: returns for some private credit vehicles will fall to 4-5%. Direct lending spreads over syndicated loans have collapsed from 230 bps in 2022 to roughly 110 today. Public bond funds drew $260 billion in Q1.

Thoma Bravo’s Jeff Levin called current credit risk-return the best of his 25-year career. The same week, the firm walked away from Medallia and a $5.1 billion equity loss.

Default rate ticked up to 5.7%.

Key Market Themes

1. Saba Tender Offer Flops as Blue Owl Investors Decline Discounted Exit

Saba Capital and Cox Capital walked away with less than 1% of OBDC II shares before the tender expired last week. The February offer carried a 20-35% discount to estimated NAV. Blue Owl had urged shareholders not to sell.

“To Blue Owl’s credit, they went around to calm nerves,” Weinstein said. “We would have had more success if we offered for their larger BDC.”

A few things conspired against the pitch. Federal tax refunds averaged $3,500 this year, up roughly $350 from last spring, easing near-term cash pressure for some retail investors. PIMCO bought $400 million of bonds from sister fund OBDC. Blue Owl sold assets to CalPERS, OMERS, and BCI at 99.7% of par. Q1 earnings beat expectations.

Saba is now eyeing bids for Cliffwater LLC’s interval fund and Blue Owl Credit Income Corp. The firm has added a $40 million position in publicly traded FS KKR Capital Corp.

Reading the result

A 1% take-up at a 35% discount tells you OBDC II shareholders looked at Saba’s bid and decided to wait. Some are betting Blue Owl’s wind-down at near-par delivers better outcomes than crystallizing losses today. Others got tax refunds and didn’t need cash this quarter.

Weinstein’s miscalculation was timing. Saba launched assuming retail investors would pay any price for liquidity. Blue Owl preempted by selling assets at near-par and committing to return 30% of capital fast. A steep discount looked compelling against a closed exit, less so against a slow recovery.

OBDC II is still winding down. AUM is still shrinking. Saba’s next move toward OCIC and Cliffwater will reveal whether other fund investors hold the line as well.

2. Blue Owl Beats Earnings as Lipschultz Calls Sentiment “Grimmer Than Reality”

Blue Owl shares climbed as much as 14% Thursday after Q1 fee-related earnings of $393.6 million beat the $384 million consensus. AUM reached $315 billion. Co-CEO Marc Lipschultz pushed back hard on the call.

“We can actually say with a lot of comfort that in the foreseeable future, portfolios are likely to remain very healthy,” Lipschultz said. With average loan maturities of three to four years, current pressure is an equity problem rather than a debt problem, he argued.

Blue Owl raised $11 billion in Q1 and $57 billion over the past year. Nearly three-quarters of equity capital raised over the trailing 12 months came from outside direct lending. The digital infrastructure strategy, accounting for roughly 6% of assets, has “significant runway ahead amid unprecedented demand for data center capacity.”

Direct lending itself looked weak. Net loss of 1.1% in Q1 against 5% over the trailing 12 months. Repayments exceeded originations by $500 million. Blue Owl said underlying portfolio company growth remained healthy with no notable increase in non-accruals, amendment requests, or revolver draws.

Lipschultz pointed to a 10x return on the firm’s SpaceX investment, with about half sold at a $1.25 trillion valuation. CFO Alan Kirshenbaum said institutions that paused on credit “might be very well coming back.”

What the beat actually shows

Beating consensus by $9 million doesn’t resolve software exposure or NAV credibility. The fee machine still works, which is the more important signal for the equity story. Fee-related earnings up 14% in a quarter where Blue Owl gated two funds and faced $5.6 billion in redemption requests demonstrates the operating model can absorb pressure.

Capital sources tell you where Blue Owl is headed. Three-quarters of equity capital from outside direct lending suggests the firm is rebuilding around real assets, GP staking, and digital infrastructure. The BDC franchise that built the company becomes a legacy business while growth comes from elsewhere.

Negative net deployment of $500 million is the leading indicator. A direct lending business shrinking organically before redemption pressure either reflects disciplined underwriting or an inability to find deals worth doing at compressed spreads. Probably both.

3. Ares, Blackstone, Blue Owl Roll Out AI Scorecards With Reassuring Findings

Three of the largest names in private credit released proprietary AI risk assessments this week. Conclusions ran uniform.

Blackstone’s BCRED used an internal scorecard and found less than 5% of investments facing AI headwinds. Software firms representing 16% of BCRED’s assets could see low impact or tailwinds from AI. The portfolio’s interest coverage ratio sits at about 2x after incorporating the software stock selloff.

Ares hired an external consultant who reported about $1 billion of investments in its largest publicly traded fund face at least “medium” AI risk. About 85% of software-oriented investments rated low risk. Just 1% rated high. Ares Capital Corp CEO Kort Schnabel said many software businesses can benefit from AI: “Not all software companies carry the same level of AI disruption.”

Blue Owl re-underwrote existing loans focused on AI vulnerabilities and found “minimal” risk. “If you took just one step back, you’d probably logically conclude that there’s a set of companies that will actually be beneficiaries of AI,” Lipschultz said.

Ares marked down three Clearlake Capital Group-owned software companies to the low-to-mid 70s last quarter. Those positions drove most of $357 million in net unrealized losses. Software and services represent about 22% of Ares Capital’s total holdings.

Reading the scorecards

Three managers running their own assessments and reaching nearly identical conclusions is either rigorous analysis or convenient consensus. Each firm picked the methodology, ran the test, and reported the results. Investors cannot verify the findings.

Fitch’s Meghan Neenan flagged the question that matters: “It will be interesting to see differences in conservatism on this metric across the BDC space.” Whether smaller managers with concentrated software exposure publish similar reviews or quietly avoid the topic will tell you more than the headline numbers from the big three.

The Ares markdowns provide context the scorecards miss. Even rating 85% of software exposure as low risk, the 1% rated high apparently includes positions worth several hundred million in writedowns. Scorecards measure relative vulnerability across portfolios. They don’t predict which specific names crater.

4. PIMCO’s Ivascyn Sees Private Credit Returns Falling to 4-5%

PIMCO CIO Daniel Ivascyn warned that investors pouring cash into private credit will likely regret the decision. Double-digit returns could fall to 4-5% for some private credit vehicles lending to medium-sized companies, closer to leveraged loan and high-yield fund returns.

“There will likely be ongoing disappointment in these returns,” Ivascyn said.

Direct lending spreads over syndicated loan spreads have compressed dramatically. The premium peaked above 230 bps in 2022. It now sits around 110 bps. Public bond funds drew record inflows of $260 billion last quarter. The Bloomberg US investment-grade index returned 7.3% last year. High-quality global bonds yield 4.6%. High-yield debt sits near 7%.

A National Bureau of Economic Research paper republished last month argued private debt funds provide returns “just appropriate for the risks they face but not more” once fees are considered. R.W. Roge & Co CIO Steven Roge was blunter: “While private credit screens as a diversifier in modeled portfolios, much of the perceived risk-adjusted return is a facade. Bottom line: unless private credit spreads completely blow out, it doesn’t belong in a portfolio.”

UBS CFO Todd Tuckner said wealthy clients have lost some interest. “Interest in private credit among our wealthy clients has been more measured in the current environment,” he said, “clearly reflecting macro uncertainty and a preference for liquidity and capital preservation.”

The compression problem

A 4-5% projection isn’t a stress scenario. It’s PIMCO’s base case for managers lending to mid-market companies at compressed spreads. Yields fell as competition intensified. Leverage costs rose as banks reconsidered fund finance terms. Defaults are climbing. The math hits returns from three angles simultaneously.

That 110 bps spread over syndicated loans tells the whole story. Lock up capital for seven to ten years to earn what a daily-liquidity loan ETF returns plus 110 bps. After fees and AI uncertainty, the math collapses. Public bond funds drawing $260 billion last quarter shows where retail capital is rotating.

UBS clients pulling back is the leading edge of institutional sentiment. Wealth platforms drove much of private credit’s growth over the past five years. If that channel cools while public credit yields 4.6-7%, the fundraising machine slows.

5. Vista Caps Withdrawals as Latest Fund Hits Redemption Limit

Vista Equity Partners capped withdrawals from its non-traded BDC after investors sought to pull roughly 10% of assets. Vista Credit Strategic Lending Corp said redeeming investors will receive just under half of the shares they tendered, reflecting the fund’s 5% withdrawal cap.

The cap “provides an orderly liquidity mechanism that honors the interests of redeeming investors while preserving the long-term value of the portfolio,” the BDC said in its filing. The portfolio “remains fundamentally strong” with all investments performing at or above underwriting expectations and zero non-accruals.

Vista joins Apollo, BlackRock, and Blue Owl on the gating list. The 10% redemption rate sits below the 22% Blue Owl Credit Income Corp absorbed or the 41% at OBDC II, but above the 5% threshold funds can typically meet without restrictions.

The Vista filing follows the playbook. Stress portfolio strength. Defend the cap as protective. Pay redeeming investors partial fulfillment. Across the industry, this is becoming the standard response to retail flight.

The gating cascade

Each major manager that gates makes the next gating easier. The reputational stigma of being first vanished after BlackRock invoked HLEND’s 5% limit on $26 billion of assets. Gating is now routine enforcement of contractual terms most retail investors never read.

Vista’s 10% redemption rate carries weight because Vista isn’t known for software concentration the way Blue Owl is. Investors pulling from a fund without obvious AI exposure points to broader sentiment problems rather than security selection. That’s the contagion private credit feared.

A fund returning 5% per quarter against 10% requests shrinks AUM by 20% annually before any new commitments or natural amortization. Sustained at that pace, managers face hard choices about raising the cap, selling assets at discount, or waiting for sentiment to reverse.

6. Thoma Bravo Hunts Software Loan Bargains After Walking Away From Medallia

Thoma Bravo partner and head of credit Jeff Levin said the firm is watching for “motivated selling” among BDCs. “We’ve been going through pretty much everyone’s book, looking at every investible deal, notably within software, where we have the most edge,” Levin said at the Milken Institute Global Conference. “I’m really excited about it.”

The risk-return in credit, Levin said, is among “the best” of his 25 years. Specific opportunities involve loans marked at 99 cents available at 94 or 95 cents. Situations like that, he acknowledged, are “few and far between.”

Thoma Bravo just walked away from Medallia, accepting a $5.1 billion equity loss after refusing to inject more capital. Founder Orlando Bravo declined to kick the can. “We could do it, kick the can down the road another five years, pretend like it never happened. But we have a big fiduciary duty to our investors.”

Sycamore Tree’s Trey Parker called for industry catharsis. Strategic Value Partners founder Victor Khosla expects elevated defaults to spread. “Software will get troubled. It’ll taint everything,” Khosla said.

Audax Private Debt and Pantheon closed a $1 billion private credit continuation vehicle to acquire and manage assets from a 2019 direct lending fund that raised $1.65 billion.

The opportunistic pivot

Thoma Bravo eating $5.1 billion on Medallia while pitching itself as a buyer of stressed software loans isn’t contradiction. The firm is trying to recover lost ground through credit deployment. 2021-vintage equity is dead. 2026-vintage debt at 94 cents could deliver double-digit returns.

Levin describing current credit risk-return as the best of 25 years sets expectations. If a dedicated software credit team views current opportunities as career-best, that’s either expert positioning or marketing for a new fund. The underlying message lands either way: distressed software paper is the trade.

Audax-Pantheon hits the same theme from the secondaries angle. Existing LPs cash out at marked-down NAVs. New LPs take down the portfolio at those discounts and lever up. Expect more of these as 2017-2020 vintage funds reach maturity in stressed conditions.

7. Q1 Default Rate Hits 5.7% as Banks Tighten Standards

The private credit default rate edged up to 5.7% in Q1 from 5.6% in Q4 2025, according to Fitch Ratings. Korean regulators expanded surveys of overseas private credit exposure. Euro-zone banks tightened corporate credit standards by the most in more than two years.

Oaktree Co-CEO Armen Panossian called market pricing a “head-scratcher” given fundamental risks. “When you overlay the Iran war, when you overlay some of the software pain that we would expect to see over the course of the next couple of years, it’s a little bit of a head scratcher as to why the markets are as robust as they are.”

Panossian said Oaktree is reserving as much dry powder as possible. He was surprised banks hadn’t tightened lending to private credit vehicles more aggressively. “There certainly has been some tightening but not as much as I would have thought.”

JPMorgan’s Jamie Dimon warned that not all 1,000+ private credit managers will navigate the cycle well. “Some firms may be brilliant, but, I guarantee you not all 1,000 of them are.” Citigroup’s Mickey Bhatia warned about private credit “tourists” forced to sell into a downturn. “If the cycle turns and these tourists, rather than working out loans, just start selling them at below the economic value, what happens to the rest of the market?”

Korea’s Financial Supervisory Service is expanding surveys to non-bank institutions and mutual finance firms. Korean insurers’ exposure stands at around 28.5 trillion won, or about 2% of total assets.

Why 5.7% matters

A 10 bps quarterly rise in defaults sounds modest. Sustained over a year, that’s 40 bps of acceleration. Across the 2027-2028 software maturity wall, defaults could compound toward Morgan Stanley’s 8% forecast or UBS’s 9-10% projection without any AI shock arriving. The trajectory matters more than the level.

Panossian’s head-scratcher framing captures the disconnect between credit fundamentals and market pricing. BDC valuations have recovered to 86% of book from 80.5%. Bond markets reopened for BDC issuers. Equity markets shrugged off the Iran war. None of those moves reflect rising default rates or known software refinancing problems.

Bhatia’s “tourist” framing identifies the genuine systemic risk. Established managers will work out loans through restructuring. Newer managers with limited workout experience may dump troubled credits at fire-sale prices, driving secondary market levels down and forcing portfolio-wide markdowns at funds holding similar paper. Dispersion becomes contagion through that channel.

Deals of Note

• GoodLife Group - Ares Management, Antares Capital, and JPMorgan provided around $800M for Apollo’s investment in Canadian fitness operator, including $675M first-lien term loan and $125M revolver

• Audax Direct Lending Solutions Fund I CV - $1B continuation vehicle led by Pantheon, acquiring assets from Audax’s 2019 fund that raised $1.65B

• Helix Digital Infrastructure - KKR secured more than $10B for AI infrastructure platform partnering with hyperscalers

• Blackstone N1 - New West Coast division consolidating Blackstone’s AI portfolio including OpenAI and Anthropic, led by Jas Khaira

• Shinhan SC Lowy No.1 Private Debt Fund - SC Lowy and Shinhan Capital launched South Korea-focused mid-yield fund

The Reality Check

Saba walked away with less than 1% of OBDC II. Blue Owl beat earnings. Shares jumped 14%. The narrative looks like a private credit recovery.

The numbers underneath suggest something more mixed. Direct lending lost 1.1% in Q1. Net deployment ran negative $500 million. Three-quarters of new equity capital came from anywhere except direct lending. Investors who declined Saba’s tender are still trapped in a winding-down vehicle with shrinking AUM.

Ivascyn’s projection of 4-5% returns is the more important development this week. If realized, the asset class becomes a high-yield bond fund with seven-year lockups and worse liquidity. Investors who locked up capital for 10%+ returns will get something closer to what their daily-liquidity bond ETF delivered. The product stops making sense at those returns.

AI scorecards from Ares, Blackstone, and Blue Owl all reach reassuring conclusions because each manager wrote the test, took the test, and graded the test. Maybe the analysis is rigorous. Maybe it’s marketing. Investors won’t know until 2027-2028 maturity walls reveal which managers selected resilient credits and which mistook concentration for conviction.

Vista capping at 5% while facing 10% requests shows how quickly gating became routine. The reputational cost evaporated once major managers normalized the practice. What’s left is the slow erosion of AUM as funds shrink each quarter.

Thoma Bravo absorbing $5.1 billion in equity losses on Medallia while pitching distressed software credit as a career-best opportunity captures where private credit lands next. Equity in 2021-vintage software buyouts is gone. Whether the same paper at 94 cents recovers depends on the same AI questions that destroyed Medallia’s equity. Levin’s enthusiasm requires you to believe Thoma Bravo can underwrite better than Thoma Bravo did three years ago.

A 5.7% default rate doesn’t break the asset class. Compressed spreads and PIMCO telling clients returns will fall to 4-5% might. Manager dispersion arrives whether the cycle gets worse or just stays mediocre. Funds that survive will be the ones that adjusted product structure and return expectations before investors made those adjustments for them.

Read the Latest Issues of Private Debt News:

Two big private equity loans just defaulted.

Medallia can’t repay roughly $3 billion in loans from Blackstone, KKR, Apollo, and others. Thoma Bravo is walking away from the $5.1 billion it sank into the company in 2021, handing the keys to creditors. Lenders had Medallia at 80 cents in December. They marked it to 60 cents this month. The restructuring under discussion would slash Medallia’s debt to $1 billion to $1.4 billion against $200 million of EBITDA, with creditors taking 100% of equity.

Blackstone and KKR are simultaneously restructuring a $1.4 billion loan to Affordable Care, the dental services business owned by Harvest Partners. BCRED marked that loan to 69.8 cents. Together, Medallia and Affordable Care drove BCRED’s non-performing loans to a record 2.4% of its $80.5 billion portfolio.

Then PIMCO showed up. The firm bought every dollar of Blue Owl Capital Corp’s $400 million bond offering at a 6.5% yield, the first BDC bond sale in more than six weeks. Blue Owl shares jumped 17% afterward. Spreads tightened 25 bps. Goldman Sachs’s direct lending fund followed a day later with $750 million against a $500 million target, drawing nearly $3 billion of orders. BCRED priced $850 million Wednesday at 230 bps over Treasuries with $4.3 billion of demand.

Retail flows tell a different story. Non-listed BDCs took in $4.9 billion in Q1, down 59% from $12 billion a year earlier. Redemptions topped $15 billion, breaching 5% caps at most major funds.

Banks finally disclosed exposure. JPMorgan leads at $50 billion, then Wells Fargo at $36.2 billion, Citi at $22 billion, Morgan Stanley at $20.1 billion, and Bank of America at $20 billion. Eleven banks total around $185 billion. JPMorgan is also building its own private credit operation, deploying tens of billions through asset management.

Moody’s pointed at the 2028 maturity wall. UBS sees defaults doubling to 9-10% this year as the SaaSpocalypse unfolds. Diameter’s Jonathan Lewinsohn called it a “reckoning threatening” the industry, with manager dispersion that’s “never happened before.”

Some funds navigate this. Others don’t. Medallia just showed which side of the line Thoma Bravo’s $5.1 billion landed on.

Key Market Themes

1. Medallia Hands Keys to Creditors as $5.1 Billion Thoma Bravo Bet Implodes

Medallia can no longer repay about $3 billion of loans from firms including Blackstone, KKR, and Apollo. Lenders are negotiating to take control from Thoma Bravo, which will likely lose the $5.1 billion it invested in 2021. Blackstone and KKR valued their Medallia loans at 80 cents on the dollar in December before slashing them to 60 cents this month.

Medallia’s troubles started before AI. Interest expense jumped in 2022 when the Fed raised rates. Sales suffered from competition with Qualtrics, another PE-owned software company with debt problems of its own.

The credit crunch hit because Medallia’s loans contained provisions requiring Thoma Bravo to inject more equity if earnings missed targets. Thoma Bravo had until end of June to put in cash. Last week, it told Blackstone it’s handing over the keys.

Private credit funds hired Alvarez & Marsal to vet Medallia’s finances and aim to restructure outside bankruptcy court. They’re considering cutting loans to $1 billion to $1.4 billion, or five to seven times Medallia’s $200 million EBITDA, with creditors receiving 100% of equity.

What Medallia signals

Medallia is the test case private credit feared. Many firms concentrated 20% or more of their funds in software loans. UBS analysts said the SaaSpocalypse will likely double default rates to 9-10% this year.

The 80-to-60 cent move in three months shows how fast software valuations crater when sponsors stop supporting refinancings. Apollo’s John Zito reportedly told investors “I literally think all the marks are wrong” about private equity values on buyouts including Medallia.

Thoma Bravo founder Orlando Bravo conceded Medallia was a mistake and the firm paid too much. Medallia’s failure suggests 2021-vintage software buyouts at peak multiples won’t survive higher rates plus AI uncertainty plus the leverage these deals carried into the storm.

2. PIMCO Buys Entire $400M Blue Owl Bond, Reopens BDC Capital Markets

Blue Owl needed a win. Shares had collapsed nearly 50% from peak. Clients sought to pull unprecedented sums. Activists and short sellers were piling on. Then Morgan Stanley pitched a bond sale that would reaffirm Blue Owl’s access to capital markets and reinforce its investment-grade standing.

The catch: Blue Owl had to offer a premium. Blue Owl Capital Corp’s 2.5-year notes priced at 6.5%, or 270 bps over similar Treasuries. PIMCO emerged as the buyer of the entire $400 million offering after approaching Blue Owl directly about taking down the deal.

Blue Owl had partnered with PIMCO last year to finance a Meta data center project. Executives recognized the signal Pimco’s involvement would send and accepted the premium. Blue Owl shares have jumped 17% since the sale. Spreads on the bonds tightened by about 25 bps.

The deal was the first BDC bond sale in more than six weeks. A day later, Goldman Sachs’s direct lending fund raised $750 million, exceeding its $500 million target after drawing nearly $3 billion in orders. Blackstone’s BCRED followed Wednesday with $850 million, attracting $4.3 billion of demand at 230 bps over Treasuries.

Why PIMCO matters here

PIMCO buying every dollar of Blue Owl’s bond at 6.5% sends the strongest signal the institutional market has produced in months. Same firm whose president called loans for sale “pretty bad” two weeks ago just underwrote $400 million of Blue Owl debt. That’s not contradiction. It’s precision.

PIMCO buys investment-grade BDC bonds backed by diversified loan portfolios at attractive spreads. PIMCO walks away from individual bad loans being dumped at discounts. Managers got the message: investment-grade structures with verifiable cash flows clear the market. Stressed individual loans without clearing prices don’t.

The 270 bps premium Blue Owl paid versus similar Treasuries was cheap relative to what continued share price collapse would have cost. PIMCO taking the entire deal rather than syndicating suggests current pricing represents attractive entry rather than market-clearing level.

3. Banks Disclose $185 Billion in Private Credit Exposure as JPMorgan Plans Own Push

Major US banks disclosed approximately $185 billion in private credit exposure during recent earnings calls. JPMorgan leads at $50 billion, followed by Wells Fargo at $36.2 billion, Citi at $22 billion, Morgan Stanley at $20.1 billion, and Bank of America at $20 billion. KeyCorp disclosed $10.9 billion, US Bancorp $9.6 billion, PNC $7 billion, Citizens $4.1 billion, Truist $4 billion, and Fifth Third $1.4 billion.

JPMorgan’s $4.3 trillion asset management arm is committing to a strategy that will deploy tens of billions into loans sourced by the firm’s commercial bankers. The bank is talking with institutional investors to raise several billion dollars to start and has secured some commitments.

The push echoes Citigroup’s 2024 partnership with Apollo on $25 billion of deals over five years and Wells Fargo’s 2023 venture with Centerbridge on a $5 billion fund. JPMorgan’s twist: housing the strategy within JPMorgan Asset Management’s fixed-income business rather than alternatives, reflecting the bank’s view that public and private credit markets will converge.

Jeff Bracchitta, brought over from JPMorgan’s commercial and investment bank, has recruited about a dozen specialists for the team. The bank earmarked $50 billion of its $4.9 trillion balance sheet for direct lending and holds another $50 billion in back leverage to private credit funds.

The banks reentry decoded

The $185 billion disclosure resolves months of speculation about exposure size. Numbers are large but distributed. JPMorgan’s $50 billion sits at roughly 1% of its balance sheet.

Dimon publicly warning about private credit while JPMorgan builds the largest bank-affiliated private credit operation tells you the strategy. Stake the territory while competitors are weakened. The Monroe Capital deal collapsed in 2024, so JPMorgan is building organically.

Banks deploying capital into private credit while pulling back leverage from existing managers creates the new dynamic. Banks become competitors. The 150 bps over SOFR fund finance pricing that helped goose private credit returns gets reconsidered when banks can deploy that capital directly into loans they own.

4. Q1 BDC Inflows Plunge 59% as Retail Exodus Accelerates

Non-listed BDCs attracted just $4.9 billion in Q1, down 59% from over $12 billion a year earlier per Robert A. Stanger & Co. data based on 23 publicly registered BDCs. The figures don’t account for redemption requests, which topped $15 billion across the industry and exceeded 5% caps at most major funds.

BCRED, one of the few large non-traded BDCs to meet redemptions in full, drew about $1.3 billion in inflows, down 60% from a year earlier. Blue Owl’s flagship fund, which capped withdrawals after investors sought to redeem 22% of shares, took in $580 million. Blue Owl Technology Income Corp added about $77 million. Combined, Blue Owl’s funds saw nearly 70% less inflow than the same period last year.

Ares Management is planning a significantly smaller flagship US direct lending fund than its previous record-breaking vehicle. The Ares Strategic Income Fund saw inflows slow by about 53% in Q1 from a year earlier.

Moody’s flagged refinancing risk building from 2028 onward, particularly for software borrowers. “An important test for BDCs will be how the sector addresses loan maturities,” Clay Montgomery, vice president at Moody’s, said. The maturities start accelerating in 2028 and 2029.

The retail flow inflection

A 59% drop in inflows is a regime change. Non-listed BDCs built their model on consistent retail accumulation funding new loan deployment. Without that flow, funds either deploy from balance sheet, slow originations, or lean on institutional capital with different return expectations.

The redemption-to-inflow ratio matters most. Blue Owl’s flagship took in $580 million while facing requests to redeem 22% of shares. Even capped at 5%, that’s roughly $1.7 billion of net outflows on a $34 billion fund, or 5% net asset reduction in one quarter. Sustained at that pace, the fund shrinks 20% annually before any mark changes.

Ares planning a smaller flagship fund acknowledges new reality. Vintage 2026 funds will deploy at better entry points than 2024 vintages but at smaller scale. Less capital chasing the same deal pipeline could improve underwriting discipline. It also compresses fee income for managers built on AUM growth.

5. Listed BDCs Trade at 86% of Book as Bargain Hunters Buy the Selloff

Bargain hunters are scooping up listed BDCs after valuations dropped to their lowest since 2022. The Cliffwater BDC Index sat at 80.5% of book value in late March before recovering to 86% by Thursday. Ares Capital Corp closed as low as 87.5% of book in March, trading closer to 93% Thursday.

Some investors are running an arbitrage trade between unlisted and listed BDCs. For non-listed BDCs, investors get NAV when cashing out, though funds may limit total quarterly withdrawals. Listed BDCs trade actively and can sell below NAV.

“We’ve seen that in our BDC fund, where investors have said that they are liquidating their private holdings and buying the public funds for less, and we’ve seen significant inflows into our fund because of that,” said Mike Petro, a portfolio manager at Putnam Investments who runs an ETF that buys BDCs.

Not every investor is buying. Software loans make up about 20% of BDC portfolios per Barclays. “You don’t want to catch a falling knife,” said Scott Opsal, CIO at Leuthold Group. “These BDCs don’t have enough of a yield pickup to offset the unknown black hole of software loans that could hurt you since you can get decent yield from investment grade debt or a junk bond fund.”

US investment-grade bonds gained 0.4% YTD through Thursday’s close. Junk bonds returned 1.2%. Listed BDCs dropped 7.8% per the Cliffwater BDC Index.

The arbitrage opportunity

The unlisted-to-listed BDC arbitrage exposes a structural inefficiency. Same managers, similar portfolios, different prices. Investors selling unlisted at NAV and buying listed at 86% of book capture roughly 14% upfront, assuming portfolios genuinely match.

Whether that arbitrage closes depends on Q1 BDC earnings starting April 28. If markdowns prove limited and dividend coverage holds, listed BDCs return toward 95%+ of book. Severe markdowns push listed BDCs further below book and force unlisted BDCs to mark down to match.

Fitch’s Chelsea Richardson expects “pressure from markdowns in software investments during the first quarter given what’s happened with spreads in that sector.” Even without actual credit losses, market-related moves will translate into lower valuations.

Deals of Note

• Affordable Care - Blackstone and KKR leading restructuring of $1.4B loan; BCRED marked at 69.8 cents

• Medallia - Lenders negotiating to take control from Thoma Bravo; loans cut from 80 to 60 cents, considering reduction to $1B-$1.4B with 100% equity to creditors

• Blue Owl Capital Corp - $400M bond at 6.5% yield, entirely purchased by PIMCO in first BDC bond sale in 6+ weeks

• Goldman Sachs Private Credit Corp - $750M bond raise after $500M target, attracted nearly $3B in orders

• BCRED - $850M bond sale at 230 bps over Treasuries, drew $4.3B in demand

• AirAsia Aviation Group - Deutsche Bank marketing $230M private credit deal for Malaysian budget airline

• Recordati - Banks and private credit lenders working on financing for CVC Capital’s potential acquisition of Italian drugmaker

• Sotheby’s - KKR providing up to $100M secured against fees clients owe on auction purchases

• NBA European Expansion - Apollo, Ares, and Sixth Street in early discussions to fund league’s European expansion

The Reality Check

Medallia handing keys to creditors and Thoma Bravo eating $5.1 billion isn’t anomalous. It’s the prototype. Software companies bought at peak multiples in 2021 with 7x+ leverage and provisions requiring sponsor equity at performance shortfalls were vulnerable from inception. AI just collapsed the timeline.

The 60-cent mark on Medallia debt sets a benchmark. If a 80-to-60 cent move in three months represents the path for stressed software credits, the 26% software exposure across BDC portfolios faces 5-15% portfolio-wide markdowns over the next 12-18 months.

PIMCO buying every dollar of Blue Owl’s $400 million bond at 6.5% draws the line. Investment-grade BDC structures with diversified portfolios clear at current spreads. Individual stressed loans don’t clear at any reasonable price. PIMCO took both sides correctly: bought the structure, walked from the loans.

Q1 inflows down 59% with redemptions topping $15 billion creates compounding pressure. Even funds meeting redemptions watch AUM shrink, fees fall, and capacity to support stressed loans through workout disappear with it.

Diameter’s “reckoning” and Sycamore Tree’s “culling of the weaker herd” point to the same destination. Some funds navigate this. Others don’t. Manager dispersion replaces the consistent returns that defined the asset class for a decade. The genuine shift isn’t whether private credit survives. It’s which managers do.

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The tone shifted this week. Not dramatically. But the first quarter bank earnings provided something the private credit market hasn’t had in months: a moment to breathe. Blue Owl’s stock posted its biggest two-day gain since 2022. PIMCO bought a $400 million Blue Owl bond outright, the first BDC unsecured debt deal in over a month. Goldman followed with a $750 million offering of its own. More are expected.

The redemption wave hasn’t stopped. The structural problems haven’t been solved. But the acute panic that defined March appears, for now, to be easing.

What replaced it this week was something more interesting. The banks started talking.

$180 Billion and Counting

For years, the precise scale of Wall Street’s exposure to private credit was a matter of estimates and inference. This week, under pressure from investors and the Federal Reserve, the major banks disclosed it directly.

JPMorgan: $50 billion. Wells Fargo: $36.2 billion. Citigroup: $22 billion. Morgan Stanley: $20.1 billion. Bank of America: $20 billion. Total across the nine banks that disclosed: roughly $180 billion.

The executives were uniform in their reassurance. Jamie Dimon said “you have to have very large losses in private credit before at least it looks like banks are going to get hit.” Morgan Stanley CEO Ted Pick called private credit “an adolescent moment” and said it “will perform broadly in line with the economy.” Wells Fargo CFO Michael Santomassimo pointed to decades of lending experience and structural protections.

The disclosures were designed to calm investors. They mostly succeeded on that narrow goal. But read carefully, they revealed something else.

The $180 billion figure is what banks disclosed voluntarily, with definitions that vary across institutions. Bank of Montreal told analyst Darko Mihelic at RBC that its private credit lending was about 1% of its overall book. Mihelic’s own calculations put it at closer to 7%. Canada’s bank regulator restored non-bank lending to its annual risk report this week after a three-year hiatus, citing concerns that “opaque” markets and high leverage could intensify losses in a crisis.

The transparency push that produced this week’s disclosures is just beginning. It won’t stop here.

Banks Are Tightening Back Leverage Quietly

The disclosure story is the one that ran in headlines. The more consequential story ran underneath it.

Behind the scenes, major banks are tightening their back leverage arrangements with private credit funds. JPMorgan, Goldman and Barclays are exercising their rights to mark down individual loans posted as collateral, prompting fund managers to swap out assets from collateral pools. Back leverage rates are rising, with some now topping 3 percentage points over SOFR, up 50 to 150 basis points from prior levels. Top bank executives are getting directly involved in adjusting rates and collateral terms.

This isn’t new behavior. JPMorgan has done broad-based markdowns in 2022 and twice in 2020. What’s new is the prevalence. The strategies banks are employing to protect themselves are becoming more common across more facilities simultaneously.

The mechanics matter. When a bank marks down collateral, the fund can respond in a few ways. Borrow less. Post more equity. Or swap out the marked asset for something the bank finds more acceptable. That last option is the most common, and it means assets that one bank has flagged as problematic are potentially moving into collateral pools at other banks.

JPMorgan charges lower rates but demands stronger unilateral marking rights. Other banks have dispute provisions and third-party arbitration built into their facilities. The inconsistency across arrangements means banks don’t all have equal protection, and some may find themselves better positioned than rivals if defaults begin to rise.

The return compression is the immediate practical consequence. Funds that built return projections on back leverage at SOFR plus 150 now face SOFR plus 300. That gap has to come from somewhere. Either the fund demands wider spreads from borrowers, which is happening at the margin, or the returns get thinner, which pressures distributions, which generates redemption demand.

The cycle is self-reinforcing and it’s running quietly in the background of every earnings call reassurance this week.

The $770 Billion Number Nobody Wants to Own

The most sobering data point of the week didn’t come from a bank or a fund manager. It came from Davidson Kempner partner Suzy Gibbons.

About a third of the direct lending market is currently stressed, Gibbons said on the Credit Edge podcast. On basic fundamental credit metrics, including changes in leverage versus earnings and interest coverage ratios, roughly $770 billion of loans to US companies are already in troubled territory. That’s double the stressed level at end-2019. If you tighten the screen to companies exceeding 7x earnings, the number is closer to 40% of the market.

Gibbons was careful to distinguish between stressed and defaulted. An acute crisis is unlikely, she said. But soft defaults will mutate into hard defaults. And when they do, recovery rates will probably surprise people.

The data on recovery rates is worth sitting with. Average recovery rates in the leveraged loan market fell to 36 cents in 2025 from around 60 cents a decade ago. Gibbons said she has “no reason” to think private credit recoveries will be stronger. The starting leverage in this cycle is higher than prior cycles. The PE owners backstopping many of these credits are running out of road on extend-and-pretend.

Adams Street Partners’ Jeff Diehl made a related point from a different angle. Current disclosure standards for private credit funds are incomplete, he said, and need to change. Beyond non-accrual rates and PIK percentages, Diehl wants funds to disclose the percentage of assets in loans above 60% LTV, the percentage where interest costs exceed pre-tax cash flows, and the percentage above 6x pre-tax cash flows. His warning thresholds: 10%, 5% and 20% respectively.

The argument is straightforward. Managers with material cushion to those thresholds are probably fine. Managers near or through multiple thresholds are not, even if current marks and yields look acceptable. The NAV doesn’t tell you that story. The additional metrics would.

Apollo has said it’s working toward monthly NAV reporting and eventually daily NAVs with third-party valuations. That’s the direction the industry needs to move. The question is whether it moves voluntarily or gets pushed by regulators who are now clearly paying attention.

Private Equity Has It Worse

The private credit stress has been the dominant story for months. Chris Bryant at Bloomberg Opinion made the case this week that it might be the wrong place to look.

Private credit managers have a genuinely persuasive defense: their loans are senior secured. In a typical software buyout, PE contributed more than half the purchase price as equity. The asset value would need to fall 60-70% before senior secured lenders take losses. The equity cushion absorbs the first hit.

That’s the good news for credit. The bad news is what it implies for PE.

Private equity firms are sitting on a massive portfolio of software and tech assets acquired at 2020-2021 valuations that they cannot exit. Distributions to investors in 2024 were more than ten times lower than 2015 levels. The average holding period has stretched to 6.6 years. The 2020 and 2021 vintage funds, which deployed heavily into software during peak valuations, are showing DPI multiples of 0.30x and 0.20x respectively.

Those assets aren’t marked to market. They sit on PE fund balance sheets at manager-determined valuations that don’t get tested until there’s a transaction. When sponsors eventually have to refinance the debt on these companies, lenders will see what the business is actually worth in 2026 rather than what it was worth in 2021. Some PE owners will chip in more equity to protect their position. Others will look at a terminal software business and hand the keys to creditors.

Medallia is the case study. Taken private by Thoma Bravo for $6.4 billion in 2021. Struggling to service interest payments. Lenders potentially taking control. Roughly $5 billion of equity at risk. The Thoma Bravo fund that partially funded that deal has a 6.2% net IRR, bottom quartile for the 2020 vintage.

Multiply that across the industry’s software book and the numbers get large fast. Blue Owl’s Ostrover said it clearly: “If you’re worried about direct lending at all, you’ve got to be really worried about PE.”

The private credit stress is public because BDCs report NAVs quarterly and retail investors can request redemptions. The private equity stress is private because fund portfolios aren’t traded and LPs are locked in for a decade. Both are real. Only one is visible.

Blue Owl Has a Week to Breathe

It’s worth noting, fairly, that Blue Owl had a materially better week than the previous several.

PIMCO’s outright purchase of the $400 million Blue Owl Capital Corp bond was significant. It was the first BDC unsecured debt issuance in over a month and it cleared at terms that suggested genuine institutional demand rather than distressed pricing. The stock gained sharply over two days, outperforming Ares, Apollo and KKR.

Blue Owl’s GP Strategic Capital platform is also reportedly nearing a deal to take a minority stake in Paris-based BlackFin Capital Partners, a European financial services PE firm. That’s a business-as-usual GP stakes transaction of the kind Blue Owl has built a franchise around, and it signals the firm is still operating offensively in parts of its business even as the BDC redemption story dominates coverage.

The consensus analyst price target for Blue Owl sits at $14.07 against current trading levels near $9.65. That gap reflects either significant analyst optimism that hasn’t caught up to reality, or a market that has oversold the stock relative to fundamental value. Probably some of both.

One good week doesn’t resolve a 40% redemption request. But it changes the immediate narrative, and narrative matters in a market where retail investor behavior is driven as much by headlines as by credit fundamentals.

The Disclosure Reckoning Is Coming

The theme connecting everything this week is transparency.

Banks disclosing $180 billion in exposure. Adams Street calling for six new fund-level metrics. Apollo committing to monthly and eventually daily NAVs. Canada’s bank regulator restoring non-bank lending to its risk report. The Federal Reserve asking banks for private credit exposure details.

Every one of these moves is a response to the same problem. The private credit market grew to $1.8 trillion in a disclosure environment designed for a much smaller, purely institutional asset class. Retail investors got access to the returns without getting access to the information needed to evaluate the risks. Regulators are now trying to understand a market that moved faster than their data collection did.

Goldman’s Kristin Olson framed it charitably as “an education moment.” Jeff Diehl at Adams Street framed it as an unacceptable data void. Both are right.

The direction is clear regardless of framing. Disclosure standards will increase. The managers who get ahead of that voluntarily will be better positioned with both regulators and investors than those who wait to be pushed. The ones with portfolios that look better under additional scrutiny have an obvious incentive to move first.

The ones who don’t move first are telling you something too.

Where the Cycle Stands

The acute phase of the retail redemption crisis may be easing. The deeper structural problems are not.

Back leverage costs are rising and won’t come back down quickly. The $770 billion stress figure from Davidson Kempner is not a default forecast but it’s not nothing either. The maturity wall in software debt is a 2027 and 2028 problem that hasn’t started yet. The PE equity cushion that protects senior secured credit looks thinner the longer software valuations stay depressed.

What changed this week is that the banks showed their hand, partially and under pressure, and the number was large but not catastrophic. Markets took that as permission to exhale.

The exhale is probably warranted. The problems haven’t gone away. They’ve just moved from the acute phase, redemption panic and forced selling, to the chronic phase, back leverage compression, disclosure pressure, creeping soft defaults and a PE exit market that remains effectively closed.

Chronic is harder to trade. It’s also harder to ignore.

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Something shifted this week that won’t shift back.

On Monday, S&P Global and a syndicate of banks including JPMorgan, Morgan Stanley, Goldman, Bank of America, Deutsche Bank and RBC launched the S&P CDX Financials Index, a credit default swap benchmark that allows investors to take direct positions on BDC credit risk for the first time.

About 12% of the index is tied to private debt funds managed by Apollo, Ares and Blackstone. Senior tranches of private credit CLOs have been widening. Deutsche Bank’s US distressed desk more than doubled its quarterly profit, booking over $100 million partly by shorting software company debt. Wall Street equity trading desks are on pace for an $18 billion quarter, the best on record, driven partly by private credit volatility.

The institutional infrastructure for expressing negative views on this market is now live.

That’s a different environment than the one that existed three months ago.

What the CDX Index Actually Means

The mechanics are straightforward. CDS written directly on BDCs, not proxy baskets of listed equities, not leveraged loan indices. Actual credit protection on the funds themselves. Barclays estimates BDCs will account for nearly 30% of the new index spread.

The more interesting detail is who got excluded.

Blue Owl was on the preliminary list and was pulled before launch. S&P’s Nicholas Godec said the firm checked Blue Owl’s spreads versus peers and “didn’t want the index at launch to be too idiosyncratic around a particular name.” In other words, Blue Owl was already trading so wide that including it would have skewed the entire index.

That’s not a technical footnote. That’s the market telling you something about where Blue Owl stands relative to its peers right now.

Robert Smalley at MacKay Shields put it plainly: “If this is seen as the proxy for higher beta, wider spread financials, I believe it will trade that way. Perception will become reality.”

He’s right. The moment a liquid hedging instrument exists, it becomes a mechanism through which negative sentiment expresses itself in real time. Every bad headline, every redemption announcement, every NAV markdown has a place to land in CDX spreads. Those spreads feed back into coverage, into investor sentiment, into redemption decisions.

The industry just got a new way to be shorted. It will be used.

The Maturity Wall Nobody Wants to Talk About

The redemption story has dominated coverage for months. It may not be the most important story.

More than $330 billion of high yield, leveraged loan and BDC-linked software and technology debt is coming due through 2028. The single biggest year is 2028, with roughly $130 billion maturing. Citigroup’s Michael Anderson and Steph Choe flagged the specific problem: a third of these loans still have 2021 credit dates, meaning the borrowers haven’t demonstrated capital market access in years. The average price of the 2021 vintage, 2028 maturity cohort is $83.40.

That’s not stress. That’s distress pricing on a large pool of debt that hasn’t technically defaulted yet.

Refinancing efforts are already running into trouble. Some private credit funds are turning away software borrowers outright. Several PE-sponsored software exits have stalled. The leveraged loan market’s technology premium has completely collapsed this year.

Marathon Asset Management Chairman Bruce Richards said this week that as much as 15% of software direct lending could default in the coming years. Goldman Sachs Asset Management’s Vivek Bantwal pushed back, noting that most private credit software exposure sits at the top of the capital structure and is relatively insulated from restructurings.

Both can be true simultaneously. Senior secured lenders may recover well on individual credits while broader portfolio marks deteriorate, distributions get pressured, and redemption demand stays elevated. The headline default rate and the NAV trajectory are different numbers that tell different stories.

Lincoln International’s bad PIK data is the most honest leading indicator available. About 6.4% of direct lending borrowers had bad PIK in Q4, up from 2.5% at end-2021. Bad PIK is PIK added during the life of a loan to relieve cash flow pressure, not PIK that was part of the original structure. It’s the lender and borrower jointly agreeing that the company can’t service its debt in cash. Loan-to-value ratios on these borrowers are soaring.

That’s the pipeline for the default cycle. It doesn’t show up in non-accrual rates until it does, and by then it’s already in the marks.

Ares Gets Smaller on Purpose

Ares is planning its next flagship US direct lending fund at approximately $20 billion, significantly below the $33.6 billion record it raised for the prior vehicle.

This is being framed as adapting to market conditions. It’s more interesting than that.

The previous fund used substantial leverage and raised equity commitments of $15.3 billion against a $10 billion target. The new vehicle, Ares Senior Direct Lending Fund IV, targets $10 to $12 billion in equity with significantly less leverage. Total AUM roughly halves. The fee base shrinks.

Ares is choosing to raise less money at lower leverage in a market where they could probably still raise more. That’s a deliberate signal about where they think deployment opportunities are and what risk they want to carry into a deteriorating credit environment. A smaller, less levered fund deploys faster into a wider-spread market and carries less refinancing risk on the liability side.

It’s also a signal about where institutional LP appetite is going. Ares raised $9.8 billion for opportunistic credit and $7.1 billion for credit secondaries earlier this year. That capital is chasing dislocation. The flagship direct lending fund is being right-sized for a more disciplined origination environment. The money is being allocated where the opportunity is, not where the brand historically sat.

Howard Marks Does What Howard Marks Does

Oaktree co-founder Howard Marks sent a note to clients this week clarifying the firm’s software and direct lending exposure.

Software credit exposure: “extremely small on an absolute basis and relative to peers.” Direct lending: less than half of Oaktree’s private credit book, about 20% of performing credit investments and less than 15% of total AUM. Public direct lending vehicles: just over $10 billion, against $40 to $50 billion for the leading managers.

The note was careful, precise and landed exactly when it needed to. Marks has spent decades building the credibility that makes a client letter like this move markets. The timing, as the industry faces its most intense scrutiny in years, is not accidental.

The substantive point is worth taking seriously independent of the positioning. Oaktree built its franchise on distressed debt and mezzanine, not direct lending. It has been in private credit for decades and deliberately avoided the retail-facing BDC structures that are currently under the most pressure. When the firm says it maintained “a particularly high bar” for new software transactions over the last 12 to 18 months, that’s consistent with the investment culture Marks has built over 30 years.

It’s also a clean contrast with the managers who rode software exposure to record AUM and are now managing the consequences.

Europe Is Positioning and It’s Working

European private credit managers are having the best quarter in years, and they’re not being subtle about why.

Hayfin, Pemberton and AlbaCore have been telling potential investors explicitly that the problems in private credit are predominantly a US story. Software exposure at Pemberton: less than 1%. At Hayfin: less than 5%. AlbaCore’s entire senior lending strategy has a single software borrower.

Pemberton’s Mark Hickey said it plainly: “The current challenges in private credit are predominantly a US story. This is driven by the scale of retail capital invested and high exposure to the software sector. The picture in Europe is very different.”

The data supports the pitch. Europe-focused private credit funds captured 46% of global fundraising in the first three quarters of 2025, up sharply from 23% in 2024. That’s not a marginal shift. That’s a reallocation.

The most telling detail came from Hayfin’s Marc Chowrimootoo. The firm expects to win an upcoming deal over a US rival despite offering less favorable pricing. The borrower, anticipating the need for follow-on financing, is wary of the US lender’s retail capital exposure and balance sheet leverage.

When sponsors are reportedly choosing European lenders at wider spreads because they’re uncertain about the stability of a US lender’s capital base, the US market has a problem that goes beyond quarterly NAVs. The relationship between private credit managers and the sponsors who bring them deals is the foundation of the origination business. If that relationship is starting to shift, AUM numbers follow with a lag.

The Quiet Winners

The firms playing offense right now are worth watching closely.

Blackstone hit its $10 billion hard cap for its opportunistic credit fund. Ares raised nearly as much for a similar vehicle. Even Blue Owl, the firm at the center of the retail stress, raised $2.9 billion for a new opportunistic credit fund, citing “an increasingly attractive opportunity set, driven by market dislocation, complexity and the demand for flexible capital.”

Goldman’s Private Credit Fund saw redemption requests of just 4.999% in Q1, a sliver under the 5% limit. The firm’s letter to shareholders was almost clinical in its confidence: when capital becomes scarce, spreads widen, structures tighten, documentation improves. Goldman is describing a market that is getting better for disciplined lenders with dry powder.

Morgan Stanley is launching a new interval fund investing predominantly in private credit. Into this market. That’s either a contrarian confidence signal or a belief that the structural problems are product-specific rather than asset-class-wide.

Deutsche Bank’s distressed desk more than doubled quarterly profit partly by shorting software company debt. UBS packaged $500 million of stakes in eight private credit funds into insurance-backed debt, allowing it to exit positions without direct sales. The secondary market for private credit positions is developing in real time, under pressure.

The Wall Street playbook in a distressed cycle is consistent across decades. Firms with capital and flexibility buy from firms without. The CDX index just made it easier to express a view on which category specific BDCs fall into.

Carlyle Joins the Queue

The pattern is familiar but one detail in Carlyle’s situation is worth noting.

Carlyle’s Tactical Private Credit Fund, a $7 billion vehicle, capped redemptions at 5% after investors asked to pull 15.7% in Q1. Investors who requested approximately $750 million received about $240 million. The fund’s software exposure is around 12%.

Carlyle noted that its redemption deadline was later than most peers, which likely left it exposed to elevated requests from investors whose capital was already gated at other funds. The implication, though Carlyle didn’t state it directly, is that some of the pressure reflects queue dynamics across the industry as much as specific concerns about the fund itself.

Moody’s revised its outlook on non-traded BDCs to negative this week. The reasoning was circular but accurate: proration and elevated redemption headlines incentivize other investors to seek redemptions. The feedback loop that market observers have been warning about for months now has a Moody’s rating action attached to it.

Where the Cycle Stands

Three things are true simultaneously and they point in different directions.

The firms with dry powder are genuinely finding opportunity. Blackstone, Ares, Goldman and others raised tens of billions for vehicles explicitly designed to buy into this dislocation. Spreads are wider. Structures are tightening. Documentation is improving. For patient capital with no redemption pressure, the vintage of loans being originated right now may look very good in five years.

At the same time, the problems in the retail-facing BDC structures are not resolved. The motivated seller universe hasn’t cleared. Redemption queues at some funds extend two years at current cap rates. The CDX index now gives short sellers a clean instrument. Moody’s just turned negative on the sector. The maturity wall is a 2027 and 2028 story, not a 2026 story, meaning the default cycle that bad PIK data is signaling hasn’t arrived yet.

And then there’s the software question, which sits underneath all of it. More than $130 billion of technology debt matures in 2028 alone. A third of those loans haven’t been in the market since 2021. The borrowers that can refinance will. The ones that can’t will find out who their lender really is.

That’s the test that hasn’t happened yet. Everything playing out right now, the redemptions, the CDX launch, the European repositioning, the opportunistic fundraising, is the market getting into position before it does.

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The numbers that came out this week weren’t bad. They were in a different category entirely.

Investors sought to pull 40.7% of shares from Blue Owl’s technology-focused BDC. From its flagship $36 billion fund, the number was 21.9%. No major private credit manager has ever disclosed redemption requests close to those percentages.

Blue Owl enforced the 5% cap, as everyone else has. But the gap between what investors asked for and what they received is now wide enough to raise questions that go beyond liquidity management.

Blue Owl shares fell 8.7% to a record intraday low Thursday before recovering to close down 1.6%. The stock move tells you something the shareholder letters don’t.

What Blue Owl’s Numbers Actually Mean

The firm’s response was measured. Co-President Craig Packer pointed to 9% revenue growth among portfolio companies, a 0.3% non-accrual rate, $11.3 billion in liquidity across OCIC, and the fact that 90% of shareholders chose not to tender. Redemption pressure was concentrated among a “small minority” within “certain wealth channels and regions,” a reference to the Asian wealth channel that has been an unusually concentrated source of capital for OTIC specifically.

Those are defensible facts. The non-accrual rate is genuinely low. The liquidity position is real.

None of that is the point.

The point is the math John Cocke at Corbin Capital laid out: at a 5% quarterly cap, OTIC’s backlog takes two years to clear assuming zero new redemption requests. That assumption is heroic. Investors who were pro-rated this quarter roll their remaining requests into next quarter automatically. New investors watching a fund gate at 5% with a two-year exit queue have little incentive to come in.

Without inflows, the fund shrinks every quarter regardless of credit performance. Shrinking assets compress the income base. A compressed income base pressures distributions. Pressured distributions generate more redemptions.

That’s not a liquidity crisis. It’s a slow structural unwind, and it plays out over years.

The 40.7% number on OTIC deserves its own attention. Software and technology represent just over 30% of the portfolio, healthcare technology another 12%. Blue Owl’s position that these are mission-critical businesses “actively adapting to, or already benefiting from, AI-driven innovation” may be accurate for the best names in the book.

The investor base doesn’t believe it yet. And in semi-liquid vehicles, belief drives redemption behavior more than credit fundamentals do.

The CLO Machine Is Running for a Reason

Private credit CLO issuance has hit $9.5 billion year-to-date, just shy of 2024’s record first quarter pace. More deals are coming.

This isn’t coincidental timing.

CLOs solve a specific problem that redemption pressure creates. When investors pull capital, available cash shrinks. When banks simultaneously restrict credit lines, as JPMorgan is currently doing after marking down loan values in private credit portfolios, the funding base narrows further. A CLO issues long-term bonds that can’t be redeemed on short notice, locking in stable funding regardless of what’s happening in the retail wrapper above it.

The Citigroup data buried in this week’s coverage is worth pausing on. BDCs retain approximately $12 billion of junior capital in private credit CLOs, roughly one-third of total junior capital across the market. That means BDCs aren’t just using CLOs as a funding tool. They’re also carrying concentrated exposure to the riskiest tranches of those same deals on their own balance sheets.

If the underlying loan pools deteriorate, the BDC absorbs those first losses directly. That hits NAV. Which generates more redemptions. The CLO machine providing relief today is quietly building a secondary exposure that amplifies stress if credit quality moves.

HPS priced a $748 million CLO in February with senior tranches at 140 basis points over SOFR. Current market levels are about 30 basis points wider. The cost of this funding tool is rising even as demand for it increases, driven partly by the same redemption headlines pushing managers toward CLOs in the first place.

KKR Joins the Gate Club

KKR’s non-traded BDC, K-FIT, received redemption requests of 6.3% for the quarter ended March 30 and capped repurchases at 5%, satisfying roughly 80% of requests.

The headline looks bad. The details are among the more reassuring disclosures of the week.

K-FIT received gross inflows in excess of total repurchase requests during the quarter. The fund has generated 13.9% annualized returns since launching in March 2023. A 6.3% redemption request is modest compared to what Blue Owl is seeing.

KKR’s framing was also notably different from the defensive crouch most managers have adopted. The firm called its redemption cap “a key feature that enables our disciplined long-term investment strategy” rather than apologizing for it. More honest posture. Probably more durable with the remaining investor base.

The K-FIT data matters because it shows the pressure isn’t uniform. Funds with lower software concentration, stronger inflow dynamics, and more diversified shareholder bases are living in a different environment than OTIC. The private credit stress story is real. It’s also being applied indiscriminately to vehicles with meaningfully different risk profiles.

Banks Are Paying Attention

A Moody’s report this week put a number on something the market has discussed without quantifying. US bank lending to non-depository financial institutions has nearly quadrupled over the past decade, reaching approximately $1.4 trillion as of end-2025. It now represents 11% of total bank loans and is the fastest growing segment of bank balance sheets.

The category that proxies for private credit lending specifically, what Moody’s calls “business credit intermediaries,” has grown to $348 billion, up 7.5% in Q4 2025 alone. Wells Fargo leads at approximately $70 billion, more than double Bank of America’s $35 billion.

Moody’s analyst Jeffrey Berg said what needed to be said: rapid expansion “raises broader credit questions about seasoning, since a seasoned book is a more predictable book. Without that, there’s a greater probability of risk and of weaker underwriting.”

Banks are beginning to act on those concerns. JPMorgan is restricting lending to some private funds after marking down loan values. The Tricolor and First Brands blowups have focused attention on NDFI underwriting quality broadly. First-quarter bank earnings next month will provide the first systematic look at how credit quality in these portfolios is actually holding up.

The number worth watching is the $157 billion in unutilized commitments banks have extended to business credit intermediaries. Those are credit lines that haven’t been drawn yet. In a stress scenario where private credit funds need liquidity simultaneously, that $157 billion gets tested at exactly the wrong moment. Whether banks honor those commitments, quietly restrict them, or reprice them is a question that doesn’t get answered until it gets asked under pressure.

Zelter’s Defense and What It Reveals

Apollo President Jim Zelter went on Bloomberg Television Thursday to call the current situation “growing pains” and describe redemption headlines as a “skirmish on the sidelines.” He said the 5% cap is “on page one, in black and white” and enforcing it is “actually quite an easy conversation.”

Blue Owl announced its 40.7% and 21.9% numbers shortly after he finished speaking.

The timing was not ideal for the skirmish framing.

The more interesting part of Zelter’s interview was the context he buried. Private credit has generated significant compounded returns for institutional investors over 15 years, outperforming high yield and loan indices materially. That’s accurate and underappreciated right now.

The retail semi-liquid structure is a small fraction of total private credit. Most capital in this asset class sits in institutional closed-end funds with 10-year lockups, completely insulated from what’s happening in BDC land. The stress being covered extensively is real but contained within a specific product type.

That distinction gets lost when every headline gets treated as evidence of systemic collapse.

The Question Nobody Is Answering

The shareholder letters spent considerable effort this week demonstrating that portfolio credit quality is holding up. Non-accruals are low. Borrower revenue growth is running 9-10%. Defaults remain contained.

What they didn’t address is the question that actually determines whether these vehicles survive: where does new money come from?

The semi-liquid BDC structure requires inflows to function. When these products were growing, new subscriptions absorbed redemption demand with room to spare. That dynamic has fully inverted. Gross inflows have dropped to a fraction of prior quarters. The investor base trying to exit is large. The investor base considering entry is watching gates, NAV pressure, and headlines, and waiting.

Robert A. Stanger’s Michael Covello said this week that now “seems to be the peak of redemptions.” The non-traded REIT comparison suggests pressure does eventually exhaust itself as the motivated seller universe clears. That may prove right.

But non-traded REITs didn’t have an AI disruption narrative actively eroding confidence in a major portion of their underlying asset base while the redemption cycle was playing out. That’s the variable that makes this situation genuinely different, and it’s the one hardest to model from historical comparisons.

The 40.7% redemption request on OTIC isn’t just a liquidity story. It’s a signal about what a concentrated, sophisticated wealth channel thinks about software loan portfolios in an AI disruption environment.

At 40%, they’re not whispering.

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Something notable happened at an industry conference in Melbourne last week.

Senior executives from two of the largest private credit managers in the world stood up in front of their peers and acknowledged that the industry hadn’t fully explained liquidity restrictions to the retail investors now rushing for the exits. Jim Zelter, president of Apollo, said certain distribution channels “may not have fully communicated the risks inherent to the asset class.” Doug Ostrover of Blue Owl was similarly direct: “Between us, and the advisers who sell our products, I don’t think we made it clear enough.”

These aren’t peripheral figures making offhand comments. These are two of the most prominent executives in a $1.8 trillion industry, and they’re saying publicly what a lot of people in the market have been saying privately for months. The retail democratization of private credit ran ahead of the investor education that should have accompanied it. That gap is now the industry’s most pressing problem, and regulators across four continents are paying close attention.

What’s Actually Happening

Let’s establish the facts before getting into what they mean.

Private credit funds aimed at retail investors are experiencing their worst redemption cycle since these structures went mainstream. Investors have sought to pull roughly $13 billion from over a dozen funds this quarter. More than $4.6 billion of that capital is now sitting behind withdrawal limits. Redemption requests are running at approximately 10% of net asset value on average, roughly double the prior quarter.

Performance is deteriorating in parallel. February was the worst month for most major non-traded BDCs since 2022, tracking the leveraged loan market’s steepest monthly decline in that period. Several large funds posted their worst monthly returns since inception. FS KKR Capital Corp. was cut to junk by Moody’s this week, with a 5.5% non-accrual rate that ranks among the highest in the peer group. That’s a rare event in this market and worth watching closely as a potential leading indicator.

Managers are responding in divergent ways. Blackstone and Oaktree dipped into firm capital to meet full redemption requests above the 5% limit, framing it as a confidence signal. Apollo, Ares, BlackRock’s HPS, and Morgan Stanley enforced the cap and called it fiduciary discipline for remaining investors. Several other large funds have yet to announce tender results for the current quarter.

The stated causes: concerns over loan quality, software exposure to AI disruption, and a broader reassessment of whether semi-liquid structures are suited for retail portfolios. Those concerns are real. They’re just not the complete picture.

The Structure Is Being Tested for the First Time

Here’s the honest read on what those Melbourne admissions actually capture.

The private credit industry spent the better part of a decade building retail-accessible wrappers around institutional-grade assets. Business development companies. Non-traded interval funds. Semi-liquid vehicles with quarterly redemption windows. The pitch was democratization, giving individual investors access to the same return streams that pension funds and endowments had been harvesting for years.

The underlying assets in these structures are the same ones that institutional LPs hold in 10-year closed-end funds, because that’s what the loans require. There’s no liquid secondary market. Prices are set quarterly using internal models and public market comps rather than arm’s-length transactions. The semi-liquid retail structures were designed with a 5% quarterly redemption window as a safety valve, and that safety valve worked well through years of steady inflows and low redemption demand.

What the current cycle is testing is what happens when that safety valve gets used at scale.

The 5% gate works when the universe of sellers is manageable. When requests run to 10-14% of NAV in a single quarter, managers face a genuine tension between honoring redemption demand and protecting the portfolio for remaining investors. That’s not a design flaw so much as a design limit, one that most participants understood intellectually but hadn’t experienced in practice until now.

Larry Fink made the fiduciary argument directly when he told the BBC that the liquidity terms are “on page one” of the prospectus. That’s accurate. The harder question, which multiple senior executives gestured at in Melbourne, is whether the distribution process communicated those terms with the same clarity as the yield figures. The answer, based on what those executives said publicly, appears to be no.

The Cliffwater Situation Is Structurally Distinct

Every other fund in this story shares a version of the same challenge. Illiquid assets, semi-liquid structure, redemption pressure building. Cliffwater’s situation is different in a way that matters.

The Cliffwater Corporate Lending Fund is a $33 billion interval fund that doesn’t make loans directly. It invests in other funds and co-invests in loan deals alongside them. Stephen and Blake Nesbitt built the model on a genuine insight: broad diversification, faster deployment, and fee discounts by partnering with direct lenders rather than competing with them. The strategy scaled impressively, accumulating stakes in more than 50 private investment vehicles and exposure to over 4,000 loans.

The structural complexity that enabled that growth is now the source of pressure.

In the first quarter, investors demanded 14% of the flagship fund back. The firm paid out 7%, or $2.3 billion, the first time that figure had exceeded inflows. S&P Global lowered its outlook to negative and flagged the rating as potentially at risk if payouts continue above 5%.

What makes Cliffwater’s position distinct is the two-sided nature of its liquidity challenge. Its own investors are requesting redemptions on one side. The funds it owns stakes in are simultaneously managing their own redemption pressure on the other. Cliffwater may find itself unable to exit fund positions at the exact moment it needs liquidity to pay its own investors.

Jeffrey Gundlach noted publicly that “A Private Credit Fund of Funds in 2026 seems to rather closely resemble a CDO-squared in early 2007.” The diversification argument, 50 funds and 4,000 loans, cuts both ways. In a stress scenario, Cliffwater’s own redemption pressure can transmit into incremental pressure on every fund in its portfolio at the exact moment those funds are managing their own outflows. It’s a structure that amplifies flows in both directions.

There’s also $4.6 billion in unfunded commitments in Cliffwater’s regulatory filings. Borrower draws on revolvers or delayed-draw term loans would require Cliffwater to deploy additional capital at the same time it needs to raise cash for redemptions.

A Cliffwater spokesperson has said the fund has enough liquidity to meet 5% redemptions for more than a year without selling a fund position or an asset. S&P’s own analysis supports the view that the firm has sufficient resources to navigate difficult quarters. The question is what happens if redemption demand stays elevated beyond that window, and whether the industry stabilizes fast enough to give Cliffwater the breathing room it needs.

Apollo Is Playing Offense

While the redemption story dominates coverage, the most underappreciated detail in the current environment is what Apollo is doing on the other side of the trade.

Apollo Debt Solutions, which capped its own redemptions at 5% after investors sought to pull 11.2%, simultaneously secured a $500 million credit facility called Bald Eagle Funding, structured as a warehouse line with Bank of America and Citigroup. A warehouse line is typically a precursor to a CLO. Apollo told shareholders the current environment presents “some of the most attractive opportunities in a credit cycle” and disclosed $5.3 billion in immediately available liquidity.

This is deliberate positioning. Wider spreads benefit buyers with dry powder. The gap between a manager focused on redemption management and one with $5 billion in liquidity and a new warehouse line is meaningful, and it tends to define who emerges from a credit cycle in a stronger competitive position. Apollo is explicitly making that bet.

The Valuation Question

Lloyd Blankfein put it plainly on Bloomberg TV: “At some point there needs to be a forcing function or a reckoning that causes you to come to grips with what your balance sheet really is worth.”

When Ares disclosed that their February loss “reflects the broader selloff in public debt markets rather than losses on any specific investments,” they described something worth understanding. Private loan valuations are partially tethered to public leveraged loan indices. When public markets sell off, private marks move lower even on loans that are performing. The reverse was also true during the bull run, public market appreciation provided a tailwind to private NAVs even where individual credits were softening quietly.

The quarterly NAV is a manager’s estimate of portfolio value, informed by models, public comps, and judgment calls on specific credits. It is not a transaction price. Boaz Weinstein is currently offering to buy BDC stakes at a discount to stated NAV. That discount represents one sophisticated market participant’s view of these assets net of liquidity risk and information asymmetry. The FSK downgrade to junk by Moody’s is the first instance of a rating agency making a similar call explicitly and publicly. It likely won’t be the last as the cycle progresses.

To be clear, the major managers have consistently argued their underlying portfolios are performing. Zelter, Ostrover and others pointed to contained defaults and healthy portfolio company revenue growth at the Melbourne conference. Those aren’t hollow claims. The valuation question is about the gap between current marks and where assets would clear in a real sale process, not about imminent widespread credit losses.

What the JPMorgan Launch Signals

JPMorgan this week filed a prospectus for a new retail-facing private credit interval fund promising 7.5% quarterly redemptions and monthly liquidity optionality, more generous terms than any comparable vehicle currently in market.

The easy read is that this is a contrarian confidence signal from the largest bank in America entering at the point of maximum fear. There’s something to that.

The more interesting read is what the product design implies. JPMorgan isn’t replicating the existing structures under stress. They’re launching with higher redemption thresholds, which reflects a view that current structures have limitations worth addressing. That’s product iteration informed by what this cycle is revealing in real time.

Worth noting: 7.5% quarterly redemptions work smoothly unless demand runs above 7.5%. The industry is currently seeing 10-14% requests across major funds. JPMorgan’s structure is more generous but not immune to the same underlying dynamic under severe stress. The more durable question is whether any semi-liquid structure with a fixed redemption cap can fully solve the mismatch between illiquid assets and investors who want periodic liquidity. Regulators in multiple jurisdictions are now actively studying that question.

The Regulatory Response

The credit stress will likely resolve as the cycle progresses. Spreads normalize, redemption pressure works through the motivated seller universe, and new capital eventually returns. The Cerulli data provides useful context: the average adviser allocated just 3.9% of a moderate-risk client’s portfolio to alternatives, with only 5% of that in private debt. The motivated seller universe may be more finite than the current narrative implies, and the path back to inflows shorter than it feels right now.

What’s less likely to reverse is the regulatory attention now focused on the industry.

Australia is requiring weekly data submissions from private credit fund managers on defaults, redemption requests, liquidity and leverage. The Bank of England is running a system-wide stress test of private markets. The ECB’s incoming vice president has flagged portfolio quality deterioration across euro area exposures. Hong Kong and South Korea are monitoring private bank distribution and retail exposures. The activity is simultaneous across jurisdictions because regulators are looking at the same structural questions at the same time.

The Melbourne admissions about investor education will inform how regulators think about disclosure standards going forward. New rules around liquidity terms, redemption mechanics and retail suitability are coming. The timeline is being driven by investor complaints more than credit losses, which means it arrives faster than a traditional credit cycle response would suggest. The industry would be well served to engage those conversations proactively.

Where This Goes

Private credit as an asset class is not in existential trouble. The executives pushing back on crisis narratives are correct on the fundamentals. The loans are senior secured, defaults remain contained, and the industry is nowhere near the systemic leverage that defined 2008. Apollo’s willingness to go on offense with $5 billion in dry powder is its own signal about where sophisticated money sees the risk-reward.

The harder questions are more specific. Marks at some funds are probably running ahead of where assets would clear in a real sale process. Cliffwater’s structural position gets more complicated before it gets simpler. The regulatory response arrives regardless of how the credit cycle resolves and reshapes the economics of retail-facing private credit on a permanent basis.

Credit cycles transfer assets from sellers who needed liquidity to buyers who had the patience to wait. That process is underway. Weinstein has his bid in. Apollo has its warehouse line. The question for everyone else is whether the motivated seller universe exhausts itself before the pressure builds further.

The Melbourne conference gave us the industry’s own diagnosis. The treatment plan is still being written.

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Blackstone’s $83 billion BCRED posted its first monthly loss in more than three years, dropping 0.4% in February. The fund was flat for the first two months of 2026 after an 8% gain in 2025.

The loss reflected wider spreads and unrealized marks including Medallia, marked down to 78 cents. PIMCO president Christian Stracke isn’t buying what’s for sale. “A lot of the loans that are out for sale right now are pretty bad loans,” he said. “They’re not clearing at a price yet where we would be interested.”

PIMCO would need “high-teens” returns to get interested. The firm flagged a multi-year process of churning through weaker loans as capital flows out.

JPMorgan started pulling back from select private credit funds, paring lending amid panic about underwriting standards and software exposure. Other major banks have begun similar discussions. Banks lent at 150 bps above SOFR, down from 275 bps in 2024. Now they’re reconsidering terms.

Morgan Stanley predicts default rates will climb to 8% as AI disruption unfolds. Software represents 26% of BDC portfolios, with 11% of loans due in 2027 and another 20% in 2028. Houlihan Lokey shows 13% of lower-middle-market loans valued below 90% of par, an “alarming” sign.

Meanwhile, Goldman is raising $10 billion for a new direct lending fund. Oak Hill launched a retail interval fund called OFLEX. Some managers are calling this a buying opportunity. Others are walking away.

The market is splitting. BCRED just posted its first loss in three years. Banks that fueled the leverage boom are reconsidering terms. And PIMCO says nothing for sale is worth the price.

Key Market Themes

1. BCRED Posts First Monthly Loss Since 2022, Down 0.4% in February

Blackstone’s $83 billion flagship private credit fund posted its first monthly loss in more than three years, losing 0.4% in February according to its website. The last monthly decline was September 2022. Performance was flat for the first two months of 2026 after an 8% gain in 2025.

Blackstone told investors the February loss reflected wider spreads across public and private markets, as well as unrealized marks on individual names including Medallia. The firm pointed out the fund outperformed the leveraged loan market by around 0.4 percentage points in February and 1 percentage point since the start of the year.

A spokesperson said BCRED continues to deliver strong performance with a 9.5% annualized total return since inception for Class I shares. The fund was set up in January 2021.

Blackstone disclosed in February it had marked down the value of its loan to Medallia, a software company owned by Thoma Bravo, to 78 cents on the dollar. The loan has become a weak spot for private credit lenders, exposing sharp differences in valuations across managers.

The shift matters

BCRED breaking its three-year winning streak signals broader portfolio stress that smooth NAVs have masked. The 0.4% loss is small but the timing matters more than the magnitude. February marked the month software concerns peaked and redemption requests surged across the industry.

Medallia at 78 cents demonstrates how quickly marks can move when sponsors stop supporting refinancings. Other managers holding the same credit at different values creates the valuation arbitrage that undermines NAV credibility.

The fund’s 9.5% annualized return since inception remains strong, but that’s backwards-looking. Forward returns depend on whether February’s loss signals the start of prolonged mark deterioration or just monthly volatility. BCRED is the bellwether. If it’s showing cracks, smaller funds face worse.

2. PIMCO President Says Loans for Sale Are “Pretty Bad” at Current Prices

PIMCO president Christian Stracke is staying away from loans being put up for sale amid private credit tumult because they’re “pretty bad.” As funds offload assets to meet redemptions, the prices being asked are still too high given the risk. PIMCO would need to see “high-teens” returns to get interested in what’s increasingly stressed or distressed territory.

“A lot of the loans that are out for sale right now are pretty bad loans,” Stracke said Wednesday in a Bloomberg TV interview. “We’ve seen some blocks of those. They’re not clearing at a price yet where we would be interested in buying them.”

Stracke said there will be a multi-year process of churning through weaker loans as capital continues flowing out. Firms from Blue Owl to New Mountain have disclosed selling typically illiquid private loans this year. Investors rushed out after high-profile blowups turned the spotlight on what Stracke previously called “a crisis of really bad underwriting.”

Exposure to software borrowers is a particular concern as AI threatens business models. “In an industry that has 20%, 30%, sometimes even more of their loans in software, you have to imagine that some significant part of that is going to get into trouble and there will be losses in that space,” Stracke said.

What this reveals

PIMCO managing $2.3 trillion and publicly calling assets for sale “pretty bad” while demanding high-teens returns creates a bid-ask standoff. Sellers need higher prices to avoid triggering marks. Buyers want discounts that reflect actual risk. The gap prevents price discovery.

The multi-year churning process Stracke describes isn’t a prediction. It’s PIMCO’s deployment timeline. The firm raised $7 billion for asset-backed finance as the alternative while waiting for distressed opportunities to clear at appropriate prices.

When one of the world’s largest credit managers says loans aren’t clearing at prices where they’d buy, that’s not market commentary. That’s PIMCO telling sellers they’re still too optimistic about recovery values and telling the market the bid is 30-40 cents lower than current asks.

3. JPMorgan and Other Banks Reconsider Private Credit Lending Terms

JPMorgan decided to pare lending to select private credit funds as the $1.8 trillion sector wrestles with panic about underwriting standards, outdated valuations, and software exposure. Discussions have begun at other major lenders about funding they’ve provided to private credit firms.

Industry executives said privately that terms including loan-to-value ratios will tighten and some banks may press pause on new leverage lines while determining concentration risk that sparked the retail exodus.

Banks lent enthusiastically to private credit at low rates, often just 150 bps above SOFR, down from 275 bps in 2024. Now they’re considering raising costs when funds return for refinancing. This back leverage can push 8-9% gains into double digits, a milestone that helped draw institutional capital.

JPMorgan negotiated the right to revalue private credit assets at any time based on its own assessment. So far only a small number of borrowers are impacted and its retreat hasn’t triggered material margin calls. Heavy loan markdowns reported by BDCs in recent weeks pointed to declining asset quality banks can’t ignore.

Bank of America is sticking with plans to pump $25 billion into the asset class. Bernard Mensah, who heads strategy internationally, said signs of strain present an opportunity for “a very good, healthy cleanup.” BofA “didn’t rush” into private credit and still feels “very good about” its positioning.

Why the pullback accelerates pressure

Banks provided the leverage that turned 8% yields into 12-13% returns. If JPMorgan tightens terms and others follow, funds face the choice between accepting lower levered returns or finding new lenders at higher costs. Either outcome compresses performance.

The Office of Financial Research estimates private credit fund borrowing could be as high as $345 billion. JPMorgan’s move to revalue assets unilaterally gives the bank control over leverage ratios regardless of manager-reported NAVs. That creates potential forced deleveraging if bank marks diverge from fund marks.

BofA staying committed while JPMorgan pulls back creates bifurcation. Managers with BofA relationships maintain leverage access. Others face tighter terms or reduced capacity. The $25 billion BofA commitment becomes more valuable as JPMorgan capacity shrinks, giving BofA pricing power in future negotiations.

4. Continuation Vehicles Hit Record $225 Billion as Liquidity Escape Hatch

The private capital secondaries market hit $225 billion in 2025 with 86% of survey respondents expecting record volumes in 2026 per Houlihan Lokey’s inaugural Compass survey. Continuation vehicles are dominating conversations as participants question true risks and fair values against base rate volatility, potential stagflation, and war.

For some, continuation vehicles help avoid selling into crashing markets, stay invested in sectors temporarily out of favor, or give companies more time to reach full return potential. Others say the vehicles conceal sins sponsors don’t want to confess, whether poor management performance or outdated valuations that stymied exits.

Just 7% of LP-led secondaries in H2 2025 sold at par or better. Around a third sold at 90% or more of NAV, while more than one in four transactions went under 80%.

GPs are increasingly turning to secondaries to return liquidity to credit investors. Credit represented around 15% of market volume in 2025. A continuation fund allows existing investors to cash out while enabling new investors to put on new leverage, optimizing capital structure for sizeable returns.

Sixth Street warned the $1.8 trillion private credit industry may need years to work through an “intense yet warranted reset” causing redemption waves. “While some may believe today’s volatility is only a minor episode to be weathered, we believe there is going to be an honest reckoning for the sector resulting in a healthier and more resilient direct lending industry.”

The continuation dynamic

Continuation vehicles selling at 70-90 cents on the dollar expose the gap between reported NAVs and what sophisticated buyers will pay. When a third of LP-led secondaries clear below 90% of NAV, that’s not distressed selling. That’s price discovery.

The 15% credit volume in secondaries creates a secondary market for loans that managers claimed were hold-to-maturity. New investors putting on fresh leverage to goose returns demonstrates the model depends on layering debt rather than generating alpha from credit selection.

Sixth Street’s multi-year reset warning matters because the firm manages significant capital and has visibility across the market. Comparing private credit to the non-traded REIT segment, which took years to work through capital flow disruption, suggests this isn’t a one-quarter blip. It’s a structural repricing.

5. Lower-Middle-Market Shows Most Distress at 13% Below 90% of Par

Smaller companies are showing the most strain, with 13% of private credit loans in the lower-middle market valued below 90% of initial value, an “alarming” sign per Houlihan Lokey. Among companies with sub-$20 million in adjusted EBITDA, only 78% of loans are valued within 3% of original price, compared to 88% of all borrowers.

These loans may be struggling now, but the looming wall of maturities in software poses greater risks. Software companies are performing well currently, with nearly 70% achieving revenue growth and EBITDA margin growth year-over-year. Another 75% have loan-to-value ratios below 50%.

But 47% of software loans, and 56% by dollar amount, will mature by 2029 when firms must either repay debt or prove they can refinance in the age of AI. That’s over $160 billion in loans, a massive wall taking up significant proportion of private credit’s entire direct lending book.

For loans maturing sooner, there’s a “race against time” with companies potentially able to refinance before AI drastically changes the industry. Those with longer-dated maturity have more time to prepare but “their entire business model could be fundamentally challenged by more agile, AI-native competitors.”

While 4.3% of loans Houlihan Lokey tracked were in default, that made only 1.4% of total loan value. Many defaults were in smaller companies which, because of size, have lower potential impact on investors.

The distress distribution matters

Lower-middle-market at 13% below 90% of par versus 5% distressed across all borrowers shows risk concentrating in smaller loans. These borrowers lack financial cushion to ride out rate pressure, tariffs, and supply chain disruption.

But focusing on current small-company distress misses the larger threat. Software performing well today with 75% of companies at sub-50% LTV doesn’t mean the $160 billion maturity wall disappears. It means the stress is deferred to 2027-2029 when refinancing comes due.

The race against time framing captures the tension. Companies maturing in 2027 might refinance before AI disruption hits full force. Those maturing in 2028-2029 face both the need to refinance and prove their business model survived AI competition. Lenders can’t price that uncertainty, which explains why some are exiting exposure entirely rather than trying to underwrite through the unknown.

6. Morgan Stanley Sees Private Credit Defaults Climbing to 8% on AI Disruption

Default rates in direct lending will climb to 8% as AI advances continually disrupt software, according to Morgan Stanley. While AI disruption hasn’t impacted private credit fundamentals in a “material way” yet, elevated leverage and looming maturity walls within software may push default rates near peak levels unseen since the pandemic.

“Credit fundamentals of software loans are challenged with the highest leverage and the lowest coverage ratios across major sectors,” strategists including Joyce Jiang wrote. While defaults have moderated across public and private markets, defaults will climb further as AI disruption unfolds.

Software is the largest sector in BDC portfolios at roughly 26%. Private credit CLOs, which securitize middle-market loans, have about 19% of portfolios in software, with many loans coming due soon.

The maturity wall is “front-loaded for software loans in direct lending,” with 11% of such loans due in 2027, followed by another 20% in 2028. Default rates in direct lending last approached 8% in 2020 during COVID, though they recovered quickly and now hover in mid-single digits.

UBS strategists warned last month that private credit could see default rates surge as high as 15% in a worst-case scenario where AI triggers “aggressive” disruption among borrowers. Morgan Stanley strategists argue broader risks in private credit are significant but not systemic, posing limited danger of spillover to wider markets.

The 8% baseline assumption

Morgan Stanley calling for 8% defaults isn’t a bear case. It’s the base case assuming AI disruption continues at current pace. The comparison to 2020’s 8% peak during COVID provides the reference point, but COVID was a temporary shock that reversed. AI disruption is structural and permanent.

Software at 26% of BDC portfolios and 19% of private credit CLOs means if software defaults hit 15-20%, overall portfolio default rates reach 8% even if other sectors perform normally. The math is straightforward but the implications are severe for funds marketed as lower-volatility alternatives to high-yield bonds.

The 11% of software loans maturing in 2027 and 20% in 2028 creates the trigger mechanism. Defaults accelerate not when business models fail but when refinancing becomes impossible because lenders won’t roll maturing debt at any price. Morgan Stanley’s 8% forecast assumes a portion of that $160 billion maturity wall can’t be refinanced.

7. Goldman Raising $10 Billion While Oak Hill Launches Retail Interval Fund

Goldman Sachs Asset Management began preliminary talks to raise at least $10 billion for West Street Loan Partners VI, a global direct lending fund. The fund will focus on companies across North America, Europe, and Australia, typically targeting businesses generating more than $100 million in EBITDA. Its predecessor fund raised over $13 billion in 2024.

Goldman is targeting returns of 10-12% on a levered basis and 6-7% unlevered. At least 80% of the portfolio is expected to consist of senior loan positions.

Oak Hill Advisors is courting retail investors with launch of a new interval fund that will deploy capital across public and private debt. CEO Glenn August said the firm is ready to capitalize on dislocations across credit markets. “We’re not sitting here today and deploying all of our dry powder, but there is an opportunity to buy assets at prices that are more attractive than six months ago.”

The new OFLEX fund will target opportunities across direct lending, asset-backed finance, CLOs, public credit, and special situations. The non-publicly traded vehicle will allow investors to buy in daily and offer quarterly redemptions of at least 5% of net assets.

August sees the launch as opportunity to offer retail buyers access to a strategy available only to institutional buyers such as public pension funds for over 30 years. “We’re deep believers that individual investors should have access to alternative investments.”

Oak Hill’s own non-traded BDC, OCREDIT, saw repurchases well below the 5% limit in its most recent quarter per a person familiar. August said institutional investors are already looking to scoop up assets but individual buyers may take more time to dip back into the market.

The divergence signal

Goldman raising $10 billion while retail redemptions surge demonstrates institutional appetite remains strong even as individuals exit. The 10-12% levered return target matches current market pricing, not distressed pricing, suggesting Goldman sees current entry points as fair value not bargain hunting.

Oak Hill launching a retail interval fund during peak redemption pressure looks either brave or foolish depending on execution. August framing this as bringing institutional strategies to retail echoes the pitch that built the BDC boom, but launching amid the shakeout tests whether retail appetite exists at any price.

The 5% quarterly redemption limit August defends as “what the product was designed for” will determine OFLEX’s success. If the fund faces 10-15% redemption requests like peers, enforcing the 5% cap protects the portfolio but leaves investors trapped. That’s the liquidity mismatch retail is learning to fear.

Deals of Note

• Paratek-Radius merger - Blackstone leading $1.3B financing; Sixth Street contributed over $400M, joined by Oaktree and Silver Point

• GeneDx - Blackstone Credit & Insurance and Blackstone Life Sciences jointly led $100M facility for genomic testing company

• Taiwan wind farm - Deutsche Bank underwrote $625M loan, part syndicated to private credit funds and banks

• Women’s soccer team - Peyton Manning-backed franchise raised $40M through private bond sale

The Reality Check

BCRED posting its first loss in three years isn’t the headline. The headline is what happens if February’s 0.4% drop becomes March’s 0.6% and April’s 0.8%. Smooth NAVs only work when marks move in one direction.

PIMCO calling loans for sale “pretty bad” while demanding high-teens returns creates the standoff. Sellers can’t accept prices that trigger portfolio-wide revaluations. Buyers won’t pay prices that ignore actual recovery risk.

JPMorgan pulling back eliminates the leverage that turned 8% yields into 12% returns. Banks lent at 150 bps over SOFR because they believed NAVs were real. Now they’re renegotiating because they don’t.

Continuation vehicles selling at 70-90 cents expose what sophisticated buyers actually pay versus what NAVs report. When a third of LP-led secondaries clear below 90% of NAV, that’s not distressed selling. That’s the market telling managers their marks are 10-30 points too high.

Morgan Stanley’s 8% default forecast assumes AI disruption continues at current pace. The $160 billion software maturity wall hitting 2027-2029 doesn’t need aggressive disruption to cause problems. It just needs lenders unwilling to refinance because the business model uncertainty is ununderwritable.

Goldman raising $10 billion shows institutional capital still deploys. Oak Hill launching OFLEX shows some managers still chase retail. But BCRED’s first loss signals the inflection. PIMCO’s “pretty bad” pricing sets the new clearing level. JPMorgan’s pullback removes the leverage. And continuation vehicles at 70-90 cents show what the assets are actually worth when someone has to sell.

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The private credit industry built its retail pitch on a simple reframe. Illiquidity was not a risk to be compensated for. It was a feature to be marketed. Patient investors earned higher yields than public markets offered, with smoother returns and steady income that did not gyrate with every Federal Reserve press conference.

The pitch worked spectacularly. Capital flooded into interval funds, non-traded BDCs, and private credit vehicles of every description. The industry grew to nearly $2 trillion.

What none of the marketing materials explained clearly enough was the exit. These structures were designed to accommodate modest, staggered redemptions from a broadly satisfied investor base. They were not designed for a simultaneous, industry-wide crisis of confidence. When the underlying assets come into question, when fraud allegations surface across multiple unrelated deals, and when the marks themselves become disputed, the quarterly liquidity promise reveals itself for what it always was: a best-efforts commitment with hard limits baked into the fine print.

Those limits are now being hit. Everywhere. At once. What follows is a breakdown of how the pressure is building, where it is concentrated, and what the industry is doing about it.

The Redemption Wave Is Systemic

Cliffwater’s $33 billion Corporate Lending Fund capped redemptions at 7% in Q1 after investors requested 14%, double the regulatory maximum. Morgan Stanley’s North Haven Private Income Fund honored less than half of tender requests, returning $169 million against roughly $370 million sought. BlackRock capped its HPS Corporate Lending Fund at 5% after investors tried to pull 9.3%.

These are not isolated stress events at marginal managers. These are some of the largest and most institutionally credible vehicles in the space, hitting structural limits simultaneously.

The mechanics matter. When redemption pressure exceeds quarterly caps, managers face a binary choice: sell assets to meet exits, or gate. Most have chosen to gate. The ones that chose to sell are discovering the consequences in real time.

Selling quality assets first, because they are the only ones with a bid, creates the liquidity paradox now visible in leveraged loans. According to Octaura data, the 100 most liquid loans fell 77 basis points in the last week of February versus 40 basis points for the broader market. Better debt is underperforming because it is the only debt that can be sold. The fund that tries hardest to accommodate its investors ends up penalizing the ones who stay.

Quarterly liquidity promises were always contingent on orderly markets. The industry is now learning, in public, what happens when markets stop being orderly. For investors still inside these vehicles, the key question is not whether the assets are good. It is whether the fund structure can survive the exit pressure long enough to prove it.

What the Industry Is Doing About It

Apollo has announced plans to report NAVs monthly initially, with daily reporting as the stated goal. The Bank of France recently flagged concerns about opaque and increasingly leveraged financing structures in private credit, signaling regulatory pressure is building on both sides of the Atlantic. Apollo is trying to get ahead of it. Others will follow or be pushed.

The pressure is also coming from bank counterparties. JPMorgan has begun restricting lending to private credit funds after marking down the value of software-linked loans in its own portfolios. The decline in those asset values limits how much the bank can lend against them. It is a different kind of pressure than retail redemptions, and in some ways a more serious one: when the banks financing the funds start losing confidence in the collateral, the feedback loop tightens considerably.

The one stable signal is Japan. Nippon Life, Meiji Yasuda, and Dai-ichi Life are all maintaining or increasing private credit allocations into the next fiscal year. Patient institutional capital is not running. The divergence between institutional staying power and retail redemption pressure will define who owns this asset class a decade from now.

The Software Thesis Is Now the Consensus Risk

BDCs sit at 26% software concentration on average. Private credit CLOs are at 19%. Broadly syndicated loans sit at 16%. The thesis is straightforward: AI disrupts SaaS business models, coverage ratios compress, and a refinancing wall peaking in 2028 becomes a default wall instead.

What is less appreciated is the timeline. Refinancing pressure builds into 2027 before the maturity wall peaks in 2028. If AI disruption continues eroding software borrower fundamentals over that window, the refinancing environment will be materially worse than when the debt was originally underwritten. Partners Group chair Steffen Meister put it plainly: default rates could double in the next few years.

The leveraged loan market is already repricing this risk. The $6 billion Invesco Senior Loan ETF saw $460 million of outflows last week, its sixth straight week of withdrawals. The State Street Blackstone Senior Loan ETF extended its redemption streak to seven weeks, the longest in its history. Both have slid to their lowest levels since the 2020 pandemic selloff. Meanwhile, public markets are absorbing supply in the other direction: Amazon’s $50 billion bond deal last week contributed to a record single day of corporate issuance. Capital is not leaving credit. It is rotating out of private and into public, which is its own form of verdict on relative confidence.

Most of the actual credit deterioration has not yet shown up in reported marks. Private credit managers mark portfolios quarterly using valuations that are inherently backward-looking. By the time the marks reflect the operating reality of AI-disrupted software borrowers, the refinancing window will already be narrowing. Investors relying on current NAVs are working with a lagging indicator in a fast-moving situation.

Blue Owl Is the Epicenter

The $1.4 billion loan sale from OBDC, OBDC II, and OTIC at 99.7 cents was presented by Co-President Craig Packer as a clean, arm’s length transaction. Four institutional buyers, CalPERS, OMERS, BCI, and Kuvare, conducted independent diligence and purchased on identical terms. Packer held a private investor call to make this case explicitly. It has satisfied almost no one.

Short interest in Blue Owl stock is at an all-time high. Shares are down roughly 40% year-to-date. Saba Capital and Cox Capital have launched an unsolicited tender offer for OBDC II at a 33% NAV discount. Weinstein’s offer is doing something the secondary market cannot: generating price discovery on assets whose marks are increasingly in dispute.

Kuvare reviewed 117 portfolio companies and reportedly rejected seven. Kuvare disputes that characterization. The exact number matters less than the implication: a buyer with deep information access passed on a meaningful subset of the portfolio. What those rejected assets look like on OBDC’s books is an open question the market is clearly asking.

Blue Owl is the industry’s stress test in real time. If its marks hold up under scrutiny, the sector stabilizes. If they do not, the repricing conversation moves from Blue Owl specifically to private credit broadly. That is the binary the market is currently pricing.

The Fraud Problem Has Not Been Fully Reckoned With

Market Financial Solutions in the UK, First Brands and Water Station in the US, Fat Brands in bankruptcy. The common thread is asset-based lending vehicles with opaque collateral structures that experienced lenders missed. Apollo’s Atlas SP, Barclays, Castlelake, Jefferies, and Santander all had MFS exposure.

The central allegation, that MFS pledged the same collateral multiple times, is not novel. Identical failures appeared in First Brands and Tricolor. When the same vulnerability produces the same failure mode across multiple unrelated borrowers, it stops being an underwriting error and starts being a systemic design flaw.

Jefferies is the most exposed name. Lawsuits from Western Alliance, Indiana Public Retirement System, and the Eugenia entities all stem from its Leucadia arm. Its stock is down nearly 40% year-to-date. The rogue employee defense may be legally sound. It is reputationally costly regardless.

How many other deals from the 2020 to 2023 vintage share the same structural vulnerability but have not yet blown up? The litigation cycle will eventually answer that question. The market will start pricing the uncertainty well before the lawsuits resolve.

The Structural Mismatch Was Always There

The problem was never the asset class. Private credit properly underwritten and properly structured serves a legitimate function. The problem was the wrapper. Interval funds and non-traded BDCs marketed quarterly liquidity on top of assets that are fundamentally illiquid. Institutions understood that tradeoff. Many retail investors are discovering it now, under pressure, when their options are most limited.

The reckoning is not arriving all at once. It is arriving fund by fund, gate by gate, quarter by quarter. Slow-moving crises allow narratives to calcify before the full picture emerges. By the time the marks reflect reality, the decisions that mattered have already been made.

The retail democratization of private credit was always a structural experiment dressed up as a product innovation. What the industry does in the next twelve months on transparency, gating policy, and mark integrity will determine whether retail access to private credit survives as a viable product category or becomes a cautionary tale. The clearest sign of where things stand: the managers best positioned to survive this period are the ones moving toward daily NAV reporting and tighter collateral verification, not because regulators are forcing them to, but because their investors are. That pressure, more than any reform effort, is what will ultimately reshape the industry.

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Blue Owl’s shares are down 30% this year. The firm suspended quarterly redemptions at one fund. It sold $1.4 billion in assets to its own insurance unit. Activist Boaz Weinstein is offering to buy shares at 20-35% discount to NAV.

And this week, Blue Owl led a $750 million debt deal for Vista Equity Partners’ buyout of Nexthink, a Swiss-American software company. The $650 million term loan priced at 550 bps over benchmark.

Then PIMCO issued its verdict: direct lenders will face a “full-blown default cycle” after years of loosened underwriting. BlackRock followed by capping withdrawals from its $26 billion HPS Corporate Lending Fund at 5% after shareholders requested 9.3%. Investors will get back about $620 million instead of the $1.2 billion they wanted.

Blackstone took a different approach. The firm allowed investors to redeem a record 7.9% from its $82 billion BCRED, equivalent to $3.8 billion. How? More than 25 senior leaders pitched in $150 million, combined with $250 million of firm capital.

Meanwhile, Goldman Sachs revealed that 146 European companies have ceded control to direct lenders since 2017. Around $38 billion of loans to 150 companies became troubled. Goldman said reported default rates of 2% likely “understate the stress under the surface.”

Private credit executives are now openly divided. Apollo CEO Marc Rowan warned of a shakeout that “won’t be short term.” Marathon’s Bruce Richards predicts 15% default rates for software in 2027 and 2028. Ares CEO Michael Arougheti called UBS Group’s 15% forecast “absolutely wrong” and “actually irresponsible.”

The solution emerging: asset-backed finance. Sound Point closed $1.5 billion for an ABF fund. Pimco raised more than $7 billion for ABF last year, calling it “investment-grade-like” risk.

At JPMorgan’s 3,500-person Miami conference, the Iran war brought reality checks. New issuance slowed to a trickle. JPMorgan is preparing $20 billion for Electronic Arts and $5.3 billion for Qualtrics. Software firm Qualtrics’ existing debt was quoted at 87.5 to 88.5 cents, signaling steep discounts ahead.

The private credit market sits at an inflection point. Some managers are doubling down. Others are warning investors to brace for pain. And the data from Europe suggests the stress isn’t theoretical. It’s already here.

Key Market Themes

1. Blue Owl Leads $750 Million Software Deal Amid Redemption Crisis and Share Collapse

Blue Owl led a $750 million debt financing for Vista Equity Partners’ buyout of Nexthink, a Swiss-American software company that uses artificial intelligence to monitor employee device performance. The financing includes a $650 million term loan and $100 million revolving credit facility. Blue Owl was the largest lender. The term loan priced at 550 bps over benchmark.

Vista agreed in October to acquire a majority stake in Nexthink in a deal valuing the company at $3 billion. The financing wrapped this week as Blue Owl shares have fallen over 30% this year amid scrutiny over redemption limits and software exposure. The firm suspended quarterly withdrawals from one fund last month and opted to return capital through asset sales, including $1.4 billion in loans sold to three pension funds and Kuvare, Blue Owl’s own insurance asset manager.

Representatives for Vista and Blue Owl declined to comment.

Why It Matters

Blue Owl doubling down on software financing while facing redemption pressure and activist tender offers at steep discounts demonstrates either conviction or desperation. The 550 bps spread represents premium pricing but Vista could have accessed bank financing or other direct lenders. Blue Owl’s willingness to lead the deal signals the firm needs deployment velocity to offset redemptions and maintain fee streams. The $3 billion valuation on an AI-enabled software company underscores the challenge: is Nexthink’s AI monitoring capability a defense against disruption or additional exposure to the sector’s uncertainty? Vista buying now suggests private equity sees opportunity in software valuations. Blue Owl financing it suggests private credit has limited options to rotate away from the sector that built the industry.

2. PIMCO Predicts “Full-Blown Default Cycle” After Years of Loose Underwriting

Pacific Investment Management Co. warned that direct lenders will eventually face a “full-blown default cycle” after years of loosened underwriting standards and heavy fundraising. “Like every mature segment of leveraged finance, direct lending should eventually face a full-blown default cycle, one that would test its resilience to both sector-specific and macroeconomic shocks,” PIMCO analysts Lotfi Karoui and Gabriel Cazaubieilh wrote Friday.

PIMCO flagged heavy software exposure in direct lending portfolios will likely constrain performance relative to public stocks and other parts of private credit. Moreover, direct lending funds haven’t been compensating investors for locking up their money for longer. The firm warned that semi-liquid doesn’t mean fully liquid: “While the risk of a true bank-run dynamic in these vehicles is generally low, given explicit contractual limits on redemptions and the ability of managers to gate flows, investors must still assess their own liquidity needs and tolerance for constrained access to capital.”

PIMCO was an early critic of private credit and took the other side by hunting for emerging problems in private-credit-backed companies. The roughly 55-year-old firm oversees about $2.3 trillion. Last year, Pimco raised more than $7 billion for asset-based finance strategies.

Why It Matters

PIMCO calling out the inevitable default cycle isn’t news. What matters is the source and the timing. PIMCO manages $2.3 trillion and raised $7 billion for ABF last year, positioning itself as the alternative to direct lending rather than a competitor within it. The firm’s critique carries weight because it’s been consistent, early, and backed by deployment into what it views as safer structures. The warning that direct lenders haven’t compensated investors for illiquidity premium strikes at the core value proposition. If private credit delivers leveraged loan returns without leverage loan liquidity, the product doesn’t justify the lock-up. PIMCO pointing to ABF as offering “investment-grade-like” risk levels creates a bifurcation narrative: smart capital goes to asset-backed, dumb capital chases sponsor-backed deals at compressed spreads.

3. BlackRock Gates $26 Billion HPS Fund at 5% After 9.3% Redemption Requests

BlackRock curbed withdrawals from its $26 billion HPS Corporate Lending Fund after client redemption requests spiked to 9.3% of shares. The firm capped repurchases at 5%, meaning investors will get back about $620 million instead of the $1.2 billion requested based on year-end values. It’s the clearest gating instance among major private credit funds since late last year.

BlackRock said the step is in line with existing liquidity management for the flagship direct lending retail product, known as HLEND, and a “foundational” feature of the investment. “Without it, there would be a structural mismatch between investor capital and the expected duration of the private credit loans in which HLEND invests,” the firm said.

Last month, the non-traded BDC offered to tender as much as 5% of its shares as typical. It faced withdrawals of about 4.1% in the prior period. A separate BlackRock private credit fund with about $2.2 billion of assets also disclosed investors asked to redeem 4.5% of shares. That vehicle, called BlackRock Private Credit Fund, will meet all those requests.

Why It Matters

BlackRock gating HLEND at exactly 5% when requests hit 9.3% demonstrates the first major manager enforcing contractual limits rather than meeting excess demand through balance sheet support or asset sales. The decision protects the fund from forced selling but sends a clear signal: liquidity is conditional, not guaranteed. The $620 million versus $1.2 billion gap leaves $580 million of unfulfilled redemptions that either roll to next quarter or trigger investor anxiety about being trapped. BlackRock shares fell as much as 8.3% Friday while alternative asset manager stocks swooned, off to their worst start to a year in a decade. HPS executives said the restriction would help buy into “compelling investment opportunities” amid uncertainty, framing gating as offensive rather than defensive. The optics matter less than the precedent: if BlackRock gates, other managers have cover to do the same.

4. Blackstone Employees Pitch In $150 Million to Meet Record BCRED Redemptions

Blackstone allowed investors to redeem a record 7.9% of shares from its $82 billion flagship BCRED, equivalent to around $3.8 billion. To meet the requests without changing tender terms, more than 25 senior leaders from across Blackstone pitched in some $150 million, combined with $250 million of the firm’s own capital.

The withdrawals exceeded the 5% quarterly limit typically allowed by funds like BCRED. Managers can increase quarterly offers by an additional two percentage points without formally reopening the tender. The remaining 0.9% required employee and firm capital to avoid a costly re-tender that could have been perceived badly.

Brad Marshall, Blackstone’s global head of private credit strategies, said elevated redemptions reflected “a lot of noise” in the market but the fund was “doing what it’s supposed to do.” BCRED had its highest institutional inflows during Q4, with roughly $2 billion in new commitments. The fund reported $8 billion in available cash at year-end.

Why It Matters

Blackstone turning to employees for $150 million to avoid gating reveals the reputational cost of being first to formally restrict withdrawals beyond the 7% ceiling. The firm had liquidity with $8 billion in cash and borrowing capacity but couldn’t redeem more than 7% without restarting the tender process and changing terms. That would take time and send a worrying signal. The solution, having senior leaders write checks, demonstrates management’s view that temporary capital infusion is cheaper than permanent reputational damage. The $400 million total from Blackstone and employees represents less than 0.5% of the $82 billion fund but bridges the gap that separates meeting all requests from gating at 7%. The decision underscores liquidity management as much psychological as mathematical. Investors seeing 100% of requests met versus 89% changes perception even if the fund’s underlying portfolio hasn’t changed.

5. Goldman Sachs: 146 European Companies Ceded Control to Direct Lenders

Some 146 companies in Europe have ceded control to direct lending funds after they could no longer afford to pay debts, according to Goldman Sachs. The findings offer a rare glimpse into one of the more opaque areas of the $1.8 trillion private credit market. Unlike US peers that run business development companies with public portfolio valuations, European direct lending funds generally don’t publish detailed holdings information.

Goldman analysts chronicled leveraged buyouts financed by senior private loans since 2017. They showed that around $38 billion of those loans to 150 companies became troubled. Of those, four companies became insolvent or forced to liquidate, the rest involved debt-for-equity swaps. The largest number of troubled deals, 24, originated in 2017 during cheap financing. Since 2023 alone, more than 100 borrowers have ended up under lender control as higher borrowing costs squeezed finances.

Financial strain has been particularly acute in consumer and retail sectors, where Goldman identified 61 companies taken over by lenders. Firms with less than €20 million in EBITDA accounted for nearly half the troubled loans. Goldman analysts Patrick Badaro and Juliana Hadas said reported default rates of 2% likely “understate the stress under the surface.”

Why It Matters

Goldman’s 146 company count provides the first comprehensive snapshot of European private credit stress and exposes the gap between reported 2% default rates and actual portfolio deterioration. Debt-for-equity swaps allow lenders to avoid marking defaults while taking operational control, masking stress in performance reporting. The fact that 100+ borrowers ceded control since 2023 alone demonstrates the impact of higher rates on portfolios originated in the 2017-2021 cheap money era. Consumer and retail accounting for 61 takeovers highlights cyclical sector vulnerability. Companies under €20 million EBITDA representing nearly half of troubled loans suggests the middle-market sweetspot became a risk concentration. The analysis matters because European funds don’t publish BDC-style disclosures, making Goldman’s research one of few windows into actual portfolio stress. The conclusion that stress is “concentrated” rather than “systemic” provides managers talking points but doesn’t change the math: $38 billion troubled, 2% reported defaults, and opacity that prevents independent verification.

6. Sound Point Closes $1.5 Billion Asset-Backed Fund as ABF Emerges as Safe Alternative

Sound Point Capital Management closed an asset-backed private credit fund with $1.5 billion in total commitments, which the credit manager said was oversubscribed. Strategic Capital Fund III will deploy into asset-backed, first-lien investments for US corporate borrowers, with check sizes averaging between $150 million and $300 million.

The fund will mainly focus on accounts receivable-backed financings, as well as equipment and inventory-backed structures. Sound Point investors include a third-party permanent capital fund managed by Blue Owl’s Dyal Capital unit. Other strategic investors include bond insurance provider Assured Guaranty and private equity firm Stone Point Capital.

The fund launch comes amid recent cooling in private debt capital raising as investors grow wary of sectors potentially vulnerable to AI-related disruption, like software. PIMCO pointed to asset-based finance as offering “investment-grade-like” levels of risk and raised more than $7 billion for ABF strategies last year.

Why It Matters

Sound Point raising $1.5 billion while direct lending fundraising cools demonstrates capital rotation toward structures with tangible collateral and shorter duration. ABF targeting $150-300 million checks positions between traditional asset-based lending and large corporate direct loans, filling a gap as banks retreat and direct lenders face redemptions. Accounts receivable, equipment, and inventory backing provides liquidation value that software loans lack, reducing recovery risk in defaults. The oversubscribed close signals investor demand for private credit exposure without software concentration or valuation opacity. PIMCO’s positioning of ABF as “investment-grade-like” risk creates bifurcation between asset-backed structures and sponsor-backed leverage, potentially fragmenting the $1.8 trillion private credit market into quality tiers. Sound Point’s investor base including Blue Owl’s Dyal, Assured Guaranty, and Stone Point demonstrates institutional acceptance. The timing, closing amid software selloff and redemption pressure, suggests ABF becomes the narrative escape hatch for an industry under fire.

7. Private Credit Executives Openly Split on Default Outlook at Miami Conference

At JPMorgan’s 3,500-person leveraged finance conference in Miami Beach, private credit executives clashed over whether UBS Group’s forecast of 15% default rates is accurate. Marathon Asset Management’s Bruce Richards said it’s “unequivocally coming.” Ares Management CEO Michael Arougheti called the UBS report “absolutely wrong” and “actually irresponsible.”

Apollo’s John Zito said the UBS report was “taken out of context” and presented as a “severe bear case.” Apollo CEO Marc Rowan warned of a shakeout coming for private credit firms that “won’t be short term.” Soros Fund Management CIO Dawn Fitzpatrick predicted “a painful 18 to 24 months” for private credit and private equity investors.

Marathon’s Richards is staying away from software, predicting default rates could hit 15% for 2027 and stay at those levels for 2028. He focuses on “HALO” businesses: hard assets, low obsolescence. “If you have a direct lending loan to a company that does sprinkler systems for commercial buildings or concrete with rebar that’s going to help power the reindustrialization of America, that’s a very stable business,” Richards said.

Richards noted private credit’s 23% exposure to software is too much when the sector makes up 1% of all US companies and 7% of publicly-listed businesses. Marathon oversees more than $24 billion and has just 1% exposure to software.

Why It Matters

The public split between Arougheti calling UBS “irresponsible” and Richards saying 15% defaults are “unequivocally coming” demonstrates the industry’s credibility problem. When CEOs of major managers can’t agree on whether defaults will be 2% or 15%, investors lose confidence in all guidance. Marathon positioning around hard assets and low obsolescence while keeping software at 1% creates performance differentiation if Richards proves right. Ares defending the sector while software represents 9% of its private credit AUM creates accountability if stress materializes. The 23% industry exposure to software when it’s 1% of US companies and 7% of public markets underscores concentration risk that portfolio construction ignored during deployment pressure. Rowan’s warning that the shakeout “won’t be short term” from Apollo, which cut software from 20% to 10% last year, signals even managers taking action expect prolonged pain. The divergence matters because it reveals managers positioning for different outcomes: those defending current marks versus those already rotating portfolios.

Deals of Note

• Nexthink - Blue Owl led $750M comprising $650M term loan at 550 bps plus $100M revolver for Vista Equity Partners’ $3B acquisition

• Champions Group - Blackstone financed acquisition of residential services provider with more than $1B private credit loan

• GeneDx - Blackstone Alternative Credit and Blackstone Life Sciences jointly led $100M facility for genomic testing company

• Apiam Animal Health - Barings co-lead manager of A$180M+ deal for Adamantem Capital’s acquisition

• Arcmont continuation fund - Ares emerged as primary buyer, Pantheon significant buyer in vehicle raising up to $2.2B from Arcmont’s 2019 fund

• New Mountain Finance - Coller Capital agreed to buy $477M of assets as private credit fund boosts financial flexibility

• Electronic Arts - JPMorgan preparing roughly $20B debt offering, split between $9.5B junk bonds and $6B leveraged loans for record LBO

• Qualtrics - JPMorgan preparing $5.3B comprising $3.3B leveraged loan and $2B for high-yield or private credit to support Press Ganey purchase, existing debt quoted at 87.5-88.5 cents

The Reality Check

Blue Owl leading $750 million for Vista’s software buyout while shares collapse 30% isn’t conviction. It’s necessity. The firm needs deployment to offset redemptions. The 550 bps spread is premium but Vista had options. Financing AI-enabled software during peak sector uncertainty demonstrates limited ability to rotate away from the exposure that built the franchise.

Pimco predicting a “full-blown default cycle” matters because the firm raised $7 billion for asset-backed finance instead. When a $2.3 trillion manager says direct lending is headed for stress and deploys elsewhere, that’s not commentary. It’s competition.

The split between Arougheti calling 15% defaults “irresponsible” and Richards saying they’re “unequivocally coming” destroys credibility. If CEOs managing hundreds of billions can’t agree whether defaults will be 2% or 15%, why should investors trust any guidance?

Goldman’s 146 European companies ceding control exposes the gap between 2% reported defaults and actual stress. Debt-for-equity swaps mask defaults while lenders take operational control. The $38 billion troubled loan count suggests reported metrics understate reality by an order of magnitude.

BlackRock gating at 5% when requests hit 9.3% establishes precedent. Blackstone avoiding the gate with $150 million in employee checks demonstrates the reputational cost of being first to restrict. The math is simple: $400 million of temporary capital is cheaper than permanent damage to the brand.

The market now splits cleanly: believers defending marks and doubling down versus realists rotating to hard assets and predicting 15% defaults. The redemption pressure forces the reckoning. And the data from Europe suggests the stress isn’t coming. It’s been here for years, hidden in debt-for-equity swaps and 2% default rates that understate everything beneath the surface.

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Blue Owl just demonstrated what happens when semi-liquid structures meet illiquid assets under pressure.

Facing a deadline to return cash to investors in Blue Owl Capital Corp II after scrapping a merger that would have cost investors 20%, the firm sold $1.4 billion in loans at 99.7% of par. The buyers: three of North America’s biggest pension funds and Kuvare, Blue Owl’s own insurance asset manager acquired in 2024 for $750 million.

The optics are striking. Blue Owl co-founder Craig Packer called the near-par sale “an extremely strong statement” that proves portfolio quality. Barclays warned the transaction could provide a template where debt held in publicly visible BDCs gets shifted into “more opaque and more highly leveraged vehicles.” Unlike BDCs with 1x leverage, CLOs typically run 9-10x leverage. “It would add additional leverage to private credit assets,” Barclays wrote.

Then Boaz Weinstein entered. His hedge fund Saba Capital Management and Cox Capital Partners launched a tender offer for Blue Owl BDC shares at 20-35% discount to the most recent estimated net asset value. Existing shareholders would have the option to sell to the firms, providing an exit at steep discount. “With rising redemptions and limited liquidity, private BDCs and interval funds are facing one of their toughest periods yet, leaving many investors with limited options,” Weinstein wrote.

The price any tender clears at will provide a window into where the market gauges actual value versus Blue Owl’s internal NAV. Steeply discounted exits could hurt future fundraising. Democratic Senator Elizabeth Warren seized on the news: “The Trump administration needs to wake up. Stop pushing these risky investments into Americans’ retirement accounts.”

Blue Owl shares closed the week at their lowest level since June 2023. The firm has decided to return 30% of OBDC II capital at book value in the next 45 days rather than resume quarterly 5% redemptions. Packer insisted: “We aren’t halting redemptions. We’re in fact accelerating redemptions.”

Meanwhile, traditional banks make contradictory moves. Bank of America committed $25 billion to private credit deals per internal memo, joining JPMorgan’s $50 billion allocation. But Bank of Ireland is withdrawing from US leveraged acquisition financing entirely, citing competition from direct lenders hindering its ability to earn higher returns. The Irish lender’s €1.2 billion loan book will run down over three years.

The software uncertainty continues. Private companies including McAfee, Rocket Software, and Perforce released earnings ahead of schedule to convince lenders of AI resilience. JPMorgan is preparing to raise $5.3 billion for Qualtrics’ purchase of Press Ganey, testing appetite for software debt. And Vantor came to market with $2.3 billion to refinance Sixth Street unitranche at 425-450 bps, sharply inside the original private credit pricing.

Blue Owl’s solution to its redemption crisis raises more questions than it answers. When the only way to meet withdrawals is selling assets to your own subsidiaries, the liquidity isn’t real. It’s an accounting exercise.

Key Market Themes

1. Blue Owl Sells $1.4 Billion in Loans to Own Insurance Unit Plus Pensions

Blue Owl found four buyers for $1.4 billion in loans to help pay out investors facing a deadline in Blue Owl Capital Corp II: California Public Employees’ Retirement System, Ontario Municipal Employees Retirement System, British Columbia Investment Management Corp, and Kuvare, Blue Owl’s own insurance asset manager. The firm sold the loans at 99.7% of par value.

The sale was evenly spread across three funds and part of a plan to return cash after scrapping a merger with a publicly traded vehicle that would have hit investors with losses of about 20%. Blue Owl acquired Kuvare Asset Management from Kuvare in a $750 million deal in 2024, which Blue Owl used to form Blue Owl Insurance Solutions. At that time, Kuvare Asset Management had around $20 billion in assets under management.

Blue Owl co-founder Craig Packer said bidder interest was so strong “they would have bought multiple amounts more.” He described the size and price as “an extremely strong statement,” even as investors dumped the firm’s stock on concerns about rising risks in private credit assets.

Why It Matters

The transaction highlights rising entanglement between private credit and insurance. Barclays warned the deal could provide a template where debt held in publicly visible BDCs gets shifted into more opaque and highly leveraged vehicles. Citing public disclosures, analysts said some assets being sold will likely make their way into Blue Owl-managed CLOs, a popular insurance investment because of high ratings and beneficial capital treatment. Unlike BDCs with 1x leverage, CLOs typically run 9-10x leverage. “It would add additional leverage to private credit assets,” Barclays wrote. Packer dismissed concerns: “The fact that one of the four might be a part of our insurance business, how is it reasonable that that would undermine the other 75% of the sales?”

2. Weinstein Launches Tender Offer at 20-35% Discount to Blue Owl NAV

Activist investor Boaz Weinstein’s Saba Capital Management and Cox Capital Partners launched a tender offer for Blue Owl BDC shares at 20-35% discount to the most recent estimated net asset value and dividend reinvestment price. That will be determined when tender offers start after a 10-business day notice period. Existing shareholders would have the option but no obligation to sell to the firms.

Saba and Cox sent notice to purchase OBDC II shares on February 17. They plan similar offers for Blue Owl Technology Income Corp and Blue Owl Credit Income Corp. The firms said the tender would “provide a liquidity solution to retail investors in the wake of a significant industry-wide increase in BDC redemption requests, multiple quarters of net outflows and a rise in redemption gate provisions.”

Weinstein, a Deutsche Bank alum who launched Saba in 2009, has sometimes positioned himself as a defender of retail investors. Cox Capital is an investor in dozens of private funds from BDCs to REITs, providing “secondary liquidity” to investors in alternative assets per its website.

Why It Matters

The price any tender clears at will provide a window into where the market gauges value versus Blue Owl’s internal NAV. Steeply discounted exits could hurt future fundraising. Michael Covello at Robert A. Stanger said for an investor saying “I’ve read all the headlines, I’m scared, I don’t care what it costs, I want to get out today,” the tender could be a good opportunity even with the discount. “But there’s a cost to liquidity.” The move comes days after Blue Owl restricted withdrawals from OBDC II. Investors in BDCs holding more than $1 billion asked to pull a total of more than $2.9 billion in Q4, up 200% from the prior period per Stanger data.

3. Bank of America Commits $25 Billion While Bank of Ireland Exits

Bank of America is committing $25 billion to private credit deals per internal memo, preparing a war chest to advance in the lucrative market. The move underscores a broader push from Wall Street giants including JPMorgan, which allocated $50 billion last year, and Goldman Sachs, which created a new division for the push.

Simultaneously, Bank of Ireland is withdrawing from the US market for leveraged acquisition financings as private credit chips away at fees historically collected by traditional banks. The Irish lender’s decision to wind down its loan book for US acquisition financings came after a review found heightened competition from direct lenders hindering its ability to earn higher returns.

Loans tied to US leveraged acquisition financings were the “biggest driver” for the bank’s €137 million impairment charge. The loan book, worth €1.2 billion in December, is expected to run down over three years. In the US, most leveraged finance deals are led by local banks, leaving fewer fees for European peers.

Why It Matters

The divergence reveals how private credit competition affects banks differently based on scale and geography. Bank of America deploying $25 billion demonstrates major US banks treating private credit as strategic priority rather than competitive threat. The partnership model with direct lenders on large deals creates fee-sharing opportunities. Bank of Ireland’s exit shows smaller or foreign banks struggling to compete as private credit reshapes leveraged finance. Bob Kricheff at Shenkman Capital Management: “Private credit has reshaped the landscape of leveraged finance, with reports indicating that it has grown to be at least as large as the leveraged loan market, and even larger when uninvested commitments are included.”

4. Private Software Firms Release Earnings Early to Calm Lender Nerves

A handful of private equity-backed software firms including McAfee released earnings ahead of schedule to convince lenders of resilience to AI disruption. McAfee told debt investors preliminary Q4 revenue was $626 million, little changed from the prior year. The firm, backed by Advent International and Permira, advanced earnings to provide clarity during market volatility.

Rocket Software, the Bain Capital-backed IT modernization firm, disclosed 2025 revenue rose 5.2% to about $1.4 billion compared with the year earlier. Clearlake Capital and Francisco Partners-backed Perforce Software reported slight decline in annual revenue to $644 million from $654 million in 2024. On a recent call, Perforce management detailed efforts to drive sales by embedding AI into products.

Cloudera, backed by Clayton Dubilier & Rice and KKR, highlighted recent momentum in a statement. The firm closed fiscal 2026 with strong Q4 “fueled by over 50% year-over-year growth in new and expansion business, robust annual recurring revenue growth.”

Why It Matters

The early earnings releases represent private companies adopting public company crisis management tactics. Software firms accelerating disclosure to reassure lenders demonstrates the pressure on portfolio companies as debt investors scrutinize AI exposure. McAfee’s roughly $2 billion unsecured bonds due 2030 rose to 85 cents on the dollar February 9 from 79.5 cents prior week, though have since dropped swept up by continued selloff. Rocket Software’s $2.7 billion term loan due 2028 was quoted around 97 cents. Cloudera’s $2.19 billion term loan due 2028 was quoted around 94 cents, up from 86.5 cents January 30. The willingness to share preliminary results signals companies prioritizing lender confidence over traditional disclosure schedules.

5. JPMorgan Tests Software Appetite With $5.3 Billion Qualtrics Deal

A lender group led by JPMorgan is preparing to raise $5.3 billion of debt to support Qualtrics International’s purchase of health-care survey firm Press Ganey Forsta. The package is expected to comprise a $3.3 billion leveraged loan issued in US dollars and euros, while another $2 billion could be sold in the high-yield bond market or to private credit firms. Proceeds will also refinance about $1.8 billion in Press Ganey’s debt. A deal could launch in March.

The lender group is looking to raise cash as wary investors assess how new AI models could disrupt software. Qualtrics, which makes online survey tools, agreed in October to buy Press Ganey in a deal valued at $6.75 billion. Silver Lake Management owns Qualtrics.

The financing talks come a week after direct lenders provided loans for two other software companies, Clearwater Analytics and OneStream, being acquired by private equity firms.

Why It Matters

The $5.3 billion Qualtrics financing tests whether syndicated markets can still absorb large software deals or if private credit dominates despite AI concerns. The structure offering flexibility to place $2 billion in either high-yield bonds or private credit reflects lenders hedging distribution risk. JPMorgan leading the deal signals banks remain willing to underwrite software despite selloff. The timing, coming after Clearwater Analytics and OneStream financings closed via direct lenders, creates comparison point for pricing and investor appetite. Success or failure will influence whether future software M&A leans on banks or private credit for financing.

6. Vantor Seeks $2.3 Billion Refi of Sixth Street Unitranche at Tighter Spreads

Vantor Holdings came to market with a $2.3 billion broadly syndicated term loan to refinance privately placed debt that supported Advent International’s buyout of the commercial earth imaging satellite operator. Goldman Sachs is leading the offering for Colorado-based Vantor, a provider of imagery to Google Maps.

Goldman was included along with Blackstone in a group of direct lenders led by Sixth Street on a $2.25 billion seven-year unitranche transaction that helped finance Advent’s $6.4 billion takeover of Vantor, formerly Maxar Intelligence, signed in May 2023. Initial price talk for the new loan was 425-450 bps over benchmark at discounted price of 98.5 cents on the dollar.

Vantor serves customers in defense, intelligence, and commercial sectors. Last year it launched an AI-powered service that can guide satellites to focus on developments on the ground without human touch.

Why It Matters

Vantor refinancing Sixth Street unitranche with broadly syndicated loan at 425-450 bps demonstrates banks winning back deals at materially tighter spreads than private credit. The original $2.25 billion seven-year unitranche pricing wasn’t disclosed but unitranches from that vintage typically priced 500+ bps. Saving 50-75+ bps on $2.3 billion represents $11-17 million annual interest savings. Goldman participating in both the original private credit deal and now leading the syndicated refi shows banks maintaining relationships while reclaiming economics. The transaction pattern, private credit financing buyouts then banks refinancing at lower spreads 18-24 months later, pressures direct lenders on both deployment and hold strategy.

7. Fortress Adds Unleveraged Sleeve to Fund V for Insurance Capital

Fortress Investment Group is adding an unleveraged sleeve to Fortress Lending Fund V to lure insurance companies and European institutional investors. The previous vintages of the strategy offered a single version using leverage. Fortress, backed by a consortium led by Abu Dhabi sovereign wealth fund Mubadala, expects to double assets under management to $100 billion by 2029 in part by attracting insurance and wealth management firms.

The firm seeks to raise at least $3 billion for Fund V. The leveraged version will invest in a mix of direct corporate loans and asset-based lending. The unlevered version will focus more on direct corporate loans. Fortress is targeting net IRR for the leveraged version in a range of around 11-14%. The unleveraged version is expected to reach net IRR of around 8-9%.

Recent deals under this strategy include Fortress leading a $500 million private loan to refinance existing debt at Blue Raven Solutions. Last year, Fortress provided a forward-flow agreement to purchase up to $1.2 billion of consumer loans from AI-lending marketplace Upstart.

Why It Matters

Fortress adding unleveraged sleeve targeting 8-9% net IRR reflects adaptation to insurance demand for unlevered strategies offering beneficial capital treatment. Insurers increasingly allocate to private credit but face regulatory capital charges on leveraged structures. The unleveraged option allows insurance participation without leverage-related capital hits. The 11-14% levered target versus 8-9% unlevered suggests Fortress using roughly 2-3x leverage on the traditional sleeve. Growth in global private credit fundraising cooled to 3.2% in 2025 from 9.7% prior year per S&P Global Market Intelligence. Managers adapting structures to insurance preferences demonstrates product evolution as institutional appetite moderates.

Deals of Note

• Qualtrics - JPMorgan preparing to raise $5.3B comprising $3.3B leveraged loan in USD and euros plus $2B for high-yield bond market or private credit to support Press Ganey purchase, refinance $1.8B existing debt

• Vantor - Goldman Sachs leading $2.3B broadly syndicated term loan at 425-450 bps over benchmark to refinance Sixth Street unitranche that supported Advent’s $6.4B acquisition

• EG A/S - Ares leading approximately €1.4B private credit financing for Scandinavian software business

• Synera Renewable Energy - Stonepeak portfolio company seeking $800M private credit for offshore wind farm project in Taiwan

• Elara Caring - HPS Investment Partners led roughly $700M private credit deal for home health-care provider

• Aidacare - Bain Capital Credit and UBS lending combined $382M to Australian health-equipment manufacturer

The Reality Check

Blue Owl selling $1.4 billion in loans to meet redemptions would be unremarkable except one buyer was Kuvare, its own insurance subsidiary. When you need to sell assets to yourself to meet withdrawals, the liquidity isn’t real. Barclays warned the template shifts debt from BDCs with 1x leverage into CLOs with 9-10x leverage. Each layer amplifies returns in good times and losses in bad.

Boaz Weinstein offering 20-35% discounts to NAV provides the market’s verdict on Blue Owl’s book values. The discount isn’t small. It’s massive. And it exists because investors would rather take the loss than wait to see what NAVs become under continued pressure. Investors pulling $2.9 billion from BDCs in Q4, up 200% from prior quarter, demonstrates retail exits accelerating industrywide.

Vantor refinancing Sixth Street unitranche at 425-450 bps, likely 50-75+ bps inside original pricing, demonstrates the pattern pressuring private credit. Direct lenders finance buyouts at 500+ bps, banks refinance 18-24 months later saving borrowers millions annually. The model works if you plan to syndicate in three months, not hold seven years. Bank of America committing $25 billion while Bank of Ireland exits shows scale separating winners from losers in the new competitive landscape.

The semi-liquid structure only works when redemptions stay under 5% quarterly. Once they spike, managers face impossible choices: sell to your own subsidiaries at par, gate investors and destroy credibility, or accept Weinstein’s tender at 35% discount. Blue Owl chose option one. Shareholders are choosing option three. Neither inspires confidence in the model.

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The software exposure is bigger than anyone admitted.

Bloomberg reviewed thousands of holdings across seven major BDCs and found at least 250 investments worth more than $9 billion weren’t labeled as software loans by one or more lenders, even though the companies borrowing the cash describe themselves as software firms. The discrepancies reveal a fundamental problem: when industry classification lacks consistency, investors can’t accurately assess concentration risk.

Consider the examples. Pricefx calls itself “The #1 Leading Pricing Software” on its homepage, mentions software more than a dozen times on the first screen alone. Sixth Street classifies it as “business services.” Kaseya describes itself as an “IT management software” company. Apollo labels it “specialty retail” while Blackstone and Golub place it in software. Restaurant365 calls itself a “back-office restaurant system software” provider. Golub categorizes it as “food products” alongside Louisiana Fish Fry and Bazooka Bubble Gum makers. Ares groups it with software and services.

The pattern extends across the industry. Raymond James analyst Robert Dodd notes: “The software classification in a BDC schedule of investments is only going to include generally industry agnostic software. It understates the exposure to it as a business model, and it’s not negligible.”

This matters because Barclays estimates software now makes up about 20% of all BDC loans, their largest sector exposure. If another $9 billion sits misclassified in other buckets, the concentration is materially higher. The classification problem becomes even more critical as bad PIK, deferred interest payments not planned at origination, hit 6.4% of private loans last quarter, up from 2.5% in Q4 2021 per Lincoln International. Companies with bad PIK saw loan-to-value ratios jump from 47% to above 75% as equity cushions compress.

Yet capital keeps deploying despite the uncertainty. Blue Owl led a $1.4 billion loan for OneStream at 475 bps even as the sector faces AI disruption. The financing demonstrates selective confidence in mission-critical enterprise software serving CFOs and finance teams. Apollo traded almost $10 billion of investment-grade private loans in 2025, building its marketplace for syndication and real-time pricing. And Coller with Ares closed a $1.3 billion credit secondaries continuation fund as that market nearly doubled to $20 billion in annual volume.

The responses from industry leaders reflect the tension. Ares CEO Mike Arougheti called AI and private credit fears “odd” and “frustrating,” noting 97% of wealth clients haven’t asked to redeem. The Bank of England is considering third-party help gathering data for its private markets stress test as participation expands from 16 to 40 firms. And Carlyle partnered with Sixth Street on a $600 million CLO equity joint venture targeting mid-teens returns to boost BDC earnings as rates compress margins.

The classification problem reveals what happens when an opaque industry lacks consistent reporting standards. Software isn’t going away. The question is whether lenders know how much they actually own.

Key Market Themes

1. Bloomberg Exposes $9 Billion in Hidden Software Exposure

Bloomberg reviewed thousands of holdings across seven major BDCs including Sixth Street, Apollo, Ares, Blackstone, Blue Owl, Golub Capital, and HPS Investment Partners and found wide variation in how investments tied to software are categorized. At least 250 investments worth more than $9 billion weren’t labeled as software loans by one or more lenders, even though the companies describe themselves that way.

The examples illustrate the problem. Pricefx’s website mentions “software” more than a dozen times on the homepage. Sixth Street classifies it as “business services.” Apollo categorizes Kaseya, a self-described “IT management software” company, as “specialty retail” while Blackstone and Golub place it in software. Golub labels Restaurant365, which calls itself a “back-office restaurant system software” provider, as “food products” alongside Louisiana Fish Fry and Bazooka Bubble Gum. Ares groups it with software and services.

The inconsistencies appear even within single firms. At least four companies in Blue Owl’s largest publicly traded BDC are classified under “chemicals,” “infrastructure and environmental services,” and “business services” but labeled “software” in its technology-focused fund. A Blue Owl spokesperson said “each of our funds has a different investment strategy, so the industry classifications can differ.”

Why It Matters

The discrepancies make it harder for investors to gauge sector concentration at a time of heightened scrutiny. Barclays estimates software comprises about 20% of all BDC loans, making it their largest sector exposure. By comparison, software is about 13% of the US leveraged loan market per Morningstar LSTA. If another $9 billion sits misclassified, actual exposure is materially higher. Raymond James’ Dodd notes: “Software is a theme in its own right, and that classification scheme breaks down even if historically it was helpful.” The problem takes on added weight in a market known for limited transparency where labels managers assign shape how investors gauge concentration risk and vulnerability to AI disruption.

2. Blue Owl Leads $1.4 Billion OneStream Loan Despite Software Selloff

A group of private credit firms led by Blue Owl provided a $1.4 billion annual recurring revenue loan to help Hg finance the $6.4 billion acquisition of OneStream, the financial software maker that went public in 2024. Goldman Sachs Alternatives, Golub Capital, HPS Investment Partners, and Blackstone joined Blue Owl in the financing.

The debt is being offered at 475 bps over benchmark. Another $850 million is available through a revolving credit facility and delayed-draw term loan. Hg announced in January it was taking OneStream private along with minority equity investors General Atlantic and Tidemark.

OneStream makes software used by chief financial officers and finance teams broadly. The financing package comes as private credit firms face scrutiny for software exposure following Anthropic’s release of AI coding tools that triggered selloff in the sector.

Why It Matters

The $1.4 billion OneStream financing at 475 bps demonstrates capital deployment continuing despite software sector volatility. Blue Owl leading the deal shows selective confidence in specific software businesses even as broader sentiment deteriorates. The annual recurring revenue loan structure tailored to subscription-based business models reflects lenders’ continued belief in certain software fundamentals. Goldman’s alternatives business previously provided debt for Permira and Warburg Pincus’ roughly $8.4 billion Clearwater Analytics purchase in December, another financial technology software deal. The pattern suggests lenders differentiating between mission-critical enterprise software serving CFOs and finance teams versus more vulnerable applications facing AI disruption.

3. Bad PIK Climbs to 6.4% as Loan-to-Value Ratios Deteriorate

The share of private equity-backed companies that deferred cash interest payments ticked higher for a third consecutive quarter, with 11% of Q4 borrowers paying interest in-kind per Lincoln International. More than 58% of those loans featured “bad PIK,” deferred interest not elected or available at close but now being utilized.

Bad PIK hit 6.4% of private loans last quarter, up from 6.1% in Q3 and substantially higher than 2.5% in Q4 2021 when Lincoln began tracking the data. The firm analyzed more than 7,000 companies during Q4 as one of the largest providers of third-party loan valuations in private credit.

Companies flagged as having bad PIK went from roughly 40/60 debt-to-equity, which is reasonable, to about 76% debt today according to Ron Kahn, global co-head of valuations at Lincoln. The average loan-to-value ratio for deals with bad PIK has been above 75% since Q4 2024, compared to 47% in Q4 2021.

Why It Matters

Bad PIK rising for three consecutive quarters signals mounting stress as unforeseen decisions to defer cash interest often indicate cash crunches. Issuing bad PIK adds to a company’s debt pile without increasing its value, eroding lender downside protection. Loan-to-value ratios jumping from 47% to above 75% demonstrates equity cushions compressing dramatically. Ares Capital CEO Kort Schnabel told analysts there was “slightly higher percentage of PIK” on the firm’s software book last quarter, but emphasized “99%, maybe even 100%” was structured upfront. The distinction between strategic PIK planned at origination versus bad PIK adopted later becomes critical for assessing portfolio health as software sector faces disruption.

4. Apollo Traded $10 Billion of Investment-Grade Private Loans in 2025

Apollo Global Management traded almost $10 billion of high-grade private loans in 2025 as part of its push to syndicate investment-grade credit on a broader scale. Apollo President Jim Zelter said at a financial conference the asset class will retain its premium “even if there’s a degree of liquidity and transparency.”

Apollo has teamed up with Goldman Sachs and other major Wall Street banks to trade investment-grade debt, syndicating it more broadly and offering real-time pricing. The firm provided loans to large corporations including Sony Music Group and Intel while also syndicating and trading large, high-grade loans.

Zelter drew parallels to the early 1990s when leveraged loans were largely illiquid and banks resisted efforts to trade them. “There was a huge pushback,” Zelter said. “Sound familiar?” That resistance faded over time, and the leveraged loan market grew into a relatively liquid one.

Why It Matters

Apollo’s $10 billion in high-grade private loan trading demonstrates progress building liquidity infrastructure for an asset class designed to avoid exactly that. Zelter’s confidence the premium will persist “even if there’s a degree of liquidity and transparency” challenges the core assumption that opacity drives returns. The 1990s leveraged loan parallel suggests Apollo expects similar evolution toward liquid markets over time. Some peers have pushed back on market-making efforts, contending private credit should remain private. But Apollo’s partnerships with Goldman Sachs and major banks to offer real-time pricing on investment-grade debt creates infrastructure for broader syndication. Success could reshape private credit from illiquid bilateral loans to tradable asset class with observable pricing.

5. Coller and Ares Close $1.3 Billion Credit Secondaries Continuation Fund

Secondaries firm Coller Capital closed a deal to extend the life of an Ares Management private credit portfolio, amassing more than $1.3 billion in total commitments. The transaction transfers a 2018-vintage portfolio of first-lien, floating-rate loans to sponsor-backed middle-market companies into a new continuation vehicle that will continue to be managed by Ares.

The credit secondaries market nearly doubled in 2025, with annual transaction volume reaching $20 billion up from $10.9 billion in 2024 per Evercore. Continuation funds allow investors to roll over investments, becoming an increasingly popular way for buyout firms to avoid selling assets at discounts.

Swedish private equity firm EQT is buying Coller in a $3.2 billion deal to expand its reach into secondaries, expected to close in Q3. Coller previously linked with TPG Twin Brook Capital Partners to establish a $3 billion continuation fund in August. Pantheon sought to raise at least $6 billion across two credit secondaries funds in December, followed by Ares’ debut $7.1 billion private credit secondaries strategy in January.

Why It Matters

Credit secondaries volume doubling from $10.9 billion to $20 billion demonstrates the market becoming essential liquidity mechanism as primary exits stall. Continuation funds transferring 2018-vintage portfolios into new vehicles extend investment timelines without forcing sales at compressed valuations. Edward Goldstein, CIO of Coller Credit Secondaries: “Continuation vehicles are becoming an increasingly important tool, enabling managers to offer LPs liquidity as well as exposure to well-performing assets.” The $1.3 billion Ares deal, Coller’s $3 billion TPG Twin Brook fund, and Pantheon’s $6 billion raise show established managers building permanent secondaries infrastructure. Ares launching $7.1 billion debut strategy after years as primary lender signals recognition that secondaries market provides both liquidity for existing LPs and deployment opportunity for new capital at potentially attractive entry points.

6. Bank of England Considers Third-Party Help for Stress Test Data

The Bank of England is in talks with private markets players about using a third-party firm to gather data for its groundbreaking industry stress test so the project can meet demanding timetables. The exercise will probe how a severe-but-plausible global downturn might impact trillions in unlisted assets occupying rapidly growing space in the global financial ecosystem.

So far 16 alternative asset managers and other financial firms agreed to take part in the System Wide Exploratory Scenario. The group is likely to grow to about 40 in coming weeks as other market participants seek to join. The BoE expects to publish final results in early 2027, with first data submission due March 16.

Some of the largest firms have misgivings about other participants’ ability to supply high-quality data quickly and potential impact on aggregated results. A third party could assist with gathering data from firms who need additional support and help keep the project timeline on track.

Why It Matters

The Bank of England considering third-party assistance for data collection demonstrates the operational complexity of stress testing private markets at scale. Expanding participation from 16 to 40 firms increases breadth but raises data quality concerns as smaller participants may lack sophisticated collection infrastructure. Senior UK lawmakers already expressed concern about how long the central bank set aside to conduct the exercise and pace of subsequent policy response amid mounting fears about mispriced risk and asset bubbles. The March 16 first data submission deadline approaches as some early work takes longer than expected. The stress test represents regulators’ first comprehensive attempt to assess how private markets would respond to severe downturn, making data quality and timeline critical for credibility. Whether third-party involvement maintains rigor while accommodating smaller participants will determine usefulness of aggregated results.

Deals of Note

• OneStream - Blue Owl, Goldman Sachs Alternatives, Golub Capital, HPS, Blackstone provide $1.4B ARR loan at S+475 plus $850M revolver and delayed-draw to finance Hg’s $6.4B acquisition with General Atlantic and Tidemark

• Structured Credit Partners - Carlyle and Sixth Street BDCs establish CLO equity JV with $600M equity commitments targeting mid-teens returns, Sixth Street Specialty Lending committed $200M, Sixth Street Lending Partners $100M, Carlyle Secured Lending and Carlyle Credit Solutions each $150M

• Ares continuation fund - Coller Capital closed $1.3B deal to extend life of 2018-vintage Ares first-lien, floating-rate loan portfolio to middle-market companies

The Reality Check

Bloomberg uncovering at least 250 investments worth more than $9 billion misclassified across major BDCs reveals how classification inconsistencies compound when industry standards diverge. Barclays estimates software comprises 20% of BDC loans. Add another $9 billion potentially hidden in other categories, and actual exposure climbs materially higher just as the sector navigates AI disruption. When investors can’t accurately assess concentration because Pricefx gets labeled “business services” despite mentioning software a dozen times on its homepage, portfolio risk becomes harder to quantify.

Bad PIK climbing from 2.5% to 6.4% over three years while loan-to-value ratios on those deals jump from 47% to above 75% demonstrates equity cushions compressing as companies defer cash payments. The distinction between strategic PIK planned at origination versus bad PIK adopted later becomes critical for portfolio assessment. When 11% of borrowers are paying in-kind and more than 58% features bad PIK not structured upfront, that signals mounting stress rather than strategic capital allocation.

Meanwhile, market infrastructure continues evolving. Apollo trading $10 billion of investment-grade private loans builds liquidity mechanisms the industry historically avoided. Blue Owl leading $1.4 billion for OneStream at 475 bps shows selective deployment continuing into mission-critical software. Credit secondaries doubling to $20 billion provides liquidity as primary exits stall. Whether these adaptations strengthen the system or mask underlying pressure depends on how accurately managers understand true portfolio exposures amid classification problems and deteriorating PIK metrics. The Bank of England stress test expanding to 40 participants by March will provide first comprehensive view of how private markets respond to severe downturns, making data quality critical for assessing system resilience.

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Slowly, then suddenly.

Software debt held stable through most of 2025, trading near par while managers pitched recurring revenue, sticky customers, and low default risk. Slowly.

Then $17.7 billion of US tech company loans dropped to distressed trading levels over four weeks, swelling the total tech distressed pile to $46.9 billion. The biggest monthly drop since October 2008 for software equities. Suddenly.

Private credit titans rushed to defend their positions. Blue Owl’s Marc Lipschultz insisted “no red flags, no yellow flags, largely green flags” on $25 billion in software exposure. Ares’ Mike Arougheti told Bloomberg TV “the narrative is wrong” around AI disruption. KKR’s Scott Nuttall said “our level of anxiety is pretty low” after years preparing for this moment.

But Apollo already cut software exposure from 20% to around 10% in 2025. Trinity Capital’s Kyle Brown said software companies that don’t evolve are “getting left in the dust.” And Oaktree’s Armen Panossian warned that while near-term disruption is unlikely, medium-term recoveries “could be quite problematic.”

The market isn’t waiting to find out. Blue Owl shares hit multi-year lows. Ares dropped 11% in a single day. Software represents roughly 20% of BDC portfolios per Barclays. UBS projects private credit default rates could hit 12-13% under aggressive AI disruption scenarios.

Meanwhile, capital migrates toward new opportunities. Private credit closed four defense deals in Europe including Carlyle financing €290 million for Mecachrome, which makes components for France’s Rafale fighter jets. H.I.G. Capital reports distressed calls went from monthly to daily. Fortress sees $4.5 trillion in commercial real estate refinancing over three years as regional banks retreat.

And Thoma Bravo just deployed a new weapon: a $1.2 billion loan requiring lenders to self-report any attempts at cooperation agreements within three business days or forfeit voting rights. The clause signals pre-emptive efforts to frustrate creditor unity before restructurings even begin.

Key Market Themes

1. Software Debt Rout Exposes the $46.9 Billion Distressed Pile

More than $17.7 billion of US tech company loans dropped to distressed trading levels during four weeks ending late January, the most since October 2022 according to Bloomberg Intelligence. That swells the total tech distressed debt pile to about $46.9 billion, dominated by software-as-a-service firms well-backed by private lenders and seen as particularly vulnerable to AI disruption.

The selloff accelerated after Anthropic released new AI coding tools, triggering the sharpest monthly decline for software equities since October 2008. The S&P North American software index fell 15% in January. Loans to Kaseya dropped 3.5 points to around 96.75-97.75. Finastra first-lien loans marked around 93-94, down from high 90s two weeks prior.

Software represents roughly 20% of BDC portfolios per Barclays, totaling about $100 billion in Q3 2025 per PitchBook. Almost half of BDC software exposure matures in four years or later, accounting for around $45 billion of loans. Sixth Street and Blue Owl BDCs have the highest exposure to longer-maturity software loans according to Barclays.

Why It Matters

The speed of the repricing demonstrates how quickly sentiment can shift in concentrated exposures. Software debt held near par through October 2025, then lost $17.7 billion to distressed levels in four weeks. When 20% of BDC portfolios sit in a sector experiencing its worst month since 2008, managers face increased scrutiny around portfolio composition and duration matching. Asset-light business models offer less collateral for recovery, making credit selection and ongoing monitoring increasingly important as the sector navigates AI-driven disruption.

2. Private Credit Titans Split Between Defense and Repositioning

Blue Owl’s Marc Lipschultz told investors the firm’s software lending portfolio is in “pristine” condition with loan-to-value in the low 30% range. “We don’t have red flags. We don’t have yellow flags. We actually have largely green flags,” he said on an earnings call. Blue Owl has about 8% of its more than $307 billion assets under management in software loan exposure.

Ares’ Mike Arougheti said on Bloomberg TV that “the narrative is wrong” around AI disruption. The firm disclosed software represents 9% of private credit AUM including real estate and infrastructure debt. Non-performing loans in the software portfolio were “close to zero” with “no change” to growth outlook. KKR’s Scott Nuttall said the firm has been preparing for AI disruption for years, selling companies deemed vulnerable.

Apollo cut direct lending funds’ software exposure almost by half in 2025, from about 20% at the start of the year to around 10% by year-end. Oaktree’s Armen Panossian said the firm has developed incremental criteria for new software investments, requiring “coherent and credible” AI roadmaps. While “too early to actually see performance degradation,” Panossian noted medium-term concerns around recovery values if AI meaningfully disrupts business models.

Why It Matters

The divergence in positioning reveals different strategic approaches to identical risks. Apollo repositioning exposure proactively while Blue Owl and Ares defend current portfolios reflects varying assessments of disruption timing and magnitude. Lipschultz emphasizing 30% loan-to-value provides equity cushion protecting senior lenders. Ares highlighting “close to zero” non-performing loans demonstrates current portfolio performance. The managers who correctly assess which software businesses successfully integrate AI versus those disrupted will drive material performance dispersion over the next 24 months as the sector matures.

3. Thoma Bravo Deploys Anti-Cooperation Clause in $1.2 Billion Loan

Thoma Bravo added a provision to a $1.2 billion loan backing its Vitech acquisition requiring lenders to alert the firm within three business days of any attempts to coordinate with other creditors in cooperation agreements. Lenders who fail to notify forfeit voting rights on matters like amending credit terms or covenant waivers.

The $1.3 billion financing package includes a term loan and $100 million revolver priced at 450 bps over benchmark with option to reduce to 425 bps based on leverage progress. The deal is covenant-lite with payment-in-kind option and non-amortizing structure. Other lenders included Oak Hill Advisors, Antares Capital, Morgan Stanley Private Credit, Golub Capital, Francisco Partners, and Octagon Credit Investors.

Cooperation agreements have become a defense increasingly used by creditors to prevent being sidelined in aggressive debt restructurings. Thoma Bravo’s requirement that lenders self-report attempts at collective bargaining signals evolving dynamics in sponsor-lender negotiations, particularly around potential restructuring scenarios.

Why It Matters

The provision represents an innovation in loan documentation that shifts information dynamics between sponsors and lenders. Requiring disclosure of coordination attempts within three business days provides sponsors earlier visibility into potential creditor coalitions. The 450 bps pricing with covenant-lite structure and PIK option reflects competitive market conditions where multiple lenders compete for large-scale opportunities. Whether similar provisions proliferate across new deals depends on market reception and lender willingness to accept modified documentation in exchange for deployment opportunities. The clause tests how lenders balance relationship capital against structural protections.

4. Defense Sector Emerges as ESG Barriers Collapse in Europe

Private credit closed at least four defense-related deals in Europe over recent months as ESG barriers collapsed and European leaders ramped up military budgets. Carlyle financed Bridgepoint’s acquisition of Norwegian communications equipment maker Comrod, following a €290 million debt package for Mecachrome, which provides components for France’s Rafale fighter jets. Adams Street Partners led $300-400 million for UK survival gear maker Beaufort.

BDC exposure to defense reached approximately $7.2 billion as of September 30, up about $1.5 billion from end of 2024 per PitchBook LCD. Pimco president Christian Stracke said on a Credit Edge podcast “there’s a very healthy and pragmatic realization that this is something that is needed in Europe that’s been under-invested for too long.”

Norway’s sovereign wealth fund is reviewing its ethical investing mandate barring companies producing nuclear arms. The European Commission clarified the EU’s sustainable finance framework to include defense. UK’s Ministry of Defence is drawing up options to help finance its defense investment plan using private funds.

Why It Matters

The defense pivot provides managers with deployment opportunities in a sector experiencing structural growth as European nations increase military spending. Private credit moving into defense, drones, and aerospace offers portfolio diversification beyond software concentration. US Vice President JD Vance’s Munich Security Conference speech reinforced European defense independence requirements. The $7.2 billion current BDC exposure up $1.5 billion since year-end 2024 positions early movers for multi-year theme if European defense spending reaches 2% of GDP targets. Defense represents recurring revenue from government contracts with lower AI disruption risk than enterprise software.

5. Distressed Calls Surge as Fortress Targets $4.5 Trillion CRE Wave

H.I.G. Capital reports distressed opportunity calls went from “maybe a month” two years ago to “maybe a day, certainly three or four a week” currently per Jackson Craig, co-head of H.I.G. Bayside. Demand comes from private credit deals where growth hasn’t materialized due to underperformance or increasing loan maturity schedules. The firm provides stretch senior or junior capital to help tough refinancings over the line.

Fortress Investment Group says rival lenders are running shy of a $4.5 trillion market for property loan refinancing over next three years, putting its commercial real estate credit business on track to achieve $5 billion in new deals by end-2026. US regional banks that traditionally dominated loans between $50-125 million now have minimal presence. Deals that once attracted 15-20 bidders now catch 4-5 according to Spencer Garfield, global co-head.

Fortress achieved rapid growth with $1.7 billion in new originations in 2024 followed by $3.4 billion in 2025. The firm regularly sees opportunities offering un-levered returns of 7-8% today that might have only offered 3-3.5% before rate hikes.

Why It Matters

The acceleration in distressed inquiries from monthly to daily quantifies stress building as maturities approach and growth disappoints. H.I.G. noting deals “not necessarily in deep distress” but needing capital to complete refinancings describes the maturity wall dynamic as sponsors and lenders work through 2021-2022 vintages. Fortress targeting $5 billion in CRE deals by end-2026 as regional banks retreat demonstrates capital migrating toward sectors with physical collateral and actual recovery value. The $4.5 trillion refinancing wave over three years provides deployment alternative at 7-8% un-levered returns while software faces near-term uncertainty.

6. Bank Leverage to Private Credit Funds Hits $300 Billion

Banks’ exposure to private debt vehicles reached almost $300 billion as of October per Moody’s. Banks provide financing to private credit funds and cash to ease capital calls from fund investors. The European Central Bank and International Monetary Fund are questioning the relationship between banks and private credit funds as regulators assess leverage and risk transmission channels.

The Bank of England is carrying out the first stress test of private markets companies. The Financial Stability Board is concerned about ratings shopping in private markets where companies seek grades from multiple providers and opt for most favorable. The SEC has been probing Egan-Jones Ratings, which rated more than 3,000 private credit investments in 2024 with about 20 analysts.

US life insurers had as much as $2 trillion of exposure to illiquid forms of credit last year per Moody’s. Many assets are structured so holders are first in line for payments on bundles of debts, allowing high credit ratings. UBS Chairman Colm Kelleher said “in 2007 subprime was all about rating agency arbitrage. What you see now is a massive growth in small rating agencies ticking the box for compliance.”

Why It Matters

The $300 billion bank exposure to private debt vehicles demonstrates interconnections between traditional and alternative credit markets. Banks providing warehouse lines, revolvers, and facilities to private credit funds creates leverage and liquidity linkages that regulators are beginning to assess more closely. Insurance companies holding $2 trillion in illiquid credit shows the sector’s importance to institutional balance sheets. Regulatory focus on ratings quality and bank-fund relationships suggests potential for enhanced oversight as private credit scales. The scrutiny parallels pre-crisis concerns around opacity and leverage, though current structures differ materially from 2007 mortgage market dynamics.

Deals of Note

• Vitech - Thoma Bravo obtained $1.3B from Oak Hill Advisors, Antares Capital, Morgan Stanley Private Credit, Golub Capital, Francisco Partners, Octagon to back Majesco acquisition and refinance existing debt, $1.2B term loan at S+450 with PIK option, $100M revolver

• Comrod - Carlyle financed Bridgepoint’s acquisition of Norwegian communications equipment maker producing military masts

• Mecachrome - Carlyle arranged €290M debt package for French aerospace components supplier to Rafale fighter jets

• Beaufort - Adams Street Partners led $300-400M for UK survival gear and aerospace equipment provider

• ADDEV - Carlyle provided €165M for French high-performance materials company

• AC Milan - Comvest Credit Partners arranged roughly $700M to refinance Elliott Management vendor loan for RedBird Capital Partners

• Evermark - Ares led $1.6B debt financing for Yellow Wood Partners’ merger of Suave Brands and Elida Beauty (Q-tips, ChapStick, Pond’s, Noxzema)

The Reality Check

Apollo cutting software exposure from 20% to 10% while Blue Owl maintains $25 billion with low 30% loan-to-value reflects different strategic positioning on identical risks. Time will determine which approach proves optimal. The LTV cushion provides protection assuming equity values stabilize. Software valuations compressing further would test these buffers, similar to dynamics seen in commercial real estate over the past two years.

Thoma Bravo’s cooperation disclosure requirement in the $1.2 billion Vitech loan shifts bargaining dynamics for future restructurings. Requiring lenders to report coordination attempts within three days or forfeit voting rights represents sponsor adaptation to increased creditor coordination. The 450 bps pricing with covenant-lite structure and PIK option reflects competitive market conditions where lenders balance returns against deployment pressure.

Capital is rotating toward new opportunities as software faces near-term uncertainty. Defense deals totaling over €650 million, Fortress targeting $4.5 trillion in CRE refinancing at 7-8% un-levered returns, and H.I.G. reporting distressed calls surging from monthly to daily demonstrate deployment alternatives emerging. Managers with software concentration face portfolio management questions as the sector navigates AI disruption. Those who accurately assess which businesses adapt successfully will drive performance dispersion over the next 24 months.

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The redemption panic passed. Blue Owl honored 15.4% of net assets in withdrawals from its tech-focused OTIC fund after breaking its 5% gate, and the firm survived. The larger Blue Owl Credit Income Corp saw redemptions of just 5.2%, in line with peers. Blackstone’s BCRED repurchased 4.5%, Ares Strategic Income Fund hit 5.6%, and Cliffwater Enhanced Lending Fund came in at 5.74%. The quarterly reckoning happened, and the funds didn’t break.

But the stress is real. Default rates across 1,200 US private debt borrowers tracked by Fitch ticked up to 5.6% in Q4 from 5.4% the prior quarter on a trailing 12-month basis. For the 300 privately issued loans rated by Fitch, the default rate jumped to 9.2% from 8.4%. Fitch recorded 18 new unique private credit defaulters in Q4, bringing the annual tally to 71 defaulting borrowers.

PIMCO president Christian Stracke isn’t impressed by the resilience. “There’s a lot of additional credit risk that people are often taking in some of these private situations that you kind of turn a blind eye to,” he said on the Bloomberg Intelligence Credit Edge podcast. “It is not a good sign that you have all of these problems emerging in terms of loan performance at a time when the economy is about as good as it gets.”

Meanwhile, BDCs are gorging on cheap debt. Nine BDCs raised $5.3 billion in the investment-grade debt market this month to lock in attractive borrowing costs and build a war chest ahead of reporting Q4 earnings. They’re paying roughly 200 bps over Treasuries, but for funds making loans with spreads often twice as wide, it’s a chance to exploit near-insatiable investor demand for bonds.

The deals keep flowing. Ares led a $1.6 billion debt financing for the merger of Suave Brands and Elida Beauty into Evermark. Covetrus pricing discussions increased to about 6.5 percentage points over benchmark from earlier talks of at least 5 percentage points as CD&R and TPG pursue Cencora’s vet business. BlackRock and Partners Group launched the first joint private-markets separately managed account through Morgan Stanley’s wealth platform combining private equity, private credit, and real assets.

Key Market Themes

1. Blue Owl Survives 15% Redemptions, Proving Liquidity Management Works

Blue Owl Technology Income Corp honored redemption requests totaling $527 million, or 15.4% of net assets, after the firm raised its withdrawal threshold to 17% from the typical 5% cap. The sharp pullback came largely from wealthy individuals in Asia, which account for a significant portion of OTIC’s investor base.

After cashing investors out, the fund had around $1.4 billion in liquidity available including cash, debt, and broadly syndicated loans. The redemptions elevated net leverage to 1.05 times debt-to-equity. Last year, OTIC’s Class I shares delivered a 9% return, bringing annualized inception-to-date returns to 10.8%.

The larger Blue Owl Credit Income Corp saw redemptions of 5.2%, totaling about $1 billion. That compares favorably with other non-traded BDCs: Ares Strategic Income Fund repurchased 5.6% of net asset value, Cliffwater Enhanced Lending Fund repurchased 5.74%, and Blackstone’s BCRED repurchased 4.5%.

Why It Matters

Blue Owl’s decision to honor all 17% of redemption requests rather than prorating at 5% was tactical brilliance or desperation, depending on perspective. The firm has honored all tender requests ever made in OTIC since its 2017 start. Flushing everyone out at once avoids the multi-quarter bleeding that plagued Blackstone’s Breit. But it only works if you have $1.4 billion in liquidity. Once funds start selling illiquid assets to meet redemptions, marks get tested against actual bids.

2. Default Rates Climb to 5.6% as 71 Borrowers Default in 2025

The default rate across 1,200 US private debt borrowers tracked by Fitch ticked up to 5.6% in Q4 from 5.4% the prior quarter on a trailing 12-month basis. For the 300 privately issued loans rated by Fitch, the default rate rose to 9.2% from 8.4% in Q3.

Fitch recorded 18 new unique private credit defaulters in Q4, bringing the annual tally to 71 defaulting borrowers. The consumer products sector saw the largest increase in unique defaulters during the period, while healthcare providers’ default rate led all sectors with 12 unique defaults on a trailing 12-month basis.

US middle-market issuance dropped 14% year over year in 2025, despite a doubling in leveraged buyout activity, which climbed to $2.5 billion in Q4 2025 from $1.2 billion in Q4 2024. LBOs’ share of total middle-market issuance increased to 20% in 2025 from 17% in 2024, which “coincided with lower purchase price multiples, narrowing valuation gaps and enabling more transactions.”

Why It Matters

Default rates rising from 5.4% to 5.6% while the economy performs well validates PIMCO’s concern. The 9.2% default rate for privately issued rated loans is nearly double the broader 5.6% rate, suggesting deterioration concentrates in newer, more aggressive vintages. Healthcare providers leading with 12 defaults signals stress in a sector previously considered defensive. The 71 annual defaulters in 2025 establishes a baseline for what “normal” stress looks like before any real downturn.

3. PIMCO President Warns Private Credit Buyers Are “Blind” to Risks

Christian Stracke, president of the $2.3 trillion asset manager PIMCO, said investors underestimate hazards when chasing fat yields in private credit. “There’s a lot of additional credit risk that people are often taking in some of these private situations that you kind of turn a blind eye to,” he said on the Credit Edge podcast.

Private debt traditionally focuses on smaller companies, which tend to have less financial flexibility and more limited disclosure than those accessing public markets. Its higher sector concentration and lack of price transparency are cause for concern, Stracke said. Loans to weaker companies signed earlier this decade when interest rates were near zero are becoming stressed as the debt comes due.

“It is not a good sign that you have all of these problems emerging in terms of loan performance at a time when the economy is about as good as it gets,” Stracke said. “There is a fairly large overhang of problem loans that were made in years earlier this decade that will take years to burn through.”

Why It Matters

PIMCO co-led a $29 billion financing for Meta’s Louisiana data center, one of last year’s biggest private loans, and recently raised $7 billion for asset-based finance. So Stracke’s skepticism about corporate direct lending carries weight. His point about mark-to-market keeping investors honest resonates: “Mark-to-market can keep you honest, and it can flag issues early in a way that is difficult when you don’t have mark-to-market. That is a fundamental concern that many in the market have been missing.” PIMCO expects underwhelming returns in private debt portfolios as losses mount.

4. BDCs Raise $5.3 Billion in Debt Markets to Lock In Cheap Funding

Nine BDCs raised $5.3 billion in the investment-grade debt market this month to lock in attractive borrowing costs and build a war chest ahead of reporting Q4 earnings. They’re paying roughly 200 bps over Treasuries, but for funds making loans with spreads often twice as wide, it presents a chance to exploit near-insatiable investor demand for bonds.

The amount of BDC debt outstanding hit a record high, according to Bloomberg data. As BDC portfolios have grown, firms have been able to raise larger deals and made bond investors more willing to buy in. The average spread on a Bloomberg index of US investment-grade corporate bonds touched 0.71 percentage point this week, matching the lowest level since the 1990s.

Ares Strategic Income Fund priced bonds at 1.95 percentage points over Treasuries this month, less than initial price talk of 2.2 percentage points. Bain Capital’s BDC priced at 2.35 percentage points over benchmark, also tightening from initial talk. Blue Owl Technology Finance Corp priced at a premium of 2.55 percentage points.

Why It Matters

The appetite for BDC bonds contrasts sharply with the mood of fund investors. Many non-traded vehicles saw redemption requests jump in Q4 as concerns over credit quality, interest rates hurting returns, and regulatory scrutiny spurred flight. But debt investors view BDCs less negatively than equity investors. “Debt investors in investment-grade are in a more senior position than equity investors and are being adequately compensated at current spread levels,” said David Del Vecchio at PGIM. The $5.3 billion raised this month finances the next round of lending at compressed spreads.

5. Barron’s Reports Exit Rush Is Over, Cash Keeps Coming In

Recent securities filings show investors may be calming down after publicized failures of some borrowers. Most good-sized BDCs have diverse portfolios and credit loss histories as good or better than other debt categories. Publicly traded BDCs are trading at a median of 83% of net asset value, though some like Ares Capital Corp trade at about 105% of NAV.

Blue Owl has become a lightning rod for private credit anxieties. At OTIC, redemptions totaled $527 million, or 15.4% of shares outstanding, even though the fund delivered annualized returns of nearly 11% without any non-accruals and a loss rate of 0.04%. The majority of investors came through private wealth banks in Asia.

Raymond James analyst Wilma Burdis said the tolerable level of redemptions at Blue Owl Credit Income should remove one overhang from Blue Owl Capital’s stock. The company has a profit margin of nearly 60% and has been increasing its fee earnings at a 20% annual rate, yet trades at a price-earnings ratio of 15 compared with 20 to 30 times for peers.

Why It Matters

As private credit funds deliver returns several percentage points above the high-yield fixed-income market, they’re seeing strong inflows, especially from institutional investors. “We continue to see a compelling buying opportunity for Owl,” Burdis wrote. The narrative is shifting from redemption crisis to normalization. Blue Owl honored 15.4% redemptions at OTIC and the fund didn’t break. The larger fund saw 5.2% redemptions in line with industry norms. If this represents peak stress, the model holds.

6. Pricing Pressure Builds as Covetrus Spread Widens to 650 Bps

Covetrus pricing discussions for roughly $3 billion of financing increased to about 6.5 percentage points over benchmark from earlier talks of at least 5 percentage points. CD&R and TPG are in preliminary discussions for Covetrus to buy the veterinary business of Cencora. The financing would refinance Covetrus’ $2 billion of existing debt and help fund the potential acquisition.

AC Milan owner RedBird Capital Partners struck a deal for new debt totaling around $700 million to refinance a vendor loan provided by Elliott Management. The financing was arranged by Comvest Credit Partners, a Florida-based private credit asset manager recently acquired by Manulife. As part of the transaction, Elliott’s managing partner Gordon Singer and portfolio manager Dominic Mitchell will leave AC Milan’s board.

Global private equity deal value hit an estimated $2.21 trillion in 2025, the highest level since 2021, according to PitchBook. Large private equity deals drove much of the rebound, particularly in the second half of the year.

Why It Matters

Covetrus pricing widening from 500 bps to 650 bps signals lenders demanding more compensation as leverage stacks up and credit quality questions mount. CD&R and TPG took Covetrus private in 2022 at about $4 billion valuation. Now they’re looking at $3 billion in new debt to refinance $2 billion existing and fund an acquisition. Blue Owl is already invested in the second lien, marked down to around 93 cents on the dollar as of September 30. The 150 bps spread widening reflects lender skepticism about adding more leverage to an already stretched capital structure.

7. Wealth Distribution Push Intensifies with New Product Launches

BlackRock and Partners Group launched the first joint private-markets investment of their partnership, a new separately managed account through Morgan Stanley’s wealth platform. The account combines a mix of private equity, private credit, and real asset funds. Investors can choose from three variations depending on risk preference: income-oriented, balanced portfolio, or growth-focused allocation.

The separately managed account invests in seven existing funds from BlackRock, its credit unit HPS Investment Partners, and Partners Group. The product charges fees on the underlying funds but not on the separately managed account itself. It’s the first US product allowing clients to invest across a range of private markets in one account.

Partners Group has about $56 billion of assets under management for evergreen funds. BlackRock manages about $250 billion of assets across its entire separate-account business. Traditional and alternative asset managers have raced to form partnerships and launch products to sell to wealthy individuals as many institutional backers such as pensions and endowments shun new private investments.

Why It Matters

The BlackRock-Partners Group separately managed account represents the product evolution managers need to access wealth channels. Combining private equity, private credit, and real assets in one wrapper with three risk profiles simplifies adviser adoption. BlackRock providing separately managed account expertise while Partners brings evergreen fund experience creates distribution infrastructure institutional money can’t match. The $250 billion BlackRock manages across separate accounts and $56 billion Partners manages in evergreens shows the scale opportunity as institutional allocations slow.

Deals of Note

• Evermark - Ares leads $1.6B debt financing for merger of Suave Brands and Elida Beauty (Q-tips, ChapStick, Pond’s, Noxzema) backed by Yellow Wood Partners

• Covetrus - CD&R and TPG in preliminary talks to buy Cencora’s vet business, pricing discussions for roughly $3B financing increased to 6.5 percentage points over benchmark from at least 5 points

• AC Milan - RedBird refinances Elliott vendor loan with roughly $700M arranged by Comvest Credit Partners (Manulife), Elliott’s Gordon Singer and Dominic Mitchell leaving board

• Databricks - Lined up $1.8B of new financing from private credit lenders and BSL investors

• Loparex - Sounding out private credit investors for as much as $1.5B of debt to refinance first and second-lien loans

• Neuraxpharm - Permira kicked off sale of German pharmaceutical company, banks and private credit firms competing to provide up to €1.5B in debt financing

• Teleport - HPS invested $50M in Malaysian logistics firm, marking firm’s first Asia deal after BlackRock acquisition

The Reality Check

Blue Owl honoring 15.4% redemptions at OTIC demonstrates liquidity management executed as designed. The firm maintained $1.4 billion in available liquidity after redemptions, with net leverage at 1.05 times debt-to-equity. The larger fund seeing 5.2% redemptions aligned with peers: BCRED at 4.5%, Ares at 5.6%, Cliffwater at 5.74%. The quarterly test validated the semi-liquid structure under stress conditions.

Default rates rising from 5.4% to 5.6% with 71 borrowers defaulting in 2025 reflects credit normalization as pandemic-era lending seasons. The 9.2% default rate for privately issued rated loans compares to 5.6% across the broader 1,200-borrower universe Fitch tracks. Healthcare providers leading with 12 defaults shows sector-specific stress rather than systemic deterioration. The 18 new Q4 defaulters establishes the pace of credit events in the current environment.

PIMCO’s Stracke noting that “problems emerging at a time when the economy is about as good as it gets” highlights the importance of underwriting discipline in vintage selection. His observation about mark-to-market flagging issues early applies across credit markets, not uniquely to private debt. PIMCO’s $7 billion asset-backed finance raise and $29 billion Meta data center financing show the firm differentiating between corporate direct lending and asset-backed strategies.

BDCs raising $5.3 billion in investment-grade debt at 200 bps over Treasuries demonstrates funding arbitrage opportunities as the vehicle structure matures. Bond investor appetite remains robust despite equity market concerns, with deals from Ares, Bain, and Blue Owl tightening from initial price talk. Debt investors viewing themselves as senior and adequately compensated reflects accurate risk assessment of the capital structure.

Covetrus pricing widening from 500 bps to 650 bps as sponsors pursue acquisition financing alongside refinancing $2 billion existing debt shows lenders adjusting returns for incremental leverage. The 150 bps spread increase reflects transaction-specific dynamics rather than broader market repricing. Blue Owl’s second-lien position marked at 93 cents predated the new financing discussions.

The BlackRock-Partners Group separately managed account launch through Morgan Stanley combining private equity, private credit, and real assets addresses wealth channel demand for simplified access. BlackRock’s $250 billion in separate accounts and Partners’ $56 billion in evergreens provides operational infrastructure for multi-asset private market investing. The three risk-profile options allow customization within a unified wrapper.

Private credit navigated Q4 redemptions within established structural parameters. Funds honored withdrawals without forced asset sales, BDCs accessed funding markets efficiently, and deal activity continued across consumer products, veterinary services, and infrastructure. Default rates reflect credit cycle dynamics rather than structural failures. The asset class demonstrates resilience while markets adjust to normalized credit conditions and compressed spreads.

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Private credit’s valuation problem just got public. BlackRock TCP Capital marked down its NAV 19% to between $7.05 and $7.09 from $8.71 and waived a third of its management fee. E-commerce aggregators and home improvement lenders from the pandemic boom are producing the losses everyone said wouldn’t come.

The stress is spreading. Redemptions hit 5% at Blackstone’s BCRED, Blue Owl, and Ares BDCs as returns collapsed to 6.22% from 11.39% two years ago. Blue Owl’s tech fund saw 15% redemptions, mostly from Asian clients. The firm broke its own 5% gate to allow 17% withdrawals, borrowing money to flush everyone out at once rather than managing a multi-quarter bleed.

Conflicts between lenders and their portfolio companies are landing in court. Planet Networks sued Post Road Group, alleging the private equity firm dangled a $50 million loan to steal trade secrets for competing portfolio company Archtop Fiber. The lawsuit claims Post Road slow-rolled due diligence, extracted competitive intelligence, then denied Planet access to utility poles when it tried to escape by repaying the $12 million bridge loan.

The secondaries market tells a different story. Volume surged 41% to $226 billion as EQT bought Coller Capital for $3.2 billion, with Jeremy Coller personally receiving $2.3 billion. Buying existing loans at discounts beats originating new ones at 450 bps on deteriorating credits.

None of this slowed the retail push. Private credit firms launched 41 evergreen funds targeting $13 trillion in 401(k) assets. Interval fund assets jumped to $92.7 billion from $15 billion in 2020. OneDigital is partnering with Blackstone, Apollo, and Ares to incorporate private credit into adviser-managed 401(k) portfolios just as spreads compressed 100 bps to 450-475 bps and CCC- borrowers hit 64, a record for the sixth straight quarter.

Key Market Themes

1. BlackRock TCP Marks Down 19% as BDC Pressure Mounts

BlackRock TCP Capital expects to cut its net asset value per share to between $7.05 and $7.09 for the quarter ended December 31 from $8.71 as of September 30, a 19% markdown. The fund struggled from exposure to e-commerce aggregators, companies that buy and manage Amazon sellers, as well as troubled home improvement company Renovo Home Partners, which filed for bankruptcy with plans to liquidate.

BlackRock said it has waived one-third of its management fee for the quarter. The vehicle is a business development company that pools together private credit loans and trades like a stock. BDC shares have been hit over the past year, with investors concerned over private credit returns, underwriting standards, and increased regulatory scrutiny.

BlackRock TCP had a market capitalization of about $497 million as of Friday’s close. The fund has been a component of BlackRock’s private credit offering since the asset manager acquired Tennenbaum Capital Partners in 2018. Shares of BlackRock TCP fell as much as 8.4% in post-market trading.

Why It Matters

The 19% markdown at a BlackRock-owned BDC signals valuation pressure is real, not theoretical. When managers start waiving fees to cushion the blow, that’s not confidence in portfolio quality. That’s damage control. E-commerce aggregators and home improvement were trendy sectors during the pandemic lending boom. Now they’re producing the losses everyone said wouldn’t materialize.

2. Redemptions Surge to 5% Across Major BDCs

Several of the biggest private credit funds eligible to wealthy individuals received redemption requests from about 5% of shareholders at year-end, well above normal volume. One fund managed by Blue Owl got redemptions for about 15% of its shares, primarily from Asian clients.

Redemptions hit 4.5% at Blackstone’s BCRED, about 5% from Blue Owl’s largest fund, and 5.6% from an Ares BDC. Total returns from five of the largest private credit funds aimed at individuals declined to an average of about 6.22% in the first nine months of 2025, compared with 8.76% in the same period of 2024 and 11.39% in 2023.

Blue Owl announced it would raise the redemption threshold on its technology BDC to 17% from the typical 5% cap, borrowing money to retire shares. The idea was to flush all shareholders who wanted out in one fell swoop, avoiding the cycle of redemptions that weighed down Blackstone’s real-estate fund for years when it fell from favor. About 15% of the technology BDC’s investors took Blue Owl up on its offer.

Why It Matters

When Blue Owl breaks its own 5% gate to allow 17% redemptions, that’s not generosity. That’s preventing a multi-quarter exodus. The technique only works as long as a fund has cash or can borrow more to fund payouts rather than liquidating investments. Once funds start selling assets to meet redemptions, marks get tested. The comparison to Blackstone’s real estate fund Breit isn’t comforting. That became a black eye for Blackstone and never returned to peak size.

3. Lawsuit Exposes Conflict of Interest in Digital Infrastructure

Planet Networks thought it had landed a $50 million private credit deal to finance the fiber internet company’s push into New York’s Hudson Valley. Instead, its founder says Wafra-backed private equity manager Post Road Group dangled the loan to access trade secrets while its own competing startup tried to swoop into the region.

Planet accused the Connecticut-based manager and its co-founder Michael Bogdan of misrepresenting their involvement in Post Road portfolio company Archtop Fiber, founded only months prior, and using the pretext of an investment in Planet to steal competitive information and stall growth plans. Post Road provided a $12 million bridge loan in January 2023 and committed to $50 million in long-term debt.

According to the lawsuit, Post Road slow-rolled its potential investment and used “bait-and-switch tactics” to steal trade secrets including sensitive information related to permitting maps, technologies, business opportunities, and vendor relationships. That helped Archtop expand into the Hudson Valley. While Planet knew Post Road had committed hundreds of millions to Archtop, the private equity firm represented itself as a “mere passive” investor.

Why It Matters

As more private equity investors with their own portfolio companies become lenders, the potential for conflicts has grown. The lawsuit alleges Archtop, which acquired control of Warwick Valley Telephone, a local utility pole company, denied Planet access to poles needed for network expansion. When Planet tried to pay off its bridge loan, Post Road demanded an “exclusivity breakage fee” and sought to rip away Planet from its founder. Private credit pitches privacy as a virtue. Now it’s spilling out in court in a rare public rebuke within digital infrastructure investing.

4. Secondaries Market Surges 41% to Record $226 Billion

Secondary deal volume for private assets surged 41% to a record $226 billion in 2025 as higher interest rates stifled dealmaking and the return of cash to investors. Distributions as a percentage of NAV remain historically low in Europe at around 20% versus a 10-year average of 28%, according to PitchBook.

EQT agreed to buy Coller Capital for $3.2 billion to gain a foothold in the booming market. The transaction will be funded through newly issued EQT shares with up to $500 million in contingent consideration to be financed in cash if certain targets are hit. EQT said the deal is expected to be “mid-single-digit accretive” to its fee-related earnings.

Coller announced the final close of its largest-ever fund earlier this month after raising $17 billion. It had $50 billion in assets as of September 30. Jeremy Coller, chief investment officer and managing partner, will become head of the newly branded Coller EQT. The transaction will crystallize a ten-figure windfall for Coller, who is set to receive about 72% of the base consideration, or some $2.3 billion.

Why It Matters

“Rather than making blunt allocation shifts, LPs can use the secondary market to reduce concentration risk and free up capital in a more targeted way,” said Michael Aldridge, Global Head of LP Portfolio Analytics at Carta. Secondaries deals help investors exit positions that sponsors can’t or won’t liquidate, mainly due to valuations mismatches or because managers want to hold assets beyond the original sell-by date. Fund manager-initiated transactions continue to increase, now representing a substantial portion of total volume.

5. Evergreen Funds Rush to Capture $13 Trillion in 401(k) Assets

Private credit firms launched 41 evergreen funds dedicated to private credit last year, according to Preqin. These vehicles are designed to offer individual investors options to cash out periodically, in contrast with closed-end vehicles that typically catered to institutional buyers and locked up capital for a set amount of time.

US credit interval vehicles held about $92.7 billion of net assets in Q3 2025, up from about $15 billion in 2020, according to Cliffwater. The new funds come on the heels of President Trump’s executive order last year designed to open up 401(k)s to assets including private equity and credit. Firms are waiting for guidance from the Labor Department, which has until early February to publish a proposal.

Historically, evergreen structures were mostly launched by smaller private credit firms or wealth managers. But last year, Blackstone, KKR, and Blue Owl all launched interval funds, suggesting these vehicles have moved firmly into the strategies of the $1.7 trillion private credit market’s bigger players. Firms are also teaming up with retirement plan sponsors. Blue Owl partnered with Voya Financial to bring products into retirement accounts, while Blackstone struck agreements with Vanguard and Wellington Management.

Why It Matters

OneDigital, which advises companies on their 401(k) plans, is partnering with Blackstone, Apollo, and Ares to incorporate private equity and private credit into some adviser-managed portfolios. The firm’s clients will review these allocations and decide whether to offer them to employees. More than 70% of 401(k) participants were invested in equities at the end of 2023. “Not only is there high concentration among the top five or seven stocks but those stocks are highly correlated and predominately in tech,” said Raj Dhanda, global head of wealth management at Ares.

6. Asset-Backed Finance Emerges as Growth Driver

Asset-backed finance will be a key engine for private credit growth this year, as demand for funding in capital intensive sectors exceeds what traditional banks have the risk appetite to provide, according to Moody’s and KBRA. Lending secured by assets and repaid from cashflows is becoming “the new frontier for private credit,” said Marc Pinto, global head of private credit at Moody’s.

The role of private credit in financing asset-heavy sectors such as data centers and digital infrastructure has soared while the ability of traditional banks to lend in some areas remains limited. Moody’s predicts global private credit assets will exceed $2 trillion this year and approach $4 trillion by the end of the decade, with asset-backed financing a primary driver.

KBRA noted the “significant growth” opportunity that asset-based finance poses for private credit but warned managing a diversified ABF portfolio requires asset-level expertise that not all managers possess. KBRA has already seen concentration limits being tested or breached because of outsized allocations to volatile sectors such as aviation, corporate receivables, and certain consumer finance sectors.

Why It Matters

Tricolor Holdings demonstrated the importance of due diligence. The founder of the bankrupt subprime auto lender was charged with alleged fraud late last year, as prosecutors said executives double-pledged auto loan collateral and manipulated descriptions of loans. “Tricolor was an asset-backed lending dilemma. It demonstrated the importance of due diligence, while the collateral, allegedly cross-pledged, opened the door for bad actors to engage in potentially unethical practices,” said Zain Bukhari of S&P Global Market Intelligence.

7. Spreads Compress to 450-475 Bps as Credit Quality Deteriorates

Spreads in US direct lending have compressed roughly 100 bps over the past year to 450 to 475 bps, according to Moody’s. “Tighter spreads and loosening terms show both sides are fighting harder for the same deals,” said Alexandra Aspioti, a vice president of private credit at Moody’s.

With interest rates easing over the past two years, the broadly-syndicated loan market has reclaimed some market share from direct lenders as borrowers seek lower-cost financing. The growth of the CCC- rated borrower bucket, often considered the core of direct lending, ticked up at the end of the year, pointing to mounting stress and the potential for more defaults in 2026.

By the end of Q4, the tally had climbed to 64 from 61 at end of September, marking the sixth consecutive quarter of increases, according to KBRA. The firm projects a half-percentage point increase in the default rate by volume next year. “Across the landscape, there are blinking lights -- as in, that risk in that context did not exist two years ago,” said Bill Cox, chief ratings officer at KBRA.

Why It Matters

PIK levels have risen steadily for BDCs over the last five quarters, with median PIK income ratios climbing from around 5% in Q1 2022 to over 8% for perpetual non-traded BDCs by Q3 2025, according to Moody’s. The compression in spreads while credit quality deteriorates and PIK increases reveals the competitive pressure. Managers are accepting worse terms on riskier credits to deploy capital and earn fees.

Deals of Note

• OneStream - Hg in discussions with Goldman Sachs Alternatives and Blue Owl for roughly $3B annual recurring-revenue loan to help finance $6.4B acquisition alongside General Atlantic and Tidemark

• Covetrus - CD&R and TPG in talks with Blue Owl and others to line up at least $2.5B of debt to refinance roughly $2B existing debt and fund potential acquisition, pricing expected at least 500 bps over benchmark

• Databricks - Lined up $1.8B of new financing from BSL and private credit lenders, increased delayed-draw term loan to $1.15B from $500M, boosted revolver to $3.65B from $2.5B, pricing at 450 bps over SOFR, total debt now $7.05B

• Blue Raven Solutions - Fortress leading $500M private loan to refinance existing debt at military supply-chain company

The Reality Check

BlackRock waiving fees on a 19% markdown reflects broader industry pressure as pandemic-era underwriting gets stress-tested. Redemptions hitting 5% while returns dropped from 11.39% to 6.22% shows the retail investor base responding to underperformance the way retail always does.

Blue Owl raising its gate to 17% demonstrates creative liquidity management: flushing redemptions in one quarter rather than managing a multi-year cycle. The approach requires substantial cash or borrowing capacity, but it’s a cleaner reset than the prolonged pressure Blackstone’s Breit experienced. Whether other funds can replicate the tactic depends on their balance sheets.

The Planet Networks lawsuit alleging Post Road leveraged loan negotiations to benefit competing portfolio company Archtop highlights structural tensions as private equity firms expand into lending. When capital providers own competing assets, relationship-based underwriting faces conflicts that standard covenants don’t resolve. The case may reshape how PE-lender conflicts are managed industry-wide.

Secondaries hitting $226 billion while EQT pays $3.2 billion for Coller shows where institutional capital sees opportunity. Coller raised $17 billion for its largest fund, and Jeremy Coller receives $2.3 billion from the sale. The returns in secondaries increasingly outpace primary origination as LPs prioritize liquidity and price discovery over new commitments.

The retail distribution push through 41 evergreen funds and partnerships with Vanguard, Wellington, and 401(k) advisers reflects the industry’s strategic pivot as institutional allocations slow. Interval funds growing to $92.7 billion from $15 billion in 2020 demonstrates demand for semi-liquid structures. The question is whether these vehicles can deliver the liquidity promised when redemptions accelerate beyond 5% thresholds.

Asset-backed finance positioning as the growth engine makes strategic sense given spread compression in direct lending to 450-475 bps. But managing ABF requires operational expertise in aviation, receivables, and consumer finance that differs from sponsor-backed corporate lending. KBRA already seeing concentration limits tested suggests not all managers possess the capabilities they’re marketing.

The private credit value proposition always rested on three pillars: covenant protection, relationship access, and underwriting discipline. Recent market behavior shows all three under pressure. Spreads compressing 100 bps while CCC- borrowers hit 64 for six straight quarters and PIK rises from 5% to 8% reflects competitive intensity overwhelming selectivity.

Returns normalizing from 11% to 6% while public markets rally tests whether the illiquidity premium still justifies the positioning. Private credit remains a viable asset class with institutional demand. The challenge is whether performance can support the distribution ambitions as managers push into retail channels just as returns moderate.

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The safeguards are disappearing. Permira negotiated covenant-lite terms from Blackstone, Goldman Sachs Asset Management, Macquarie, and Apax Credit on multiple deals. Middle-market CLO covenant-lite limits jumped to 25% from 16% in 2021. German insurance broker Global Gruppe got offers for €1 billion in covenant-lite loans before the sales process stalled.

“In 2026, I expect some private credit lenders will increasingly agree to looser or no covenants in order to win business,” said Ben Davis of Eversheds Sutherland.

Meanwhile, JPMorgan led Relativity’s $720 million leveraged loan refinancing at 275 bps over benchmark, saving the company at least $12.3 million annually. The deal refinanced out Blackstone, Apollo, Blue Owl, and Ares. Banks are winning with pricing private credit can’t match.

Neuberger’s Susan Kasser is rebranding the problem. “I think there’s bad PIK and then there’s ‘PIK on purpose,’” she said, calling deferred interest a strategic feature the syndicated market can’t offer. PIK across the industry rose from 7% to over 13% of investments. Kasser maintains a 0.01% loss rate with 3% PIK while seeing $10 billion monthly in opportunities.

Ares raised $7.1 billion for its debut secondaries strategy as deal volume heads toward $50 billion within two to three years from $6 billion in 2023. BlackRock pulled in $342 billion in Q4 after spending $28 billion on acquisitions, pushing assets to $14 trillion. Apollo traded $6.7 billion of private credit last year and is opening trading on a $3.5 billion xAI chip financing at par.

Key Market Themes

1. Covenant-Lite Becomes Middle Market Norm

Private credit firms are adopting covenant-lite terms that look much more like typical bank loans as they compete for large borrowers. Permira, along with Canada Pension Plan Investment Board, financed the acquisition of services provider JTC on covenant-lite terms from lenders including Blackstone, CVC Credit, and Singapore’s GIC. Permira also secured covenant-lite terms on a loan for the buyout of UK education software firm The Key Group from lenders including Goldman Sachs Asset Management, Macquarie, and Apax Credit.

The trend is accelerating. Middle-market CLOs have steadily boosted the amount of covenant-lite loans they’ll accept to 25% in Q1 2025 from about 16% in 2021, according to S&P research. Lenders on the largest US deals have been gradually giving up covenants even before 2023, with terms weakening as transaction size increased.

Traditional private credit carries maintenance covenants that impose limits on leverage tested regularly. As soon as a borrower breaches limits, a lender can seek equity injection, demand more collateral, or force asset sales. But now direct lenders are striking deals on the same terms as banks.

Warning Signs

“At the end of the day, nothing beats proper covenants and contractual protections when things get difficult,” said Amin Doulai, a partner at King & Spalding. “Some lenders will tell you that their fundamental protection is understanding the credit and maintaining the direct line into management teams. But when a company starts to underperform and it’s defaulting on its loans, you’ll find that the direct line isn’t open anymore.”

2. Neuberger Pitches “Strategic PIK” as Competition Intensifies

Susan Kasser, Neuberger Berman’s head of private debt, is offering “strategic” payment-in-kind to stand out from the crowd. “I think there’s bad PIK and then there’s ‘PIK on purpose,’” she said on the Credit Edge podcast, describing the feature which allows borrowers to defer interest as something the broadly syndicated loan market can’t offer.

Kasser remains fiercely protective of her 0.01% annualized loss rate and lower-than-typical PIK rate of about 3%. Her team consistently saw $10 billion of opportunity per month in the second half of last year. “Our pipeline is just bigger,” she said, adding the firm is declining more deals than ever.

PIK use has been creeping up across the industry, with investments featuring PIK as a percentage of all investments valued rising from around 7% in Q3 2021 to over 13% in Q2 2025, according to Lincoln International data.

Market Defense

Kasser welcomes questions from investors on whether creative, customized lending raises risks. But she argues Neuberger’s borrowers are more interested in lending pace, flexibility, and certainty than temporary deferrals of interest. “The structural advantages and the appeal of direct lending isn’t going away -- just the borrowers will need to decide, ‘do you want to pay the premium for that or not?’”

3. Banks Win Refinancings with Aggressive Pricing

Legal software firm Relativity refinanced its $720 million first-lien term loan in the leveraged loan market, allowing the Silver Lake-backed firm to lower its interest rate to 275 bps over the benchmark. JPMorgan led the refinancing, which is expected to save Relativity at least $12.3 million per year.

The original private unitranche loan was provided by Blackstone Private Credit Fund, Apollo Debt Solutions BDC, Blue Owl Credit Income Corp., and Ares Capital Corp. Arrangers tightened pricing to 99.75 cents on the dollar compared with the original pitch to investors of 99.5 cents.

Last month, banks led by Goldman Sachs helped refinance more than $2 billion of private debt for fire protection services firm Pye-Barker Fire & Safety. More private loans are being refinanced in the leveraged loan market as borrowers seize on lower rates and appetite from yield-starved investors.

Competitive Pressure

About $37.7 billion of broadly syndicated loan deals have been refinanced into private credit so far this year through November, compared with $28.2 billion of private credit refinanced into the BSL market, according to JPMorgan and KBRA DLD data. But the trend is shifting as banks become more aggressive on pricing and terms.

4. Secondaries Market Explodes with $7.1 Billion Ares Raise

Ares collected $7.1 billion for its debut private credit secondaries strategy, including $4 billion in equity commitments from investors and a $1 billion joint venture with Mubadala. The remainder is a mix of capital raised in affiliated vehicles and anticipated leverage.

Deal volume in private credit secondaries is expected to surpass $50 billion within the next two to three years, up from $6 billion in 2023, according to Evercore data. Private credit secondaries, once a quieter corner of the broader market for secondhand stakes dominated by buyouts, have become one of its fastest-growing segments.

More managers are raising funds dedicated to the strategy. Coller Capital raised $6.8 billion for its second private credit secondaries strategy last year. HarbourVest Partners has launched two separate vehicles to back secondary deals. Pantheon is pitching investors its latest credit funds and a new evergreen vehicle for institutional investors.

Growth Drivers

“Managers are utilizing continuation vehicles to return capital back to those investors in hopes that they will recycle those dollars into the new fund,” said Dave Schwartz, head of credit secondaries at Ares. The firm expects large LP portfolios to come to market this year, and the pipeline for continuation funds is strong.

5. BlackRock’s $28 Billion Bet Pays Off in Record Flows

BlackRock pulled in $342 billion of total client cash in Q4, pushing the firm to a record $14 trillion of assets. The company took in $15.6 billion in liquid alternative and private assets in the quarter. Investors added $268 billion on a net basis to its long-term investment funds, including $181 billion to its ETF business that now has $5.5 trillion overall.

Operating expenses hit $5.3 billion in Q4, up 48% year-over-year, driven in part by onboarding staff from newly-acquired Global Infrastructure Partners, Preqin, and HPS Investment Partners. Larry Fink shelled out $28 billion to buy the trio in an historic acquisition spree aimed at transforming BlackRock into one of the largest firms in private credit and infrastructure markets globally.

Private markets revenue for the full year roughly doubled to $2.4 billion from 2024. Full year employee compensation and benefit expenses rose 20%, primarily reflecting higher bonus payouts.

Strategic Goals

“You’ve heard us say it’s not that the big are getting bigger, it’s that the best are getting bigger. Size and scale are outputs of performance,” BlackRock CFO Martin Small said, outlining a $400 billion goal in gross private markets fundraising through 2030. The firm is targeting new products marketed to wealthy retail investors and defined-contribution plans such as 401(k)s.

6. Apollo Opens Trading on $3.5 Billion xAI Chip Financing

Apollo is trying to open up trading on a $3.5 billion chip financing deal supporting Elon Musk’s xAI. The asset manager has told other lenders it’s willing to buy more of the debt at par. The debt was used to fund xAI’s access to Nvidia graphics processing units and other data center-related infrastructure.

Last year, Apollo traded over $6.7 billion worth of private credit. The firm’s trading effort has been mainly focused on investment-grade private credit, a subset that could swell the entire market to $40 trillion. Apollo, run by CEO Marc Rowan, has been the steward of such an effort and has launched a marketplace to trade private debt.

The debt package was for a special purpose vehicle established by Valor Equity Partners, one of xAI’s key backers, to help xAI rent chips for its Colossus 2 data center site in Memphis. The Valor vehicle closed a roughly $5.4 billion deal to buy the chips, including Nvidia’s GB200 GPUs, and leased them to xAI. Apollo led the $3.5 billion debt portion, though other lenders also own smaller slices.

Capital Intensity

xAI has been tapping Wall Street, venture capital firms, and others for billions over the past year to fund its growth. The company recently announced another $20 billion investment in Mississippi and earlier this month raised $20 billion in additional equity from investors including Nvidia, Valor, and Qatar Investment Authority. It raised $10 billion across equity and corporate debt earlier in 2025.

7. Fundraising Momentum Continues Across Strategies

RRJ Capital, a private equity firm founded by a former Goldman Sachs banker, raised $1.1 billion via the first round of financing for its debut private credit fund focusing on investments in Asia Pacific. KKR closed its second Asia-focused credit fund late December, securing $2.5 billion in total investments. Sixth Street has raised €3.75 billion from investors to target financing opportunities in Europe’s direct lending market.

Guggenheim Investments closed a $250 million vehicle that will invest in its private debt strategy. The fundraising comes as private credit firms expand globally and diversify into new strategies including secondaries, asset-backed finance, and specialized sectors.

Geographic Expansion

The Asia-Pacific focus from RRJ and KKR reflects growing opportunities in the region, though private credit still faces stiff competition from traditional lenders. Asian borrowers are highly price-sensitive, often opting for bank loans that are typically 200 to 400 bps cheaper than private debt.

Deals of Note

• Covetrus - CD&R and TPG in talks with Blue Owl and others to line up at least $2.5B of debt to refinance roughly $2B existing debt and fund potential acquisition, pricing expected at least 500 bps over benchmark

• xAI - Apollo opens trading on $3.5B chip financing at par supporting Elon Musk’s AI startup, part of $5.4B Valor SPV deal for Nvidia GB200 GPUs

• Relativity - JPMorgan leads $720M leveraged loan refinancing at 275 bps over benchmark, saving at least $12.3M annually, refinancing out Blackstone, Apollo, Blue Owl, Ares private unitranche

• Beaufort - Adams Street Partners leads private credit financing of as much as $400M to back acquisition by Capitol Meridian Partners and Stellex Capital Management, joined by MidCap Financial and Hamilton Lane

• Leisure Time Products - Fortress provides $150M senior secured term loan to Aterian Investment Partners portfolio company

• Polarise - Macquarie lending as much as €117M to German data center infrastructure startup

• Acclime Holdings - Warburg Pincus secures commitments for $400M facility to support investment in corporate services provider

• Health-care software platform - Ares-led group of private credit lenders upsize loan for acquisition by Veritas Capital

The Reality Check

Covenant-lite limits jumping to 25% while Neuberger calls PIK “strategic” and Relativity saves $12.3 million by refinancing into banks tells you everything. The structural advantages that justified private credit’s premium are being traded away deal by deal to win business.

When borrowers can’t pay interest with cash, calling it “PIK on purpose” doesn’t change what it means. When Permira gets covenant-lite terms from every major lender, those aren’t protections anymore. They’re marketing talking points. And when banks price 275 bps inside where private credit can compete, the value proposition shrinks to speed and certainty. Those matter, but not at 200+ bps.

Ares raising $7.1 billion for secondaries targeting $50 billion in volume reveals where smart money sees returns. Not in originating new loans at compressed spreads with loose terms. In buying existing loans at discounts. That’s price discovery, not deployment pressure.

BlackRock’s $28 billion acquisition spree and $400 billion fundraising goal through 2030 shows the endgame. Private credit is becoming product distributed through 401(k)s, not performance chased by institutions. Apollo trading $6.7 billion and building a marketplace means liquidity infrastructure the asset class needs but also proves these loans can trade. Once they trade, they get marked. Once they get marked, the illiquidity premium disappears.

The covenant erosion, PIK rebranding, and bank competition aren’t cyclical adjustments. They’re permanent repricing. Private credit competed by offering structure banks couldn’t. Now it’s competing by matching terms banks already offer. That’s not evolution. That’s commoditization.

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Investors are rushing for the exits. Redemption requests from non-traded BDCs holding more than $1 billion asked to pull a total of more than $2.9 billion in the fourth quarter, up 200% from the prior period, according to Robert A Stanger & Co. Historically, redemptions hover at 2% of a fund’s net assets. They’re now running at 5% across the industry.

Blackstone’s BCRED, the biggest vehicle in the space, saw investors request approximately $2.1 billion in withdrawals, worth about 4.5% of net assets. Ares’ non-traded BDC redemption requests reached more than 5% of net assets, with one large withdrawal made before September contributing to the surge.

Then Blue Owl shattered precedent. The firm allowed investors in Blue Owl Technology Income Corp. to withdraw as much as 17% of net assets, worth approximately $685 million, well in excess of the 5% quarterly limit. The firm also extended the redemption deadline to January 8 from December 31.

“Typically when funds are faced with redemptions above 5% they will pro-rate, but we’ve prioritized the investor here because we have the flexibility with $2.4 billion of liquidity,” said Blue Owl co-founder Craig Packer. The steep redemptions came from wealthy individuals in Asia, which constitute a significant portion of OTIC’s investor base.

Representatives for the three firms emphasized strong performance. Ares’ ASIF vehicle has delivered 11% annualized total return through November 30 for Class I shares since inception. Blue Owl said OTIC’s performance “remains strong with roughly 11% returns” for Class I shares since inception. Blackstone noted BCRED delivered 10% annualized total return since creation with “strong, positive” net flows for the quarter.

But net assets sitting in private BDCs have declined over the past five quarters, with those in funds managing more than $750 million dropping 0.4% in Q3, according to Raymond James. Goldman Sachs analysts expect redemption requests to remain elevated in Q1 but calm down by mid-year. If redemptions continue at around 5%, non-traded BDCs would report approximately $45 billion of net outflows annually.

Meanwhile, UK lawmakers delivered a scathing assessment. A House of Lords committee criticized the Treasury for its “limited grasp” of risks related to private capital markets and said the Bank of England needs to move faster on stress testing. “HM Treasury’s evidence demonstrated a limited grasp of the concerns raised during this inquiry, which suggested passivity in the face of potential risks to the UK’s financial stability,” the committee wrote.

“One is hoping very much that Jamie Dimon’s cockroaches don’t come this side of the Atlantic,” said Lord Hollick, a committee member. “It’s all part of the same market internationally with the same players. So this needs to be high on the agenda for both the regulators and the Treasury.”

On the fundraising front, KKR closed its second Asia-focused credit fund with $2.5 billion in total investments including $700 million from separately managed accounts. Monroe Capital amassed $6.1 billion for its newest lower middle-market strategy, 27% more than its previous $4.8 billion pool. Davidson Kempner closed its second asset-backed fund with over $1.1 billion in fresh capital, up from $750 million for the predecessor.

Apollo President Jim Zelter said “the gauntlet for approving investments at the firm has gotten higher and higher over the last year or so amid rising tail risk from geopolitics.” He noted planned US layoffs topped 1.2 million last year, the most since 2020, though data suggests the US economy has become more resilient since the financial crisis.

Key Market Themes

1. Redemption Wave Hits 200% Surge as Sentiment Sours

Investors in BDCs holding more than $1 billion asked to pull a total of more than $2.9 billion in Q4, up 200% from the prior period. Historically, redemptions hover at 2% of a fund’s net assets, according to Goldman Sachs. They’re now running at 5% across the industry.

Blackstone’s BCRED saw investors request approximately $2.1 billion, worth about 4.5% of net assets. Ares’ non-traded BDC redemption requests reached more than 5% of net assets. One large withdrawal request made before September contributed to the surge, Goldman Sachs analysts noted.

“The current environment represents one of the first real tests for the largely non-institutional client base of many of these funds since Covid,” said Alfonso Rodriguez, associate director of alternative investment research at EP Wealth.

The Math

If redemptions continue at around 5%, non-traded BDCs would report about $45 billion of net outflows annually. However, managers are expected to handle redemptions even at that rate long-term, given they hold $500 billion of total available capital, according to Goldman Sachs. Redemption requests are expected to remain elevated across non-traded BDCs in Q1 but calm down by mid-year.

2. Blue Owl Breaks Precedent with 17% Redemptions

Blue Owl allowed investors in OTIC to withdraw as much as 17% of net assets, worth approximately $685 million, well in excess of the 5% quarterly limit. The firm also amended the deadline for investors to redeem shares to January 8 from December 31.

“Typically when funds are faced with redemptions above 5% they will pro-rate, but we’ve prioritized the investor here because we have the flexibility with $2.4 billion of liquidity,” Craig Packer said. The steep redemptions were due to withdrawal requests from wealthy individuals in Asia, which constitute a significant portion of OTIC’s investor base.

OTIC’s $2.4 billion of available liquidity includes $1.2 billion of liquid loans, Packer added. The fund has honored all tender requests its investors have ever made. Blue Owl’s largest direct lending vehicle, Blue Owl Credit Income Corp., saw investors yank out about 5% for the quarter, in line with the industry average, totaling approximately $966 million.

Historical Context

Blue Owl faced scrutiny in November after pulling a planned merger of two private credit funds that could have forced investors in the non-traded fund to swallow losses of around 20%. The non-traded vehicle, Blue Owl Capital Corp. II, had seen redemption requests above the preset 5% limit prior to the attempted merger. Blue Owl honored about $60 million, or 6%, but has since stopped allowing cash withdrawals. The manager said it would reinstate redemptions this quarter.

3. UK Lawmakers Warn of “Unknown Unknowns” and Treasury Passivity

A House of Lords Financial Services Regulation Committee criticized the Treasury for its “limited grasp” of risks related to private capital markets and said the Bank of England needs to move faster on stress testing. The committee titled its report “Private markets: Unknown unknowns.”

“HM Treasury’s evidence demonstrated a limited grasp of the concerns raised during this inquiry, which suggested passivity in the face of potential risks to the UK’s financial stability arising from the growth of private markets,” the committee wrote. The Treasury’s attitude was “Well, these matters are being dealt with by the regulator,” said Lord Hollick.

The inquiry said it didn’t have sufficient evidence to determine whether private markets represent a systemic risk, but rapid growth and interconnectedness with banks and insurers are concerns. “One is hoping very much that Jamie Dimon’s cockroaches don’t come this side of the Atlantic,” Hollick said.

Stress Test Timeline

Baroness Noakes called on the central bank to publish stress test results by mid-2026 instead of Q1 2027 as provisionally timetabled. “We think there would be advantages in sharing initial findings. This is an area that is rapidly growing and there are so many unanswered questions,” Noakes said. The test “could reveal that the Bank does not have sufficient powers to do what is necessary to ensure that any financial stability risks can be managed.”

4. Credit Executives See Spread Compression and Vintage Risk

Private credit executives entering 2026 see spread compression and falling rates as top concerns. According to Carlyle’s Mark Jenkins, “people have really short memories. We went through a period in 2021-2022 where we were doing unlevered first-lien loans at 12% or 13%, and it was unsustainable. Normal spreads are around that 450- to 550-basis point range, and so the industry should be inking out unlevered returns between 7.5% and 8.5%.”

Tikehau’s Mathieu Chabran said what struck him most about Tricolor and First Brands is “people were all confused on credit defaults. We’re not talking AAA-rated government bonds. We’re talking about credit underwriting, so there is some credit risk. That was a very significant misconception. Maybe because the last credit cycle goes back to the global financial crisis, which is now 17 years ago.”

Andalusian’s Aaron Kless distinguished between two private credit markets. “There are the headline-grabbers, the household-name lenders doing massive deals that are really analogous to broadly syndicated loans. That is where you see the ‘cockroach’ examples. Then there is the core middle market where we operate -- companies with $10 million to $50 million in earnings.”

Restructuring Wave

Jenkins noted “there are a lot of companies that took on outsized capital structures in a low-rate environment. Those companies represent a vintage that is never going to grow enough to catch up to their cap structure. They have to be restructured. And the only way to do that is to throw the debtholders the keys.”

5. Asset-Backed Finance Emerges as Top Asia Pick

Asset-backed finance was named the favorite alternatives pick for 2026 by Asia’s top investors in a Citywire poll of 150 leading wealth and asset management professionals. Nearly a quarter said they were finding the most attractive opportunities in ABF, followed by private equity with 19% of votes.

Davidson Kempner closed its second asset-backed private credit fund with over $1.1 billion in fresh capital exclusive of fund-level leverage. The fund will be deployed across residential, corporate, and specialty finance opportunities, with check sizes ranging from $25 million to $75 million. Investors in the predecessor fund, which had around $750 million when closed in 2021, have gotten back about what they put in with more on the way.

“We are looking to step into areas where banks have pulled back because of regulatory concerns,” said Chris Krishanthan, a Davidson Kempner partner. Deals the firm finds particularly attractive include residential projects as well as hard assets in the aviation and maritime sectors.

Market Growth

ABF offers investors an alternative to the crowded direct-lending lane as well as protections against losses because it’s generally tied to hard assets or intellectual property. Many industry participants view ABF lending as a bright spot and maintained enthusiasm even as tariff concerns arose last year.

6. Fundraising Momentum Continues Despite Market Stress

KKR closed its second Asia-focused credit fund late December, securing $2.5 billion in total investments including $700 million from separately managed accounts. The Asia Credit Opportunities Fund II is a performing credit fund designed to deploy capital into deals targeting returns in the low-to-mid-teens.

Monroe Capital amassed $6.1 billion for Monroe Capital Private Credit Fund V and related parallel funds, around 27% more investible capital than its previous $4.8 billion pool closed in 2022. The firm collected $2.8 billion for the latest fund itself along with $1.5 billion in fund-level leverage and $1.8 billion in separately managed accounts from over 90 institutional investors.

Catalio Capital Management, backed by KKR, raised more than $325 million in commitments for a private credit fund focused on life sciences, almost fourfold the $85 million it pulled in for its 2022 predecessor. The fund was oversubscribed, exceeding its initial target of $250 million.

Strategic Context

The fundraising success comes despite mounting concerns. “In some cases, these funds have raised so much capital that they don’t have enough loans to deploy it into, resulting in 20% to 40% of the portfolio being allocated to bank-syndicated loans,” EP Wealth’s Rodriguez said. “When investors are paying private-market fees for a large public-asset allocation, that becomes a problem.”

7. Apollo Raises Investment Bar Amid Geopolitical Risk

Apollo President Jim Zelter said “the gauntlet for approving investments at the firm has gotten higher and higher over the last year or so amid rising tail risk from geopolitics.” While there are “a lot of great things going on, a massive capex cycle and good economic growth and consumers in solid shape” in the US, “there’s lots of challenges between geopolitics and concerns about inflation and the return of invested capital and AI.”

Planned US layoffs topped 1.2 million last year, the most since 2020, stoking anxiety about the economy. But Zelter argued the US has been in an extended credit cycle and “it’s harder to have a real economic recession because of the diversity of funding. We have the healthiest banks on the globe and a securitization market that’s alive and well.”

On AI, Zelter said there’s a gap of $1 trillion to $1.5 trillion between hyperscalers’ capital spending needs over the next five to six years and the amount expected to be raised from equity and public debt markets. “That seems like it’s a huge number. It’s definitely going to have a strain on the IG market.”

Market Evolution

Hyperscalers will go from a negligible impact on the investment grade debt market to making up 10% to 15% of participants, Zelter said. Apollo agreed to buy a majority stake in Stream Data Centers last year as it jostles to be involved in the rollout of AI infrastructure.

8. Investment Grade Bonds Teetering on Junk Brink

Around $63 billion of US corporate bonds in the high-grade universe have a high-yield rating from one bond grader, a BBB- rating from others, and at least one negative outlook, according to JPMorgan. That figure was $37 billion at the end of 2024.

“As companies continue to refinance debt, the pressure on their balance sheets from rising interest expense is growing,” said Nathaniel Rosenbaum, a JPMorgan US high-grade credit strategist. “That, in turn, does put a little bit more ratings pressure on weaker credits.”

About $55 billion of US corporate bonds migrated from investment-grade to junk status in 2025, becoming “fallen angels.” That far exceeds last year’s $10 billion of “rising stars,” or firms elevated to high-grade. BBB- debt is just 7.7% of JPMorgan’s US high-grade corporate index, a record low share, but a relatively high amount of debt is susceptible to being cut to junk.

Credit Quality Concerns

“If you look underneath the hood there are underlying signs of weakening in credit profiles,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. Broad measures of indebtedness have been creeping higher relative to earnings, fueled by rising yields after the pandemic, spending on AI, and acquisitions.

Deals of Note

• Beaufort - Adams Street Partners leads private credit financing of as much as $400M to back acquisition by Capitol Meridian Partners and Stellex Capital Management from Survitec, joined by MidCap Financial and Hamilton Lane

• Uvesco - Hayfin and Strategic Value Partners agree to provide loan to fund management-led acquisition from PAI Partners

• Russell Investments - Completes $1.225B strategic financing with Apollo-managed funds to support long-term growth strategy and enhance balance sheet flexibility

The Reality Check

Redemptions jumping 200% to $2.9 billion in Q4 while funds maintain 11% reported returns reveals the gap between performance and perception. Blue Owl honoring 17% redemptions above its 5% gate demonstrates the liquidity management challenge facing even well-capitalized managers as investor sentiment shifts.

Jenkins’ observation that normal spreads sit at 450-550 bps with returns at 7.5-8.5% reflects the recalibration underway. The 11% returns many funds advertise include leverage, which magnifies both upside and downside. As base rates fall and spreads compress, maintaining double-digit returns requires either increased leverage or moving down the quality spectrum.

The UK Lords committee requesting accelerated stress test results signals regulators treating private markets as systemically important. Whether interconnection with banks and insurers creates stability through diversification or fragility through contagion remains the central question. Monroe’s $6.1 billion raise and KKR’s $2.5 billion Asia close show institutional capital still backs the asset class, but allocation patterns are shifting toward ABF and secondaries where collateral and price discovery provide clearer risk-adjusted frameworks.

JPMorgan’s data showing $63 billion of bonds near downgrade from $37 billion at year-end reflects broader credit cycle dynamics. As $55 billion of fallen angels versus $10 billion of rising stars in 2025 demonstrates, corporate credit quality is under pressure across public and private markets. Private credit doesn’t create these stresses. It finances through them.

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Megadeals are back. A record 68 transactions valued at $10 billion or more were announced globally in 2025, according to LSEG data going back to 1980. That drove average annual deal size to a new high of nearly $227 million. Wall Street is bracing for another wave in 2026.

But private credit managers entering the new year aren’t celebrating. They’re preparing for spread compression, rate cuts, and the restructuring wave from loans originated during the 2020-2021 zero-rate frenzy. According to Mark Jenkins, head of global credit at Carlyle, “there are a lot of companies that took on outsized capital structures in a low-rate environment. Those companies represent a vintage that is never going to grow enough to catch up to their cap structure.”

The bifurcation is stark. Aaron Kless, CEO of Andalusian Credit Partners, distinguishes between “headline-grabbers, the household-name lenders doing massive deals that are really analogous to broadly syndicated loans” where you see “cockroach examples,” and “the core middle market where we operate” with companies generating $10-50 million in earnings through bilateral, hands-dirty underwriting.

Jamie Dimon’s “cockroach” warning still resonates. First Brands and Tricolor bankruptcies exposed fraud allegations including double-pledging and off-balance-sheet vehicles. Silver Point Capital partner Michael Gatto wrote that First Brands founder Patrick James had a documented history of two legal battles over fraud allegations, including a 2009 lawsuit claiming he inflated accounts receivable and inventory figures. The company used special-purpose vehicles to keep debt off its balance sheet, a tactic used by Enron.

“People were all confused on credit defaults,” said Mathieu Chabran, co-founder of Tikehau Capital. “We’re not talking AAA-rated government bonds. We’re talking about credit underwriting, so there is some credit risk. That was a very significant misconception. Maybe because the last credit cycle goes back to the global financial crisis, which is now 17 years ago.”

Jenkins doesn’t see defaults as unusual. “I’ve been involved in credit for 35 years. You have defaults. You can’t avoid them. If you find somebody who says they have never had a default, you may have a Bernie Madoff situation -- there’s probably fraud, because it’s impossible.”

The opportunities are shifting. Chabran sees the secondary market as the big play for 2026. “You’re getting to a maturity phase of the market. People have to rebalance, to arbitrage, to rotate the portfolio. The amount of capital going after secondary direct lending is only a fraction of what is on offer.”

Kless expects non-sponsored finance to accelerate. His portfolio currently splits 50/50 between sponsored and non-sponsored deals, but he expects that to tilt toward 60% non-sponsored in 2026. “In the non-sponsored channel, we generally see lower leverage, higher spreads and tighter terms.”

The PE backlog remains elevated. About 12,900 US companies sat in private equity portfolios as of September 30, up slightly from end of 2024 despite a pickup in broader deal activity. Family offices controlling approximately $5.5 trillion in wealth, up 67% from five years ago, are becoming increasingly influential players.

Data center investment soared in 2024, with capital invested almost matching the previous four years combined. US data-center credit deals reached $178.5 billion in 2025 as of December 21, according to Bloomberg figures.

SoftBank agreed to buy infrastructure investor DigitalBridge for $4 billion including debt, paying $16 per share representing a 15% premium. Stonepeak agreed to buy a 65% stake in BP’s Castrol lubricants business in a deal valuing the entire division at $8 billion, with BP receiving roughly $6 billion in proceeds.

Key Market Themes

1. Megadeals Hit Record as M&A Machine Cranks Up

A record 68 transactions valued at $10 billion or more were announced globally in 2025, driving average annual deal size to nearly $227 million, according to LSEG data going back to 1980. The fourth quarter of 2025 was the busiest for acquisition funding since 2021, with the period ranking as the fourth busiest on record for M&A-related bond sales.

“The M&A machine is starting to crank up,” said Carlyle’s Mark Jenkins. “You’re seeing these large corporate deals, obviously, but that will lead to other activity, which is good for the ecosystem. We’ve been talking about this for two years now, and it just really hasn’t come to fruition until now.”

Wall Street expects another wave in 2026. SpaceX, OpenAI, and Anthropic are all preparing for potential public offerings that would rank among the biggest IPOs of all time. SpaceX is valued at $800 billion by investors, OpenAI at $500 billion, and Anthropic is working on a funding round likely priced north of $300 billion.

Market Dynamics

One investment banker predicted 2026 will come “out of the gate like a lion and leave like a lamb.” The first half of 2025 was slow thanks to Trump’s “liberation day” tariffs, but the second half was gangbusters. In 2026, expect the opposite as economic uncertainty and potential midterm election shifts dampen appetite for riskier deals.

2. Credit Managers Warn of Spread Compression and Rate Risk

Private credit executives see spread compression and falling rates as top concerns for 2026. Jerome Powell’s term as Fed chairman ends in May 2026, and a new chair might pursue more aggressive rate cuts. According to Andalusian’s Kless, “as spreads compress, there is a temptation in the market to compensate for lower absolute returns by increasing fund-level leverage.”

Carlyle’s Jenkins pushed back on expectations for sustained high returns. “People have really short memories. We went through a period in 2021-2022 where we were doing unlevered first-lien loans at 12% or 13%, and it was unsustainable. Normal spreads are around that 450- to 550-basis point range, and so the industry should be inking out unlevered returns between 7.5% and 8.5%.”

He argued investors got “anchored on something that was just unrealistic and temporal.” With the new math after rates rose, “you couldn’t execute a reasonable buyout anymore because it implied your growth rate on doing a buyout was about 50% or 60% higher than it was the year before to achieve 20% returns to the equity.”

Deployment Pressure

According to a Bloomberg Intelligence poll of 140 respondents conducted in September, almost a third of investors surveyed expect private credit deployment rates to remain unchanged or even decline over the next year versus the previous 12 months. In April, only 12% felt this way. About 88% of investor respondents to the April survey expected deployment to increase. In September, this dropped to 68%.

3. Vintage 2020-2021 Loans Face Restructuring Wave

Loans originated during the 2020-2021 zero-rate environment are coming due and many borrowers can’t grow fast enough to service the debt. “There are a lot of companies that took on outsized capital structures in a low-rate environment,” Carlyle’s Jenkins said. “Those companies represent a vintage that is never going to grow enough to catch up to their cap structure. They have to be restructured. And the only way to do that is to throw the debtholders the keys.”

More than 10% of private credit deals now involve borrowers paying interest with debt, with deferrals after deal closures ranging from 30-70% in recent quarters according to Lincoln International data. This represents a significant increase from 2022 levels.

Jenkins emphasized defaults are normal. “I’ve been involved in credit for 35 years. You have defaults. You can’t avoid them. If you find somebody who says they have never had a default, you may have a Bernie Madoff situation -- there’s probably fraud, because it’s impossible.”

Restructuring Reality

Jenkins noted there “hasn’t been a massive uptick relative to our past nine years” in foreclosures and restructurings. But the vintage 2020-2021 cohort represents a specific problem requiring systematic workouts rather than catastrophic defaults.

4. Market Bifurcates Between Large Syndicated and Core Middle Market

Andalusian’s Kless drew a sharp distinction between two private credit markets. “There are the headline-grabbers, the household-name lenders doing massive deals that are really analogous to broadly syndicated loans. That is where you see the ‘cockroach’ examples. The underwriting and negotiation in that upper market are often intermediated, and the diligence can be lighter.”

By contrast, “the core middle market where we operate -- companies with $10 million to $50 million in earnings. Even when we do sponsor-backed deals, the process is bilateral. It is old-fashioned, get-your-hands-dirty private credit. We are negotiating directly with the management team or the private-equity firm, not buying a piece of a syndicated deal.”

Tikehau’s Chabran echoed concerns about large-deal commoditization. “Direct-lending new origination is increasingly becoming commoditized here in the US as a consequence of two things. Obviously, a lot of capital is still being raised, and in many places, a great absence of skill in the game.”

Quality Divergence

The misconception, according to Kless, is “assuming the rot in those large, commoditized deals reflects the health of the bilateral middle market.” The bifurcation suggests manager selection will matter more as credit cycles mature and performance dispersion widens.

5. Secondary Market Emerges as Top Opportunity

Tikehau’s Chabran identified secondary markets as the biggest opportunity for 2026. “Where I see the big opportunity getting into 2026 is no longer the primary but the secondary market. You’re getting to a maturity phase of the market. People have to rebalance, to arbitrage, to rotate the portfolio.”

The supply-demand imbalance favors buyers. “The amount of capital going after secondary direct lending is only a fraction of what is on offer. We’ve always liked the supply/demand imbalance because that’s when you can be a price-setter.”

As the asset class matures with funds reaching their natural end dates and LPs seeking liquidity, secondary transactions provide price discovery that primary markets lack. The PE backlog of approximately 12,900 US companies as of September 30, up slightly from year-end 2024, creates additional pressure for creative liquidity solutions.

Market Maturation

The shift toward secondaries reflects private credit’s evolution from growth phase to maturity. When funds need to rebalance portfolios and investors seek exits, secondary markets become essential infrastructure rather than niche opportunities.

6. Red Flags and Risk Management Take Center Stage

Silver Point Capital partner Michael Gatto outlined systematic red flags investors should monitor to avoid “the next disaster akin to the recent collapse of First Brands and Texas subprime auto lender Tricolor.” His checklist includes material increases in receivable days, declining order backlogs, significant FX fluctuations, aggressive serial acquisitions, inventory mismanagement, and reductions in operating expenses like R&D or advertising.

First Brands exemplified multiple warnings. Beyond debt and acquisition-fueled growth, founder Patrick James had documented history of two legal battles over fraud allegations, including a 2009 lawsuit claiming he inflated accounts receivable and inventory. Cases were dismissed after settlements. The company used special-purpose vehicles to keep debt off balance sheet and relied heavily on reverse-factoring.

“Financial statement analysis has become something of a lost art in today’s era of rapid capital deployment in the credit markets,” Gatto wrote. A red flag should “trigger rigorous due diligence and uncomfortable questions that demand clear answers from the company.”

Lost Discipline

According to Gatto’s mentor Ed Mule, co-founder of Silver Point Capital, “the best way to become a great credit investor is to conduct postmortems on deals that went wrong.” In an asset class that has grown seven times since 2008 to approximately $1.7 trillion, “the pressure to put money to work can overwhelm the patience required for proper analysis.”

7. Non-Sponsored Finance Gains Traction

Andalusian’s Kless expects a “real shift toward non-sponsored finance, lending to companies not owned by a private-equity firm.” His portfolio currently splits 50/50 between sponsored and non-sponsored deals, but he expects that to tilt toward 60% non-sponsored in 2026.

“In the non-sponsored channel, we generally see lower leverage, higher spreads and tighter terms. We source these deals through a network of smaller regional advisers or directly through word-of-mouth.”

The shift reflects saturation in sponsor-backed lending where competition has commoditized terms and compressed spreads. Non-sponsored borrowers often lack access to competitive financing options, allowing lenders to maintain discipline on structure and pricing.

Strategic Repositioning

As large managers chase mega-deals with sponsors, middle-market lenders find opportunities in directly-originated, non-sponsored transactions where relationship-driven underwriting and flexible capital solutions command premium economics.

Deals of Note

• DigitalBridge - SoftBank buying infrastructure investor for $4B including debt, paying $16 per share representing 15% premium, company has $108B in telecom and data center assets

• Castrol - Stonepeak buying 65% stake in BP’s lubricants business for roughly $6B in deal valuing entire division at $8B

• Warburg Pincus - Commits $225M to combination of OceanFirst Financial and Flushing Financial in transaction valued at $579M, plans 12% equity stake

• PineBridge - MetLife Investment Management closes acquisition from Pacific Century Group, adding roughly $100B in assets, expected to pay up to $1.2B

• WideOpenWest - DigitalBridge and Crestview complete acquisition of broadband provider with enterprise value of $1.5B

• Lee Enterprises - Hoffmann Family backs $50M equity investment at $3.25 per share, shares jumped 21% on news

• Southern Water - Macquarie commits further £245M ($331M) bringing total investment to £2.55B since 2021

• Sapporo Holdings - KKR and PAG agree to acquire real estate subsidiary valued at $3B

• Forum Engineering - KKR wrapping up take-private of Japanese staffing provider for ¥1,710 per share, market value over $568M

The Reality Check

Megadeals hitting record levels while credit managers warn of spread compression captures the contradiction. Jenkins saying normal spreads are 450-550 bps and returns should be 7.5-8.5% conflicts with investor expectations anchored on 12-13% from 2021-2022. That gap doesn’t close quietly.

The bifurcation Kless describes between large syndicated-style deals and core middle market bilateral lending isn’t just operational. It’s existential. When “cockroach” frauds concentrate in mega-deals with intermediated underwriting and lighter diligence, the reputational damage spreads across the entire asset class regardless of whether smaller managers actually conduct rigorous analysis.

Chabran’s observation that “maybe some people haven’t had the experience yet of a credit cycle” because the GFC was 17 years ago explains the shock when First Brands and Tricolor collapsed. An entire cohort of investors and managers raised capital, deployed billions, and collected fees without ever working through a true default cycle. The vintage 2020-2021 restructurings Jenkins describes will provide that education.

Secondary markets becoming the top opportunity for 2026 signals maturation but also distress. When the best risk-adjusted returns come from buying marked-down existing loans rather than originating new ones, primary market pricing has disconnected from reality. Chabran calling it a “supply/demand imbalance” where secondaries can be “price-setters” means primaries are overpriced.

Non-sponsored finance tilting to 60% of Andalusian’s portfolio from 50% represents capital fleeing commoditized sponsor-backed mega-deals for bilateral middle-market relationships. When the largest managers chase the biggest deals at the tightest spreads, smaller managers find alpha by going where competition hasn’t destroyed economics. That only works until the next wave of capital floods into non-sponsored too.

The 12,900 US companies sitting in PE portfolios, up from year-end 2024 despite increased exit activity, shows the backlog isn’t clearing. It’s growing. Every quarter that passes without meaningful distributions adds pressure on sponsors to accept creative structures, dividend recaps, and continuation funds that defer but don’t solve the underlying problem: assets were bought at prices that don’t generate returns exits will validate.

Gatto’s red flags checklist reading like a First Brands autopsy underscores how preventable the blow-ups were. When a founder has documented fraud allegations from 2009, uses SPVs to hide debt, and relies on reverse-factoring to obscure leverage, those aren’t subtle warning signs. They’re flashing red lights. That sophisticated lenders funded the company anyway reveals how thoroughly deployment pressure overwhelmed discipline. The lesson isn’t complex. It’s embarrassing.

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The year-end scorecard is brutal. The Cliffwater BDC Index tracking 41 vehicles dropped 6.6% in 2025 while the S&P 500 gained 18.1%. That’s the worst relative performance since 2020 and a dramatic reversal from 2023 and 2024 when BDCs gained 25.4% and 14.1% respectively.

Meanwhile, the six titans of US banking rose an average of more than 45% this year. JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley collectively crushed the top four public alternative asset managers, which are down collectively with only Carlyle making significant gains. According to Wells Fargo analyst Mike Mayo, “it’s revenge of the banks.”

The regulatory environment swung decisively in banks’ favor. The second Trump administration rolled back post-crisis restrictions including proposed capital rules, stress tests, and the 2013 leveraged lending guidance that recommended companies’ total debt shouldn’t exceed six times EBITDA. Banks adhered to avoid regulatory scrutiny, creating the opening for private credit. Now that’s gone.

“For the last 15 years, banks have been competing against nonbanks, analogous to playing basketball with one hand behind their back,” Mayo said. “All of the sudden banks can now play against their competitors with two hands. That’s a euphoric feeling.”

But private credit firms aren’t retreating. They’re doubling down on risk. Managers including KKR, Blue Owl, and Sixth Street snapped up $136 billion of consumer loans in 2025, nearly 14 times the $10 billion purchased in 2024. The buying spree includes credit cards, buy-now-pay-later debt, and other unsecured personal loans. Consumer debt is typically unsecured with no recourse toward the borrower, and BNPL’s resilience during an economic downturn hasn’t been tested.

“These deals underscore an emerging trend where private capital is fuelling rapid growth in unsecured consumer lending, while regulated incumbents continue to move with caution,” KBW analysts wrote. The rush comes just as credit quality deteriorates and banks’ credit card lending declined. Revolving credit balances at US banks fell slightly in 2025 to just above $1 trillion after growing quickly post-pandemic.

Goldman Sachs BDC embodies the stress. The per-share value of its holdings has slid for seven straight quarters due to souring loans. One analyst ranks Goldman BDC’s credit performance 25th of 26 publicly traded BDCs. Total assets are approximately $3.4 billion of the roughly $162 billion Goldman’s private credit business manages. The BDC’s net asset value fell to $12.75 per share in Q3, down about 20% from $15.92 in 2021.

Ares CEO Michael Arougheti told the Financial Times his firm is open to buying a large private equity group, calling Ares’ current $25 billion PE business “sub-scale” relative to rivals. Private equity represents just 4.2% of Ares’ current assets, down from 13.5% when the firm went public in 2014. The firm set a target of managing at least $775 billion in three years from just under $600 billion at Q3 end.

Short sellers are piling in. Short interest across 47 publicly traded BDCs totaled around $1.83 billion this year with more than $500 million of new shorts, up 38% from a year ago. Traders netted mark-to-market profits of approximately $132.7 million, roughly 7% higher than last year.

Key Market Themes

1. BDCs Post Worst Year Since 2020 as Banks Surge

The Cliffwater BDC Index dropped 6.6% in 2025 versus the S&P 500’s 18.1% gain, marking the worst relative performance since 2020. In 2023 and 2024, the index gained 25.4% and 14.1% respectively. The vehicles were pummered by rate cuts, market blow-ups, and rising signs of stress. A lack of deals forced private lenders to shrink margins, diminishing earnings.

“There’s a level of skepticism from our clients around the very large broadly distributed vehicles, if they will be able to maintain the returns that they’ve had before,” said Matt Malone, head of investment management at Opto Investments. The question facing investors: “Is this the best risk-adjusted way for us to invest in private credit for our clients?”

The six titans of US banking rose an average of more than 45% this year. Stocks of the top four public alternative asset managers are collectively down, with only Carlyle making significant gains. That’s the strongest outperformance by traditional lenders in a generation.

Strategic Implications

Blue Owl tried merging its smaller private fund into its larger publicly traded OBDC when it was trading at roughly 20% discount to NAV. The firm backtracked days later after scrutiny over potential investor losses. Redemption requests into Blue Owl OBDC II exceeded 5% of NAV in November. Blackstone’s BCRED expected Q4 redemptions to reach 4.5% of NAV as of September 30.

2. Regulatory Rollback Delivers “Revenge of the Banks”

The second Trump administration’s appointees at the Federal Reserve and other regulators rolled back post-crisis restrictions including proposed capital rules and stress tests. Most significantly, regulators scrapped 2013 guidance around leveraged loans that recommended companies’ total debt shouldn’t exceed six times EBITDA.

While not a hard rule, many banks adhered to avoid regulatory ire, creating an opening for private credit firms. According to Wells Fargo analyst Mike Mayo, “for the last 15 years, banks have been competing against nonbanks, analogous to playing basketball with one hand behind their back.”

As regulation eased, top banks boosted loan portfolios at the fastest pace since the financial crisis. JPMorgan led an $8 billion effort for 3G Capital’s Skechers acquisition, agreed to $17.5 billion to help Warner Bros. Discovery split in two, and offered $20 billion for Electronic Arts acquisition, then the largest-ever single-bank commitment for a leveraged buyout. Wells Fargo pledged $29.5 billion for a bridge facility when Netflix began lining up financing for its Warner Bros. bid.

Market Dynamics

Bankers acknowledge there’s no turning back the clock. The biggest private-markets firms are established lending rivals and occasional partners. But in recent quarters, big banks started flexing their lending muscles after beating back a slew of rules. They defeated Biden-era Basel III Endgame capital requirements and got reprieves on oversight pushing them to hold more capital.

3. Private Credit Buys $136 Billion Consumer Debt

Private credit groups purchased or struck forward flow agreements to purchase $136 billion of consumer loans in 2025, according to KBW analysts. That compared with just $10 billion in 2024, a nearly 14-fold increase. Firms including KKR, Blue Owl, and Sixth Street piled into credit cards and buy-now-pay-later debt.

KKR agreed to purchase a multibillion-dollar credit card portfolio from New Day, a private equity-backed European company. Affirm, the BNPL player set up by PayPal co-founder Max Levchin, struck deals with Sixth Street and insurers Prudential and New York Life to sell billions of current and future loans as a key plank of growth plans.

Consumer debt including credit cards and personal loans is typically unsecured with no recourse toward the borrower. BNPL remains relatively new and its resilience during economic downturns hasn’t been fully tested.

Timing Concerns

The rush comes just as credit quality deteriorates in the US. Revolving credit balances at US banks grew quickly post-pandemic but fell slightly in 2025 to just above $1 trillion. According to former KeyBanc analyst Adam Josephson, “there are no signs out there that piling into consumer debt at this point of the economic cycle would be advisable.”

4. Goldman Sachs BDC Struggles Through Seven Quarters of Declines

Goldman Sachs BDC’s per-share value of holdings has slid for seven straight quarters due to souring loans. One analyst ranks Goldman BDC’s credit performance 25th of 26 publicly traded BDCs. The company changed management and restructured loans by delaying interest payments and extending maturity dates.

Net asset value fell to $12.75 per share in Q3, down about 20% from $15.92 in 2021. The NAV decline also reflects several special payouts to investors this year. In Q3, 2.6% of its investment portfolio was essentially in default and presenting risk of substantial loss.

“Where we’ve seen continued write-downs is on the more legacy names where we are not seeing a big turnaround,” said David Miller, co-CEO of Goldman Sachs BDC. “But outside of those legacy names, we feel pretty good about the portfolio.”

Portfolio Issues

For years, Goldman’s BDC functioned almost like an island, separate from the rest of Goldman’s private-lending asset management business. It bought loans tied to private-equity deals originated by other banks. Then it focused on lending directly to small and midsize companies, mostly backed by PE firms.

Executives later told colleagues the loans had underwriting issues, including some made to companies with weak financials that should never have been approved, according to former Goldman private-credit employees. PIK at Goldman’s BDC trended around 4% of total investment income five years ago, rose to about 12% last year, though fell to 8% in Q3.

5. Ares Eyes PE Acquisition, Calls Business “Sub-Scale”

Ares Management is open to buying a large private equity group to bolster its leveraged buyout business, CEO Michael Arougheti told the Financial Times. He said Ares could acquire a large PE group as US retirement plans explore adding private assets to portfolios, giving it heft to compete with Blackstone, KKR, and Apollo.

“I could see a world where we look to expand the private equity franchise, either by getting larger, geographically diversifying, looking at sector-specific capabilities that would be additive to other parts of the franchise,” Arougheti said. The firm set a target of managing at least $775 billion in three years from just under $600 billion at Q3 end.

Arougheti acknowledged the company’s current $25 billion private equity business was “sub-scale” relative to rivals. Private equity represents just 4.2% of Ares’ current assets, down from 13.5% when the firm went public in 2014.

Strategic Context

“We have a lot of financial capacity to buy and we have a lot of financial capacity to build,” Arougheti said. He signaled that a firm managing $100 billion or more in private equity investments would be within Ares’ reach. “Even the largest global private equity managers would not be significant from a market cap standpoint relative to where we are.”

6. Private Credit Hits $3.5 Trillion Despite Stress Tests

Private credit’s expansion continued at remarkable pace in 2025, with global AUM reaching approximately $3.5 trillion, representing roughly 17% year-over-year growth. Capital deployment accelerated to $592.8 billion in 2024, up 78% from prior-year volumes. Industry projections anticipate the market reaching $5 trillion by 2029.

Yet beneath aggregate growth, 2025 revealed significant structural tensions. Non-accrual rates for flagship corporate lending funds averaged 2.2%, with weighted-average non-accruals at 1.8%. Interest coverage ratios across BDC portfolios deteriorated to approximately 2.0x, with an increasing percentage of portfolio companies falling below this threshold.

The Blue Owl controversy in November crystallized investor concerns. The proposed merger between OBDC and OBDC II would have restricted investors in the $1.7 billion OBDC II from redemptions until deal closure, even as the merger implied approximately 20% paper losses based on where publicly traded OBDC shares were trading relative to NAV.

First Brands Fallout

The September First Brands bankruptcy evolved into a watershed moment when November fraud allegations detailed a multi-billion dollar scheme. The lawsuit filed by interim management accused founder Patrick James of “grievous misconduct,” alleging he fraudulently secured billions while diverting over $700 million to himself and affiliated entities between 2018 and 2025.

7. Short Sellers Target BDCs as Stress Indicators Rise

Short interest across 47 publicly traded BDCs totaled around $1.83 billion this year with more than $500 million of new shorts, up 38% from a year ago, according to S3 Partners. Traders netted mark-to-market profits of approximately $132.7 million, roughly 7% higher than last year.

Short sellers are taking note of rising stress signals within private credit and using publicly traded BDCs to express that outlook. Income from payment-in-kind debt, which allows borrowers to defer interest and can signal inability to pay with cash, has been rising across BDCs, reaching 7.9% in Q3 according to Raymond James.

In Q3, 3.6% of investments across BDCs were on non-accrual status, a designation indicating a lender expects losses, Raymond James data show. BDCs in the bottom quartile for returns have lagged top-quartile peers by around 7 percentage points annually since going public.

Manager Selection

“It is not until there is some credit weakness across the industry that it becomes more apparent that manager selection will matter more,” said Kort Schnabel, partner and co-head of US direct lending at Ares. “We believe we are at the beginning stages of that starting to bear out.”

8. Asset-Based Lending Emerges as Bright Spot

Despite First Brands fallout, asset-based lending emerged as one of 2025’s most compelling growth stories. The ABL market demonstrated strong activity throughout the year, with clearing banks performing particularly well in mid-market space by offering competitive pricing alongside complementary banking products. Industry projections estimate the global ABL market will reach $1.3 trillion by 2030, growing at approximately 10.3% CAGR.

Non-recourse, off-balance-sheet structures proved particularly popular, along with hybrid ABL and cash flow offerings. According to a Preqin survey, 58% of institutional investors indicated they would prioritize ABL strategies in 2025.

In a competitive environment, corporate borrowers benefited from lower pricing, larger single-hold levels, and structural enhancements such as accordions. Asset-heavy sectors including retail and manufacturing featured prominently in transaction flow.

Deals of Note

• Consumer debt - Private credit firms including KKR, Blue Owl, Sixth Street purchase or strike forward flow agreements for $136B consumer loans in 2025 vs $10B in 2024, including credit cards and BNPL debt

• New Day - KKR agrees to purchase multibillion-dollar credit card portfolio from PE-backed European company

• Affirm - Strikes deals with Sixth Street, Prudential, New York Life to sell billions of current and future BNPL loans

• Netflix-Warner Bros. - Wells Fargo pledges $29.5B bridge facility for bid

The Reality Check

Banks gaining 45% while alt managers fall isn’t about sympathy for regulated lenders. It’s the market pricing which business model works when competition returns. Private credit spent a decade winning because banks couldn’t play. Now they can. The structural advantage is gone, and deployment pressure is forcing managers into consumer debt banks won’t touch.

Arougheti calling Ares’ PE business “sub-scale” despite managing $600 billion total reveals the real anxiety: even winners worry they’re not big enough. When private credit’s fastest-growing firm needs acquisitions to stay competitive, the message is clear. Scale is survival. Specialization is risk.

The 14-fold jump in consumer debt purchases while credits deteriorate isn’t strategy. It’s necessity. Managers raised capital assuming they could deploy into corporate lending at attractive spreads. Instead, they’re buying unsecured credit cards and BNPL paper as banks retreat. That’s not finding opportunity. That’s chasing yield into the last pocket of the market still offering it. The cycle always ends the same way.

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The pressure is mounting from multiple directions. US private credit defaults jumped to 5.7% in November from 5.2% in October on a trailing 12-month basis, according to Fitch Ratings tracking 1,200 borrowers. For a subset of 300 privately issued loans rated by Fitch, the rate surged to 9.3% from 7.7%.

The composition tells the real story. About 59% of the 91 defaults from November 2024 through last month stemmed from payment-in-kind or interest deferrals, while bankruptcies made up just 7%. Fitch recorded 13 private credit default events in November, with nine introducing PIK interest, three involving stressed maturity extensions, and one from an uncured payment default.

Then regulators delivered a one-two punch. First, Democratic Senators Elizabeth Warren and Jack Reed urged top banking regulators to stress test the $1.7 trillion market, probing credit risks at all banks with at least $50 billion in assets “with a special emphasis on loans to private credit firms.” Hours later, the FDIC and OCC scrapped 2013 guidance around leveraged loans, the rules bankers blamed for hamstringing their ability to lend and helping private credit blossom.

“The fact that we can now compete for loans that we weren’t able to offer before is an opportunity for us,” said Wells Fargo CEO Charles Scharf at a Goldman Sachs conference. PNC CEO William Demchak was more direct: “You will see us expand some of the buckets we’ve held back because of the way they defined it, which is exciting.”

The 2013 guidance recommended a leverage limit of six times EBITDA. While not hard-and-fast, many banks adhered to it to avoid regulatory ire, creating an opening for private credit firms. According to Barclays strategists, “highly leveraged deals found financing from non-bank lenders, catalyzing the growth of US private credit.” The rollback “could present a moderate headwind to private credit growth in portions of middle market direct lending.”

Meanwhile, BDC profitability declined in Q3. Median net investment income fell to 4.7% of assets from 4.8% in Q2, according to Moody’s. Median non-accruals rose to 1.3% from 1.2%, mainly from uptick within perpetual non-traded BDCs. For publicly-traded BDCs, the median non-accrual rate actually fell to 2.1% from 2.4%.

Blackstone’s BCRED saw redemptions rise to an estimated 4.5% of shares for Q4, up from 1.5% a year ago. Capital inflows were about $3.3 billion to date, up from $3.1 billion in the same period last year. “There’s obviously been an enormous amount of noise out there around private credit, much of which we would push back with the facts,” said Blackstone President Jon Gray.

But the facts include US banks lending $363 billion to private credit firms, private equity shops, and hedge funds through November, up 26% this year, according to Fitch. Banks added just $291 billion across all other loan types. For banks with more than $10 billion in assets, private credit vehicles accounted for about 25% of non-bank lending at Q3 end.

Oak Hill Advisors raised $8 billion for senior direct lending, double its original target and the largest fundraise in the firm’s history. With leverage, total available capital reaches $17.7 billion. Pimco raised more than $7 billion for asset-based finance, including its first funds designed exclusively for insurance companies and wealthy individuals.

And a 600-page Austrian police report examined by Bloomberg revealed how billionaire Rene Benko’s €23 billion empire collapsed, including accepting a loan at an annualized rate of 70% and commitments to pay steep interest rates as liquidity tightened. The filings show “how the opaque world of private credit can go bad, a cautionary tale for the current market as volumes of non-traditional, less-regulated lending surge.”

Key Market Themes

1. Default Rate Jumps as PIK and Extensions Dominate

Fitch’s default rate for 1,200 US private debt borrowers hit 5.7% in November from 5.2% in October on a trailing 12-month basis. For 300 privately issued loans rated by Fitch, the rate surged to 9.3% from 7.7%.

The composition reveals what’s happening beneath the surface. About 59% of the 91 defaults from November 2024 through last month stemmed from PIK or interest deferrals, while bankruptcies made up just 7%. Of 13 November default events, nine introduced PIK interest, three involved stressed maturity extensions, and one was an uncured payment default.

Industrial and manufacturing, building and materials, and broadcasting and media sectors each posted two default events in November. The pattern shows borrowers avoiding bankruptcy by deferring payments rather than restructuring or liquidating.

BDC Profitability Declines

Median net investment income for BDCs rated by Moody’s fell to 4.7% of assets in Q3 from 4.8% in Q2. Median non-accruals measured at cost rose to 1.3% from 1.2%, mainly from uptick within perpetual non-traded BDCs. For publicly-traded BDCs, the median non-accrual rate fell to 2.1% from 2.4%.

Aggregate net investment losses totaled $302 million in Q3 versus $878 million in Q2, with approximately 54% of investment losses realized. PIK income ticked up modestly, though “the vast majority of BDCs’ income remains cash-oriented despite the increase in PIK,” Moody’s analysts wrote.

2. Regulators Scrap 2013 Rules, Banks Cheer

The FDIC and OCC rolled back 2013 guidance around leveraged loans that bankers complained hamstrung their ability to lend. The guidance recommended a leverage limit of six times EBITDA. While not a hard rule, many banks adhered to avoid regulatory scrutiny, creating an opening for private credit.

Wells Fargo CEO Charles Scharf said at a Goldman Sachs conference, “the fact that we can now compete for loans that we weren’t able to offer before is an opportunity for us.” PNC CEO William Demchak added, “you will see us expand some of the buckets we’ve held back because of the way they defined it, which is exciting.”

According to Barclays strategists, “highly leveraged deals found financing from non-bank lenders, catalyzing the growth of US private credit.” The rollback creates “space for banks to structure some more creative mezzanine solutions for borrowers” and “could present a moderate headwind to private credit growth in portions of middle market direct lending, particularly to some of the larger BDCs.”

Bipartisan Pressure

Hours before the rollback, Democratic Senators Elizabeth Warren and Jack Reed urged top banking regulators to stress test the $1.7 trillion market, probing credit risks at all banks with at least $50 billion in assets “with a special emphasis on loans to private credit firms and other non-bank financial institutions.”

3. BCRED Redemptions Rise to 4.5% from 1.5%

Blackstone’s BCRED saw redemptions rise to an estimated 4.5% of shares for Q4 from 1.5% a year ago. Capital inflows were approximately $3.3 billion to date, up from $3.1 billion in the same period last year.

“There’s obviously been an enormous amount of noise out there around private credit, much of which we would push back with the facts,” Blackstone President Jon Gray said at the Goldman Sachs Financial Services Conference. He cited Silicon Valley Bank’s collapse and Liberation Day tariffs as prior panic moments.

“Whenever you get a lot of negative headlines, particularly among the individual investors, you can see a shift in sentiment,” Gray said. He pointed to BCRED’s 10% annualized total return since inception, outperforming the leveraged loan index by 360 bps over the same period.

Gray’s Defense

According to Gray, private credit is “an innovation that’s been accelerating over the past five to seven years. What you’re basically doing is bringing investors directly up to borrowers. It’s not that much different than what Amazon did to revolutionize the delivery of goods to consumers.”

4. Banks Lend $363 Billion to Private Credit Rivals

US banks made about $363 billion of new non-bank loans through November 26, up 26% this year, according to Fitch citing Federal Reserve data. Banks added $291 billion across all other loan types. Regulatory capital requirements and strong demand from borrowers contributed to the uptick.

For banks with more than $10 billion of assets required to disclose exposures to non-bank entities, private credit vehicles accounted for about 25% of non-bank lending at Q3 end. Mortgage loans and lending to private equity each accounted for 23% of total loan balances.

Fitch said it doesn’t view risks as systemic for banks, but “a comprehensive assessment of financial stability risks” is difficult given the opaque nature of the market. For large banks, direct exposure to non-banks is “very manageable.” But for the 20 banks most concentrated to these institutions, they have “limited protection against a downturn for this sector.”

Interconnection Risk

Critics have voiced concern that any downturn in the market, or any deterioration in underlying borrower health, could exacerbate wobbles in the banking sector. The $363 billion in new lending to non-banks versus $291 billion to all other loan types shows where growth is concentrating.

5. Private Credit’s New Tactic: Buy Syndicated Loans First

Private credit firms are buying slices of companies’ syndicated loans to gain access to borrowers and pitch refinancings. The strategy requires scale: a liquid credit team, large CLO portfolio to buy into syndicated loans, and ability to write hefty checks.

Blackstone recently provided $2 billion to Mitratech to refinance bank debt. Blackstone held a piece of the syndicated debt, which helped pitch the refinancing even though private credit would be more expensive. The firm used similar strategies to close deals for Clario, Teneo, Justrite Safety Group, and Signant Health this year.

“You have to do your own proprietary diligence, structure a customized solution and be able to go to them and say, ‘You’re done. Here’s a complete, one-stop solution for even multibillion-dollar deals,’” said Brad Marshall, Blackstone’s global head of private credit strategies.

The Numbers

About $37.7 billion of broadly syndicated loan deals were refinanced into private credit so far this year, compared with $28.2 billion vice versa, according to JPMorgan. In November alone, about $2.9 billion of broadly syndicated debt was refinanced with private credit, but no private credit was refinanced in reverse.

6. Benko’s €23 Billion Empire Collapsed at 70% Interest

A 600-page Austrian police report examined by Bloomberg reveals how billionaire Rene Benko’s €23 billion empire collapsed, depicting months of frantic efforts to plug growing cash shortages. As liquidity tightened, he repeatedly committed to pay steep interest rates, including a loan at an annualized rate of 70%.

The Weston family, selling Selfridges for nearly £4 billion, was prepared to loan Benko £300 million to close the transaction. The six-month notes came with an initial 4.5% coupon. When Benko couldn’t repay in February 2023, he agreed to an extension with interest nearly doubling to 8.5%.

According to a Deloitte forensic financial analysis, Signa Holding was likely insolvent already in November 2022. But Benko spent the following months frantically seeking money and accepting increasingly harsh terms. One short-term credit line, the “Ameria loan” from the Arduini family, offered €200 million for three weeks at an annualized rate of 70% including interest and fees.

Cautionary Tale

The details “serve as a prime example of how the opaque world of private credit can go bad, a cautionary tale for the current market as volumes of non-traditional, less-regulated lending surge,” Bloomberg reported. Signa’s creditors continue trying to recoup their money, with claims across main units totaling more than €20 billion.

7. Oak Hill Raises $8 Billion, Pimco Gets $7 Billion

Oak Hill Advisors raised $8 billion in equity commitments for senior direct lending, about double its original target and the largest fundraise in the firm’s history. The OHA Senior Private Lending Fund will have total available capital of $17.7 billion with leverage.

The fund will focus on first lien and unitranche loans to companies with at least $75 million of EBITDA, investing across “recession-resistant” industries mostly in North America. Oak Hill, bought in 2021 by T. Rowe Price Group, manages about $108 billion in assets.

Separately, Pimco raised more than $7 billion for an asset-based finance strategy, including its first funds designed exclusively for insurance companies and wealthy individuals.

Market Timing

Oak Hill and other direct-lending firms are betting on a return of private equity M&A after a period where high rates weighed on dealmaking. Goldman Sachs CFO Denis Coleman said this week that activity in the industry is starting to return.

Deals of Note

• Mitratech - Blackstone provides $2B private credit facility to refinance bank debt for Ontario Teachers-backed software company, using strategy of buying into syndicated debt first to win mandate

• Auctane - Thoma Bravo reaching out to private credit firms for approximately $5B direct loan to support proposed merger with shipping software firm formerly known as Stamps.com

• Stago Group - Hayfin Capital Management and ICG arranging debt package of around €500M for Archimed’s purchase

• Markerstudy - UK insurer in talks with private credit lenders to refinance debt with roughly £1.4B of new loans

• Ravenswood Gold - Australian gold miner secures $650M private credit loan from RRJ Capital for refinancing

• Bally’s - Casino operator wraps up deal to increase term loan to $1.1B, allowing it to refinance debt and pay fees tied to New York State casino licenses

• Mecachrome - Carlyle Credit provides €290M debt package to French company in rare private credit deal tapping Europe’s military buildup

• FineToday Holdings - Japanese personal care business shareholders receive dividend payouts funded by $350M private credit loan

• BNP Paribas SRT - French bank completes synthetic risk transfer tied to $1.25B worth of revolving credit facilities for US BDCs, privately placed with single investor

The Reality Check

Defaults hitting 5.7% with 59% coming from PIK and deferrals rather than bankruptcies shows the playbook: avoid filing, extend maturity, defer interest. It works until it doesn’t. The 9.3% default rate for Fitch-rated loans tells a different story than the broader 5.7%, suggesting rated paper is under more stress.

BCRED redemptions tripling to 4.5% from 1.5% despite $3.3 billion of inflows signals retail investors are getting nervous. Gray calling it “noise” and comparing private credit to Amazon revolutionizing delivery is confident. Whether that confidence is justified depends on whether the 10% annualized return holds when defaults keep rising.

The FDIC and OCC scrapping 2013 guidance isn’t just technical. It’s banks getting permission to compete again. When Wells Fargo and PNC CEOs are “excited” to expand lending they previously couldn’t do, that’s market share shifting. Barclays calling it a “moderate headwind” for private credit understates the competitive pressure coming.

Banks lending $363 billion to private credit firms while adding just $291 billion to all other loan types reveals the interconnection risk. When 25% of non-bank lending goes to private credit vehicles and Fitch says the 20 most concentrated banks have “limited protection against a downturn,” the exposure is real.

Blackstone’s tactic of buying syndicated loans to pitch refinancings is smart. The $37.7 billion refinanced from broadly syndicated into private credit versus $28.2 billion going the other way shows it’s working. But it also shows private credit competing on relationship and execution rather than price, which gets harder when banks can lend at six times EBITDA again.

Benko accepting a 70% annualized rate for three weeks of liquidity demonstrates what happens when opacity meets desperation. The €23 billion empire collapse serves as exactly what Bloomberg called it: a cautionary tale for the current market. When sophisticated billionaires and institutional investors all got played, the lesson is that opacity hides problems until they explode.

Oak Hill raising $8 billion and Pimco getting $7 billion shows capital still flows to established managers. But raising happens in the good times. Deploying at attractive risk-adjusted returns while defaults tick up, spreads compress, and banks re-enter the market is the harder part.

Warren and Reed urging stress tests on the same day regulators scrap lending restrictions captures the contradiction. One side wants more scrutiny. The other wants less regulation. Private credit sits in the middle, benefiting from light oversight while attracting increasing attention. That balance doesn’t hold indefinitely.

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Private credit’s profitability problem just got worse. Median loan margins fell below 500 bps last quarter, down from 650 bps in Q1 2023. Banks are pricing at 285 bps in the US and 360 bps in Europe. That’s not competition. That’s capitulation.

The records keep falling. Permira’s Key Group got 450 bps from Goldman Sachs Asset Management, Macquarie, and Apax Credit. JTC priced £1.5 billion at 450-475 bps. Squarespace secured 400 bps from Blackstone. Each deal sets a new low. Each low becomes the new ceiling.

“Competition is way tougher in 2025 for private credit firms,” said Chris Cessna of Houlihan Lokey. “There’s competition among private credit lenders themselves, which raised a lot of capital and are chasing the same deals, as well as from the broadly syndicated market.”

The math is simple. Limited partners still get returns just under 10% from private credit versus roughly 7.5% from leveraged loans. But the gap is closing fast as base rates fall and spreads compress. Markets are pricing 90% certainty the Fed cuts another quarter-point next week.

Blue Owl executives are betting the selloff is overdone. Management and employees bought $115 million of the firm’s publicly traded BDC shares in the past month. Craig Packer spent nearly $1 million buying 83,200 shares at $11.75 on November 18, the same day the firm killed its BDC merger. Total insider purchases exceeded $200 million across Blue Owl entities.

The Hologic deal showed the new division of labor. PSP Investments, Oaktree, Franklin Templeton, and others bought $2 billion of subordinated debt at 500 bps that banks committed to as part of a $12.25 billion package. Private credit gets the junior paper. Banks keep the senior relationship and fees on the whole package.

Meanwhile, Blackstone is negotiating to provide $5-10 billion to Australian AI startup Firmus at 500-550 bps, contingent on securing client contracts. When the world’s largest alternative manager is structuring deals this way, capital deployment pressure is overwhelming traditional discipline.

Key Market Themes

1. Margin Compression Hits Record Pace

Median private loan margins dropped below 500 bps from 650 bps in Q1 2023. Banks are pricing 215 bps tighter in the US and 140 bps tighter in Europe. The gap is forcing lenders who once dealt exclusively with large borrowers to chase smaller deals, heating up competition everywhere.

“Lower spreads in the broadly syndicated market are driving down the pricing of larger private credit loans, affecting even bilateral deals,” said Philip Bowden of Proskauer Rose. Private credit funds are pitching German insurance broker Global Gruppe with a 1% fee and 450 bps pricing.

Limited partners still get returns just under 10% versus 7.5% for leveraged loans. But easier monetary policy hits private credit harder because most loans are floating-rate. Markets price 90% certainty of another Fed cut next week.

The Squeeze

According to Cessna, “if a substantial M&A volume does not materialize, there is not much lower spreads can go for debt funds to generate enough returns and make their business plans work.” Signs of M&A revival could ease pressure, with 2026 forecast as a bumper year. The question is whether spreads can hold until deals arrive.

2. European Records Fall in Weeks

Permira’s Key Group negotiated 450 bps from Goldman Sachs Asset Management, Macquarie, and Apax Credit on a £335 million facility. JTC priced £1.5 billion at 475 bps for pounds and euros, 450 bps for dollars. Squarespace got approximately 400 bps from Blackstone.

Three deals, three records, all within weeks. Yet those margins still can’t match bank pricing at 285-360 bps with fewer covenants and deeper liquidity.

3. Blue Owl Executives Buy $115 Million of Shares

Craig Packer bought 83,200 BDC shares at $11.75 on November 18, the day the merger collapsed. Co-CEOs Doug Ostrover and Marc Lipschultz each bought roughly $2.4 million of parent company shares. CFO Alan Kirshenbaum added $500,000. Total insider and company purchases: over $200 million in a month.

The BDC trades at a 21% discount to NAV. The fund’s $200 million buyback program aims to close the gap by reducing shares outstanding. OBDC is up 2.69% since October 31.

Liquidity Clock

The private fund that was set to merge has until April 2028 to find a liquidity solution before considering wind-down. It suspended redemptions after honoring requests exceeding the 5% limit but plans to resume in Q1 2026.

4. Hologic Shows New Bank-Private Credit Model

PSP, Oaktree, Franklin Templeton, Palmer Square, Oak Hill, Sona, Lord Abbett, and Blackstone Credit bought $2 billion of second-lien debt at 500 bps, 99 cents on the dollar. Banks underwrote the full $12.25 billion package including $9.5 billion of first-lien loans.

Because Blackstone and TPG lined up buyers for the subordinated portion, banks receive only marginal fees from that slice. The structure shows how the two sides cooperate on marquee buyouts: direct lenders take riskier junior paper that offers needed yields, banks keep senior relationships.

Not all bank-led deals open doors. Private credit was excluded from the $20 billion EA package and $7.9 billion Sealed Air financing.

5. SRT Market Could Double to €2.6 Trillion

Man Group forecasts the significant risk transfer market could double over five years as banks increase usage. Since 2016, default risk on more than €1.3 trillion of loans has been transferred using SRTs, with a third in the past two years.

Man Group identifies SRTs and core middle-market direct lending as niches allowing investors to sidestep broader market concerns. “This environment favours unconstrained approaches that search for value, rather than broad market exposures, particularly as many sectors remain vulnerable to significant widening should growth slow.”

6. Blackstone Eyes $5-10 Billion Australian AI Bet

Blackstone is negotiating $5-10 billion in asset-backed debt at 500-550 bps over BBSW for Australian AI infrastructure startup Firmus, which just tripled its valuation to $6 billion. The financing could fund chip purchases entirely via debt, but it’s contingent on securing firm client contracts.

Sources say Blackstone has exclusivity with a deal likely within two weeks. The pitch: strategic debt investment in data center adjacencies to its $24 billion AirTrunk acquisition, enhancing sector influence. Firmus pivoted from bitcoin mining to GPUs-as-a-service, with Nvidia as supplier, investor, and future client.

The deal is noteworthy because Firmus is relatively new in a market with intense global demand for infrastructure debt.

Deals of Note

• Hologic - PSP, Oaktree, Franklin Templeton, others buy $2B second-lien at 500 bps, 99 cents, part of $12.25B package for Blackstone-TPG buyout

• Squarespace - Blackstone-led group provides ~$400 bps, among lowest US private credit spreads on record

• Key Group - GSAM, Macquarie, Apax provide £335M at 450 bps, lowest European pricing ever

• JTC - Blackstone leads £1.5B at 450-475 bps across three currencies

• El Jannah - General Atlantic secures A$300M from Ares and Nomura at mid-to-high 4x leverage, ~500 bps

• Firmus - Blackstone negotiating $5-10B asset-backed at 500-550 bps for Australian AI startup, contingent on contracts

The Reality Check

Margins dropping 150 bps in under three years while banks price 215 bps tighter isn’t cyclical. It’s structural repricing driven by capital oversupply and bank resurgence.

The Permira trifecta proves pricing floors don’t exist. Key Group at 450 bps, JTC at 450-475 bps, Squarespace at 400 bps. Three quality sponsors, three new lows, all within weeks. Private credit won the deals by matching bank economics, which means accepting bank returns.

Blue Owl insiders buying $115 million at a 21% NAV discount signals conviction the market is mispricing risk. Whether Packer’s right depends on spreads stabilizing or continuing their descent.

The Hologic structure reveals the new equilibrium: banks underwrite full packages, sell junior paper to private credit at 500 bps, collect fees on everything. Direct lenders get access but at subordinated pricing. Banks keep senior relationships. Nobody’s fighting anymore. They’re dividing the spoils.

Blackstone negotiating $5-10 billion for Firmus contingent on future contracts shows how far deployment pressure pushes discipline. That’s venture execution risk at debt pricing. When the largest alternative manager structures deals this way, the message is clear: capital must work, even if terms don’t.

Cessna says spreads can’t go much lower and still generate returns. But business plans are already changing. The compression hasn’t finished. It’s accelerating.